In today`s global economy, business is ”the great game,” Jack Stack will tell you, and playing the game successfully means discarding all the old rules-especially those that say business is too abstract and too intricate to be grasped by anybody without an advanced business degree.
You don`t need a master`s in business administration to understand how to run a business or how to be competitive in the new global marketplace, Stack insists. All you need is willingness to operate your company with what he calls open-book management-a system that not only includes disclosing all corporate financial information to every employee, but teaching everybody in the company to understand what those numbers mean.
You have to make sure everybody on the team knows the rules, otherwise you can`t win the game, Stack says.
Stack, who began developing precepts for the game in the gritty, often perfidious and sometimes bloody trenches of International Harvester Co.`s Melrose Park plant in the 1970s, has put his money where his mouth is-with startling results.
Nine years ago, he and 12 other executives bought a nearly comatose International Harvester subsidiary in southwest Missouri named Springfield Remanufacturing Corp., or SRC. They have done what many warned was impossible. Just like the old, worn-out diesel and gasoline engines SRC remanufactures into motors that leave SRC`s factory looking new, the once-fading operation has been transformed into a profitable and growing company by SRC President Stack and his team of open-book managers.
Not bad for a guy from Elmhurst who started out as a mail boy in Harvester`s purchasing department after he had been kicked out of college and a seminary for disciplinary reasons and had been fired by General Motors Corp. for playing poker on duty.
But, then, Stack has a history of doing the impossible.
There was the time in the 1970s when as a new manager at the Melrose Park plant, Stack and those working for him dressed up truck drivers as nuns and put them into school buses to get needed steel past snipers who had shut off deliveries from U.S. Steel Corp.`s strike-crippled Gary, Ind., plant.
Another time, when Stack was in charge of procuring parts for the Melrose Park plant, he attended a secret management meeting in which it was revealed that the company was in deep trouble on a contract to make tractors for the Soviet Union. A penalty clause in the contract said the Soviets could charge Harvester for every day it went beyond the deadline.
”We were 800 tractors short with just 20 working days to go, and we were only making about five tractors a day,” Stack recalled. ”At that rate we`d still be about 700 tractors short. Everybody at the meeting was trying to figure out how to cover their rear ends. And everybody agreed heads were going to roll and that the whole mess was a secret best kept to ourselves.”
Stack shocked co-managers by doing something unheard of at International Harvester at the time. He told his workers the truth about the contract and asked them to come up with ideas to get crucial parts onto the factory floor on time. Then he put up a sign outside his office that said: ”Our goal: 800 tractors.”
Stunned Harvester executives watched as production jumped to 55 tractors a day. By the time the deadline rolled around, the Melrose Park plant had shipped 808 tractors, much to Moscow`s astonishment.
That experience taught Stack a lot about human nature.
But it taught him a lot more about management, international competitiveness and the irony of business.
Today International Harvester, one of America`s oldest corporations, is gone-renamed Navistar International Corp. and drastically reduced to about 15,000 workers from 120,000.
Stack, who looks fondly back at his formative years at International Harvester and feels intense loyalty to the company, which employed his father before him, has taken an old Harvester plant and turned it into an operation that earned more money last year than Navistar. Navistar lost $165 million in 1991 and lost $67 million in the first half of 1992, while SRC recorded earnings of $1.34 million in 1991 and projects earnings of $1.64 million for 1992.
SRC`s turnaround has been so dramatic that Stack can`t keep up with requests from other American and foreign corporations eager to learn the secrets of SRC`s success.
Not only have companies such as Navistar instituted many of SRC`s methods, Stack has created an SRC subsidiary to conduct ”Great Game Seminars” and has written a book about his philosophy.
Nobody at SRC can forget those days in 1983 when the future of every worker in the company hung by the barest of threads.
”It was probably the heaviest-leveraged buyout in U.S. history,” Stack said. ”We needed $9 million to buy the company, and all we could scrape together between us was $100,000. We borrowed the rest and began business with $8.9 million in outstanding debt. That worked out to an 89-1 debt-to-equity ratio. People said we were crazy.”
Stack and his managers decided that if their gamble was to work, each of the 119 employees at the new privately owned SRC would need to understand everything about the business and about the always-critical numbers.
If SRC was to survive, the managers reasoned, employee-owners had to understand the financial information-to know how inextricably their futures were linked, not only to how they performed, but to how everybody else performed.
The nearly lifeless company could ill afford even a $10,000 mistake. That meant open-book management-an idea that was and remains the antithesis of prevailing management philosophy at most U.S. corporations.
One of the first steps, Stack recalls, was to create an employee stock ownership plan so that employees would have the opportunity to own a piece of the company. Then he and other managers worked hard to establish credibility with a work force that had grown accustomed to being kept in the dark and lied to by management.
Over several weeks Stack met with every worker and talked with the workers about life, about their dreams, about what tools they needed to do their jobs, about pride and about winning.
”We had to put fire back in people`s eyes . . . make them proud of what they did,” Stack said.
Then Stack taught SRC workers the rules they needed to play ”the great game.”
”We taught everybody, from the guy who sweeps the floor to engineers, how to read a balance sheet, a monthly income statement, a monthly cash-flow statement,” Stack said. ”We taught them about retained earnings, equity, standard costs, inventory disposal, depreciation, overhead absorption, earnings multiples and about how all that affects them individually. Then we began distributing more than 150 financial reports each month to all of our employees.”
Stack instituted weekly financial meetings to which every employee and outsiders were invited and in which the company`s financial soul was bared.
What resulted, Stack said, was a surge of worker enthusiasm that he had never seen before-not even at International Harvester when the tractor contract was met.
”Everybody suddenly realized that we were all in this together . . . that we all contributed to the big picture,” Stack said. ”They learned how somebody`s performance in one division affected another division. They learned how everything was interconnected.”
Most of all, SRC workers learned how their jobs depended on those numbers Stack sent around each week.
The results have been spectacular.
Not only did SRC climb out of its ocean of red ink. Since 1983, sales at SRC have grown from $16 million to a projected $77 million for 1992.
Joint ventures and limited partnerships were formed with J I Case Co. and Navistar. New subsidiaries in Missouri and Canada that remanufacture and market automobile engines, electrical components, fuel injectors, water pumps and engine-overhaul kits have sent SRC`s employee base soaring to more than 650.
The debt-to-equity ratio has dropped from 89-1 to just 1.4-1, and the appraised value of the company`s stock has increased 18,200 percent, from 10 cents a share at the time of the buyout to about $18.20.
SRC has gone from corporate basket case to corporate anchor in this city of 140,000.
When you stop to talk to the men and women working on the factory floor in SRC`s Heavy Duty Division, it`s a bit like talking to a room of economics students. There is little doubt that they understand the numbers.
Recently, machining supervisor Larry Gifford and engine-line supervisor Pam Hilton were standing in front of a crescent of factory workers going over SRC`s latest sales and production numbers. Each employee clutched several computer-generated sheets of paper. There was a monthly income statement, a current sales opinion and a modified cash-flow statement.
”What about the quarterly financial statement?” asked a worker who had just joined the group.
”They should be out by Friday,” Gifford said.
There is a reason for the workers` interest in that financial statement. SRC employees receive bonuses that can equal 13 percent of their annual salary, if financial targets are hit.
To hit those targets, workers may not need to understand all the math behind the balance sheet, the capital plan, the inventory plan, the cash-flow analysis and the income statement, but just about everybody at SRC seems to.
”They lay it all out for you,” said Dwight Edwards, who started at SRC in 1978 when it was still owned by International Harvester and has watched SRC grow from undernourished infancy to mature vitality.
”You really feel that the idea is for everybody to benefit,” said Edwards, who tests remanufactured engines before they are shipped. Edwards`
evaluation is not hollow.
”When International Harvester owned the place, I took home a paycheck and nothing else,” Edwards said. ”Today I get my paycheck and I have $35,000 in company stock . . . I own a piece of the company.”
While employee ownership of corporate America is nothing new, a recent Rutgers University study reported that it is on an unprecedented upswing.
If all worker-owned stock were totaled, the study said, it would show that American workers have about $150 billion in stock and actually own an average of 12 percent of the 1,000 largest corporations with employee stock holdings exceeding 4 percent.
The difference between many of those plans and what goes on at SRC is that at SRC ownership is not passive.
”Our system allows people to see what`s going on,” said Daniel A. Rorke, senior vice president and general manager of the Heavy Duty Division.
”They can see what marketing expenses are and balance that against actual sales. They can see monthly warranty costs and use that to measure their productivity. It creates a sense of security and trust between people.”
It does something else, too.
”It makes you want to come to work every day,” Joe Smith said as he assembled a remanufactured Mercedes-Benz truck engine, ”because you can see that you are working for yourself.”
