Why a CEO Needs to Have a Plan B
For nearly three decades, in good times and bad, Jack Stack has run his company, SRC, as though disaster could strike at any moment. Now, with the economy cratering, he’s glad he did.
Julian Dufort
IT'S THEIR FACTORY: Jack Stack, center, with employees from SRC Automotive. When orders from GM plummeted, they switched to Plan B–and kept the operation running.
If you think times are tough now, consider that in the early '80s, the prime interest rate topped 21 percent, and unemployment was just shy of 11 percent. That was the economic environment confronting Jack Stack and 12 other managers of a small engine-remanufacturing plant in Springfield, Missouri, as they prepared to buy the factory from International Harvester in a desperate attempt to save their own jobs and those of the people they worked with. Their new company, Springfield ReManufacturing Corporation, survived that recession and went on to prosper for the next 26 years.
Today, Stack, the company's CEO, and his colleagues are weathering a recession of similar magnitude. But they find themselves in a far different situation. The enterprise, now called SRC Holdings, is a mini conglomerate of seven holding companies with 26 businesses whose 1,200 employees make automobile engines, irrigation pumps, home furnishings, and more. Its current health is no accident. Having launched the company to save jobs, Stack was determined never to be forced to lay people off. He spoke with editor-at-large Bo Burlingham (with whom he has co-authored two books) about how he has worked to keep that promise to his employees -- and build a company that is bucking nearly every current economic trend.
Most American manufacturers are in terrible shape right now. And yet you seem to be doing well. What do you attribute that to?
Paranoia. We've always been terrified of being forced to lay people off, and so we've spent the past 26 years trying to make sure we would never have to do that.
Where does that paranoia come from?
It goes back to our beginnings. When we started out in February 1983, we were at rock bottom. Everybody was at the bottom in 1983. It was ugly and painful, just like today. We'd bought our factory to save our jobs, but to do it we had to take on a huge amount of debt, $8.9 million, because we had very little money ourselves. Our debt-to-equity ratio was 89:1. Let me tell you, you're brain-dead in that situation. You're on life support. We had bank auditors literally camped outside our doors. If we'd had one little slip-up -- if we'd been an hour late with a payment -- they would have rushed in and closed us down, and 120 people would have been out on the street.
When you go through a period like that, you don't ever want to do it again. I am sure people who lived through the Great Depression developed some form of trapdoor thinking and contingency planning -- whether it was having two or three jobs or investments or just not living outside their means. Anyway, that experience made us realize that a job is never secure. If you let yourself get lulled to sleep, you're going to get screwed -- even if you have what you think is a fail-safe deal.
How do you keep from getting lulled to sleep?
We constantly look for our vulnerabilities. We do forecasting to determine where they are, and then we ask ourselves a lot of what-ifs. What if we're getting wrong information? What if a market goes down? What if we have a collection problem with a major customer? What if interest rates go through the roof? What if there's a 9/11? The whole idea is to provide our people with job security and job opportunities. I think it's led us to go one step further than most companies do. A lot of businesses put up a plan to satisfy their bankers or because they think it's what you're supposed to do. But our culture is, "Let's find out where our weaknesses and vulnerabilities are and then build something to offset them."
How does that work in practice?
We measure each piece of business by the amount of labor that goes into it. Then we see how concentrated our labor is. When we were starting out in the 1980s, more than 75 percent of our labor hours were in the truck market. We did some investigating and found out that the truck market has a recession every six years. So we had to ask ourselves what we'd do if we had a recession.
And the answer?
We thought about what goes up in a down market, and we discovered that automobile parts go up, because people keep their cars longer and fix them. That's how we got into the automotive aftermarket business. That kind of thinking became part of our culture and our way of doing business.
So is this all about saving jobs?
No, it's about creating jobs. That's our goal. And once you create them, you don't want to lose them. What we're doing here is helping people to get through life. I never want to have to take someone else's livelihood away because of mistakes I've made in not anticipating a problem -- even if it's a problem I couldn't have seen coming. It's management's job to anticipate those problems and prepare for them. A layoff is a failure of management. But the people who usually pay for that failure are not the ones responsible for it.
It's interesting to me that your paranoia actually led you to expand the company in some very ambitious ways.
Absolutely. The contingencies and trapdoors we developed eventually became new businesses. Our values drove our paranoia. Our paranoia drove our contingency planning. And our contingency planning drove our diversification. We knew the more we diversified, the safer we would be. So we spread out of our core competencies. We've spun off 55, 56 businesses as a result of this process.
A lot of people would say you took a big risk by getting outside your core competencies. The common wisdom is that you're supposed to stick to your knitting.
I think that's really bad advice in most cases. Sure, if we'd stayed in our core competency, we might have been very successful in the truck market. We could have reduced our expenses and increased our margins, but we would have been tremendously vulnerable. We would have had 100 percent of our eggs in one basket.
Certainly, some people have been successful by sticking to their core competencies.
Oh, sure. It's not too bad a strategy if you plan to sell the business. You build up your earnings and your sales, and then you cash out. But to create something sustainable, you have to be totally paranoid. You have to be realistic that you're going to get hit with a lot of unknown events. If you diversify, you can handle those unknowns. But it takes a lot of courage to fix a weakness when it's not immediately painful.
