“Stacked” For Success in the Game of Business

by Shel Horowitz

Business is a game to Jack Stack; he calls it the Great Game of Business. But what high stakes!

On September 5 the Family Business Center kicked off its 8th year of programs with keynote speaker Jack Stack, CEO of SRC Holdings Corporation.

Stack worked for many years as a plant manager for International Harvester, a company mired in bureaucracy and stagnant in thinking. “We had 670 pages of regulations before we could talk to anybody. We had to make the one rule apply to 17 plants. And the work was boring; we never engaged employee’s minds. There was no camaraderie, no loyalty.”

Partly through luck, Stack climbed the ladder very quickly at Harvester, becoming a manager at age 20. “I had a $243 million budget and I couldn’t buy a beer! Harvester believed their management was too old, so they brought in all the kids. I was good at my job; I made everyone fill out 15 forms to get a part off of the shelf. But I was not connected with the reality that the assembly line was shutting down because I wouldn’t give them the parts.”

Then, in the face of foreign competition and a slumping heavy equipment market, Harvester decided it didn’t need the Springfield, Missouri plant anymore. The Japanese heavy equipment manufacturers had started to “take the American market” from the 17 US tractor manufacturers. They gained market share quickly by listening to their customers, instituting rapid shifts, slashing the time for a new model introduction by two-thirds, from 18 months to 6, and by paying attention to the line workers.

“The Japanese had one simple philosophy: who knows how to do the job better than the one doing it? We did not trust hourly employees. We had seven layers of overhead, all doing the same job. We didn’t trust the crankshaft grinder to call the forge and say, ‘deliver me 10 units.”

When Harvester’s debt climbed past 6 billion, the company was laying off 1000 people a week. That’s when Stack offered to buy the Springfield plant; and got some hard lessons. “The quickest way to learn about business is to try to borrow millions of dollars when you don’t have any of it. I wanted to borrow $9 million.” It would have been much easier, Stack said, to borrow many times that amount.

Meanwhile this was 1983 and interest rates were at a record high. Venture capitalists were looking for 40% return. “I went to 54 financial institutions; by the 17th I could write a business plan in a taxi. Then I went to a bank in trouble: ‘I hear you’re looking for bad loans; I’ve got a doozy!’ If you have a bad loan, go to bad banks first; safe banks don’t give bad loans.”

Of course, bad banks making bad loans demand horrible terms. “We borrowed $8.9 million and collected $100,000 in equity. The interest was 18%: $96,000 a month in interest payments.” That is an 89:1 debt-to-equity ratio.

Stack along with 12 other managers purchased the Springfield plant, now known as Springfield ReManufacturing Corporation, brought it back from death’s door, made it profitable, and spun off business after successful business by rethinking every assumption, involving the employees in running the company (including open-book management on an unprecedented scale) and by making every one of his employees a player in the Great Game of Business.

Stack started giving his employees a crash course in economics and finance. “I gave them a financial literacy test; they were all wrong. Nobody ever told them how the business is run, but they had these perceptions. We had to trick them into learning with a metaphor, the Great Game of Business.

To do this, Stack not only opened the books, but also asked every single employee to look at productivity, efficiency and cost control by taking in both the big picture and the individual trees in the forest. He achieved quite a bit through strategically designed incentives and bonuses; but also by simply keeping all lines of communication open. “A janitor told me, ‘this open book stuff is baloney; have you looked at your balance sheet? Do you know 76% of your receivables are in the truck market? You have all your eggs in one basket. They have a recession every six years. You’re going to lay us all off.’ Then he went back to pushing his broom.”

Stack discovered the janitor, a former Wall Street analyst on hiatus, was right&emdash;and started diversifying. He and his employees looked for markets that would be strong when the truck market was weak. Auto parts was one success; in a recession, people keep their vehicles longer and need replacement parts. “Most recessions occur because of bad management; they don’t just happen. We’re still going strong because we prepared from day one for a recession. Everyone in all of our 22 organizations knows the contingency plans. When you set standards of this nature, its amazing what people come up with.”

Stack shared two more anecdotes from the early days of his company: A woman, at an employee meeting about the need to be more efficient in producing engines, said, “I don’t like engines. I like nozzles. I build 6000 nozzles a month.” He gave her some authority in the department. “I came back a month later and she had made the most incredible transformation in her department. She painted the floor to eliminate contaminants; saved $12 per unit through process improvements and creativity, bought department t-shirts with her own money…I saw the ownership, the pride.”

“There are 750 parts in an engine; we had to duplicate her success. I gave all departments the information a CEO has. Then we’d sit down and figure out how to make it better. We took half the saved interest and put it in a bonus pool.”

And then there was the person who dreamed up a five-year dealership incentive program tied to a bass fishing derby, with escalating prizes. “The dealers are killing each other to get in. They want the five-year megabucks $25,000 prize. We’ve run it for 10 years; I run seven fishing tournaments a year because of this guy!”

In SRC’s climate that rewards internal entrepreneurship with instant recognition, celebrations, career opportunities and even ownership, 80% of the new businesses succeed. Sometimes the success is dramatic: one player, a furniture company in Denver applied the game and generated an increase in sales of 220%, profits of 540%, a decrease in returns of 18% and a 19% gross margin.

Bonus programs are an important part of the success. Stack looks carefully to find places where incentives will produce large gains. “Every year, we identify different weaknesses. Every time we’ve created a bonus around a benchmark, the gain has maintained.”

Meanwhile, Stack appears to have the Midas touch at SRC. “We’ve made money for 18 consecutive years, with no layoffs.”

Currently, Stack oversees an empire of 22 companies, all aiming for 15% annual growth. A share of stock worth 10 cents in 1983 at the company’s founding is now worth $81.60. And now he consults with companies around the world, even whole countries, such as Zambia.

For more on the Great Game of Business, visit www.greatgame.com or get a copy of Stack’s book called (surprise!) The Great Game of Business