Introduction

…they have chosen not to focus on revenue growth or geographical expansion, pursuing instead other goals they consider more important than getting as big as possible, as fast as possible.  To make those tradeoffs, the companies have had to remain privately owned, with the majority of stock in the hands of one person, or a small group of like-minded individuals, or- in a couple of cases- the employees.

Not that they don’t want to earn a good return on their investment, but it’s not their only goal, or even necessarily their paramount goal. They are also interested in being great at what they do, creating a great place to work, providing great service to customers, having great relationships with their suppliers, making great contributions to the communities they live and work in, and finding great ways to lead their lives.

“I’ve made much more money by choosing the right things to say no to them by choosing things to say yes to,” said restaurant or Danny Meyer of Union Square hospitality group, and he could have been speaking for others. “I measure it by the money I haven’t lost and in the quality I haven’t sacrificed.”

“A business without soul is not something I’m interested in working at,” he (Danny Meyer) said. He suggested that the soul of a business grew out of the relationships developed as it went along. “Soul can’t exist unless you have active, meaningful dialogue with stakeholders: employees, customers, the community, suppliers, and investors…”

Common threads amongst the Small Giant companies:

First, I could see that, unlike most entrepreneurs, their founders and leaders had recognized the full range of choices they had about the type of company they could create. They hadn’t accepted the standard menu of options as given.

Second, the leaders had overcome the enormous pressures on successful companies to take past they had not chosen and did not necessarily want to follow.

Third, each company had an extraordinarily intimate relationship with the local city, town, or County in which it did business- a relationship that went well beyond the usual concept of giving back.

Fourth, they cultivated exceptionally intimate relationships with customers and suppliers, based on personal contact, one on one interaction, and mutual commitment to delivering on promises.

Fifth, the companies also had what struck me as unusually intimate workplaces. They were, in effect, functional little societies that strove to address a broad range of their employee’s needs as human beings- creative, emotional, spiritual, and social needs as well as economic ones.

Sixth, I was impressed by the variety of corporate structures and modes of governance that these companies had come up with.

Finally, I notice the passion that the leaders brought to what the company did. They love the subject matter, whether it be music, safety, lighting, food, special effects, constant torque hinges, beer, records storage, construction style, dining, or fashion.

Though they were consummate businesspeople, they were anything but professional managers, indeed, they were the opposite of professional managers. They had deep emotional attachments to the business, to the people who worked in it, and to its customers and suppliers – the sort of feelings that are the bane of professional management.

 

Chapter 1 – Fee To Choose

Just because it’s the best around doesn’t mean you have to franchise or even expand. You can stay as you are and have a business that’s profitable and rewarding and a source of great pride.

If the business survives, you will sooner or later have a choice about how far and how fast they grow. No one is going to warn you about it, or prepare you for it, or tell you when the moment arrives. Chances are, your banker, your lawyer, your account, well whatever else you turn to for business advice will be encouraging it to grow as fast and as far as you can.

Unfortunately, many people have to pass through a major crisis to recognize the choice they have. Some don’t see it until they’ve already gotten themselves in their companies into serious trouble. Others have to arrive at a critical crossroads- for example, the moment at which their company is about to be sold.

“Why am I keeping this company? Why are we in business? I decided that our reason for being here was to prove you can have a healthy, sustainable company that grows by natural demand and that is profitable.”

… Legal protections for poor substitute renovation.

“Success means you’re going to have better problems. I’m very happy with the problems I have now.”

“Before we got into trouble, it was all about getting more sales and building a bigger company,” he said. “I didn’t think about the effect of my decisions on other people. I was in denial about that right up until the day we filed for bankruptcy.”

“Today, I never make a decision that will jeopardize anybody’s job, but that’s something I had to learn the hard way.” He learned a few other things as well. He learned that he had to control his tendency to act impulsively. Like many entrepreneurs, he hated to spend time deliberating. He loved making snap decisions. Somehow, he had to slow himself down. He also realized that he had to start listing a lot better.

Wasn’t it better to have a highly profitable $10,000,000 company than $100,000,000 company that didn’t make any money? Wasn’t it better to have a business for the great reputation in the community and its industry- a company known and respected for its fabulous service, its instinctive generosity, and its happy dedicated workforce rather than its size?

… They could resist the pressures and temptations to expand too quickly or in the wrong direction, and that- unless they did- they would lose what they treasured most about their business… Among other things, they feared putting themselves in a position that would force them to compromise the excellence they strove for.

“I’ve chosen to surround myself with people who are eager to grow. Their ambitious. If you want to make sure a restaurant remains excellent over a long period of time, you have to hire people with ambition… Part of my job is to be aware of people’s aspirations, and to harness them for good.”

“The first thing I always used to look at look for in a new restaurant was a good idea, and I still do, but nowadays it’s also whether or not something fits into our plans for growth,” he said, “we’re clear on what we’re interested in and not interested in. We feel like we’ve done enough fine dining restaurants. On the other hand, we’ve created Shake Shack, which shows we’re not shying away from having some fun doing smaller things that can potentially be replicated. “

“We just believe that if we can start out having a high comfort level with the culture, the thing can become whatever it’s going to be, and it will be good.”

“It’s critical for everyone to know what few things should be non-negotiably similar,” he said, “but for me it doesn’t go too much further than the sense of how people feel treated. Beyond that, I think things should look different, taste different, smell different – which you need to sustain a high level of interest.”

If you want to have the choice, you have to fight for it. All successful businesses face enormous pressures to grow, and they come from everywhere- customers, employees, investors, suppliers, competitors- you name it. As we shall see, those forces will make the choice for you if you let them, in which case you will lose the opportunity of changing course.

 

Chapter 2 – Who’s In Charge Here

Along the way, he contended with the full range of pressures that often caused entrepreneurs to lose control of their companies at an early stage, with the result that decisions about how much and how fast they grow wind up getting made for them. Only by overcoming those pressures can you preserve your ability to choose the kind of company you’ll have in the end.

…It’s far more difficult than most people realize to keep ownership and control inside a privately owned business as it grows, but unless you do you will wind up with a company driven not by your own aspirations but rather by the need to meet growth targets set by outsiders.

“The point is, your growth is absolutely limited by your capital, or your ability to borrow capital. This was an eye-opening realization for me.  They probably teach this in the first day of Business School, but I’ve never seen it so clearly before. Every unit of growth needs new capital if you’re a capital-intensive business.”

“Of course, if you’re not in a capital-intensive business, it’s different but you still have giant steps. They just have to do with people…”

“This is what forces companies to sell out. They can’t finance their own growth. You sell a piece here and a piece there, and pretty soon you don’t have the controlling equity anymore…”

To be sure, many people don’t lose their companies, but you almost always lose a significant portion of your independence when you sell stock outsiders, even if the business remains privately owned.

…most of the CEOs don’t think that it’s necessary, or even advisable, for 100% of the stock to be owned by one person.

Whatever their particular ownership structure, all of the companies guard their equity zealously state to make it short remains in the hands of people committed to the same goals.

Most of the companies are sample have no interest buying other businesses, given the difficulty of merging corporate cultures.

It goes without saying that a great company needs to have great people working for it, but you can’t attract them, let alone hold on to them, unless they have room to grow.

Interestingly, while a few of the sample companies have grown in fairly traditional ways- by launching additional product lines, for example- most have done it by spinning off new ventures, often becoming entirely different entities in the process.

By the time you realize that the company is too big, that you’re out of your depth, that you work is simply not up to standards you set for yourself, you’ve made a lot of commitments- to employees , to customers, to suppliers- that are hard to break. If you decide to change course, people will have to be let go. Contracts will have to be renegotiated. Customers- good customers, the kind you want to keep- will have to be told that you just can’t help them. At that point, you find out just how deeply you care about being the best at what you do.

“Instead of trying to do it all, we wanted to be the best at a few things…that meant getting rid of customers including some who’d been with the company for a long time…”

It’s hard to fight off the pressure to achieve in the way that everybody thinks you should achieve and that they present as being easy to achieve. Of course, they don’t know. It’s never easy, and it’s really a lot of work. But once you open that door, all those questions are out there.

“Successful entrepreneurs have a demon they have to get rid of”, he said, for me, it was having to do as much as I could. I always worried, am I missing an opportunity here? And by leaving money on the table? How do you turn that off? How do you keep the success bug from turning into the success disease?”

“…there are three things you need to realize before you can get into recovery from entrepreneurialism. First, you have to feel the pain. Second, the people who build giant companies from scratch are different from you. It’s not just brains; It’s composition. They have a stomach you don’t have.  Then, finally, it hits you, the third realization Things are okay. You can be happy. I can lead a good life, have a great business make enough money, without going crazy.  And you begin to notice all the unhappy rich people around, with unhappy families…”

He (Goltz) was haunted by the sense of inadequacy, for not measuring up. He would compare himself with the most famous entrepreneurs in the world and wonder that they had that he lacked. He was so focused on his shortcomings that he couldn’t see- or give himself credit for- the real contributions he made to his community and the positive impact he had on the lives of the people around him. It was as though all that counted for nothing if he hadn’t achieved what the world considered the pinnacle of success as measured by the size of the company or his personal fortune.

A small giants mojo comes, in part, from active appreciation of a business’s potential to make a positive difference in the lives of the people it comes into contact with….

 

Chapter 3 – The Mona Lisa Principle

When you look closely at our small Giants, one characteristic immediately jumps out of you. Like Righteous Babe, they are so intimately connected to the place where they are located it is hard to imagine them being anywhere else…The companies shape the respective communities, and the community shaped them.

The company’s owners and employees have a strong sense of who they are, and where they belong, and how they make a difference to their neighbors, friends, and others they touch. In some mysterious way, all that contributes to buzz around the business, the passion people feel for what they’re doing.

A large company with branches around the country, or around the world, can do all kinds of good works; Can be sensitive to the environment and scrupulous in its ethics; Can donate tremendous amounts of money to worthy causes; Can sponsor dozens of charitable events. But such a company can’t do- and, more important, what its people can’t do- is interact with a particular community on a level that defines them both and provides a uniquely gratifying experience all around.

“…We also tend to get employees who are young and idealistic, which is another part of being in Ann Arbor. They are driven more by how much we contribute to the community than by how much we pay out in bonuses. Sure, they want bonuses, and I want them to get the bonus, but people here get more excited about the donations than they do about personal gain, which is nice. Of course, that’s partially because many of them are younger and don’t have families to feed in mortgages to pay.”

While all the companies in our sample are active in their communities on some level, they differ from the 1990s brand of socially responsible businesses- like Ben and Jerry’s or The Body Shop- that they tend to be relatively quiet about what they do. Most of their leaders share Saginaw’s aversion to using their good works as marketing tools.

What the Small Giants do is consistent with that distinction. Not only do they generally avoid taking initiatives that carry the whiff of ulterior motives but they also follow the rule that- to be a meaningful expression of generosity and support- an active charity has to be individual, personal, and largely unheralded (though not necessarily secret).

For many of these companies, the relationships they have with their communities overlap the relationships they have with their customers, and also with their employees. In those, too, intimacy plays a critical role.

 

Chapter 4 -Ties That Bind

From eye-popping service comes industry legends, rave reviews in the media, and fabulous word of mouth, which is the most effective marketing tool a company can have.

In the end, they agreed that it came from their commitment to five core values: caring for each other; caring for the guests; caring for the community; caring for suppliers; and caring for investors and profitability- in descending order of importance.

“Great customer service involves demonstrating to customers that you value their business and will go the extra mile to keep it. Enlightened hospitality means showing them that you care about them personally.”

Wherein Erickson and his employees first identified companies that once had mojo and lost it and then tried to figure out how that happened? The group concluded that, among other things, the companies “forgot about the emotional connection with the consumer… and concentrated on the process of business.” They stopped being the type of business to which customers feel an intimate connection- the type they identify with and want to be associated with because they share the companies values; Or because they perceive it to be authentic, true to itself, the Real McCoy; Or because they know they can always count it come through; Or because they think it’s cool.

Like other small Giants, CitiStorage strives to have an intimate workplace and uses every technique its managers can think of- or can borrow from other companies- not only to create an atmosphere in which employees feel valued and respected but also to make it possible for them to have fun at work.

The concept of value disciplines was popularized by consultants Michael Tracy and Fred Wiersema in their 1995 bestseller, The Discipline of Market Leaders, … They argued that, to be really successful, a company had to focus on providing on one of three types of value to its customers: the best price, the best product, or the best overall solution. Each type of value called for a completely different kind of organization, culture, and mindset, so you would inevitably get in trouble if you tried to excel at more than one.

But becoming customer intimate involved more than getting close to customers and selling them good products. The goal was to develop the ability to provide customers with products that could serve the multiplicity of their needs, and they do it at a lower cost than anyone else in the market.

It took years in a few costly mistakes to make the change, the company learned the hard way, for example, that it should have spent a lot of time and money developing new products for new customers … Nor did ECCO have much success selling new products to existing customers unless it already demonstrated competence in the channel.

ECCO took full advantage of new technologies. As a result, it had the lowest costs of companies its industry that aspired to be customer intimate; that is, the ones making lights alarms that could be reconfigured for use in a broad range of products. It was also one of the most innovative. 80% of its revenue in 2004 campaign products hadn’t existed eight years before- 40% from brand new products and 40% from products that had been improved.

Customers not only outsiders with whom the companies in this book of intimate relationships. There are also suppliers that make it possible to achieve levels of excellence they aspire to.

For lack of a better term, we might refer to the process as building a sense of community- that is high, the sense of common cause between the company, its employees, its customers, and its suppliers. The sense of community rests on three pillars. The first is integrity- the knowledge that the company is what it appears, and claims to be.  It doesn’t project a false image to the world. The second pillar is professionalism- the company does what it says it’s going to do. It can be counted on to make good on its commitments. The third pillar is the one we’ve been discussing- the direct, human connection, the effect of which is to create an emotional bond based on mutual caring.

“It’s not enough for us to be good to customers,” said Righteous Babe company president Scott Fisher. “We want a relationship with them to be personal and real, not contrived.”

It’s generally not the people at the top of the organization who create the intimate bonds. It’s the managers and employees who do the work of the business day in and day out. They are the ones who convey the spirit of the company to the outside world. Accordingly, they are the other company’s first priority – which, from one perspective, is ironic. For all the extraordinary service and enlightened hospitality that the Small Giants offer, what really sets them apart is the belief that the customer comes second.

 

Chapter 5 – The Culture of Intimacy

Like 140 or so of her fellow employees, Michelle is an owner of ECCO. She is a member of the employee stock ownership plan (ESOP) that controls 58% of the company stock … She has a lot of direct contact with the CEO, Ed Zimmer. Among other things, he holds a regular monthly lunch with all the people who have a birthday that month, and they talk about themselves and the company whatever else they want to discuss. There is also a company-wide meeting each month to go over the financials, as well as a steady flow of financial information between meetings.

The relationship between the employees and the company is the entire basis for the mojo they exude. You can’t have the second without the first. Unless a significant majority of a company’s people love the place where they work; Unless they feel valued, appreciated, supported, and empowered; Unless they see a future full of opportunities for them to learn and grow- unless, that is, they feel great about what they do, whom they do it with, and where they’re going- mojo is simply not in the cards.

There’s something else shaping the work environment of companies in this book- something that promotes a profound sense of belonging, of psychic ownership- and it’s necessary, if not a sufficient condition for achieving what the companies aspire to.

The other factor is, once again, intimacy. By that, I mean a relationship so close employees never doubt that the company, its leaders, and the other people they work with care about them personally and will stand by them through thick and thin as long as they hold up their end of the bargain.

But there is a limit to the number of employees a company can have and still maintain those intimate, personal connections. Most people recognize it, but few agree exactly where it is. That may be because the limit varies from company to company, depending on the nature of the business, the imagination and skill of the managers, and the personal preferences at the leader.

A smaller group tends to be more quality-oriented.

New people who weren’t working out didn’t have to be fired. They would leave of their own accord. They simply couldn’t last in a small group of people without the support of their peers. Conversely, those who meshed with the culture were embraced by the group and given more responsibility, with Maytag scarcely having to say a word.

If you have no direct contact with a substantial number of the people depending on you for their livelihood- if you don’t know who they are and what they do- it is extremely unlikely they would feel the intense, emotional attachment to the business that we see in close-knit organizations where everybody spends time together, has important experiences together, and knows what’s going on in one another’s lives.

“I wish for each one of you, with all my heart, those satisfactions that add up to a great deal of happiness,” read one sign. Another declared: “I sometimes reflect that the essence of O.C. Tanner Company’s work, expressed in symbolic terms, is putting a drop of oil on the bearings of the free enterprise system.”

Long before variable pay became all the rage in corporate compensation circles, O.C. Tanner was paying quality bonuses, efficiency bonuses, and delivery bonuses to the people on the shop floor.

To begin with, you need to get the basics right and that starts with making sure you have the right people on the bus, as Jim Collins put it in Good To Great.

If you want a company that cares, you need people who care, and they need to be motivated by more than money. Not that there’s anything wrong with money. We all want to get paid well for what we do, but if the money is the only reason people come to work, they probably belong on a different bus.

In addition to having the right people on board, you need to keep the bus in good running condition. That may seem obvious, but you’d be surprised by how many companies with wonderful intentions trip themselves up by having poor internal communications, or bad coordination between departments, or inadequate follow through on decisions, or any of 1000 other fundamental management issues that can negate all the positive initiatives those companies undertake.

“…It takes well-designed, appropriate, and values-driven systems and processes to support and create, the kind of cultures we’re going after.”

There are three broad imperatives that all the companies pursue in different ways and with different means…The first imperative involves articulating, demonstrating, and imbuing the company with a higher purpose. That purpose may relate to the work that the business does, or the way that the business does it, or the good that comes from doing it, or some combination of the three, but however you frame the higher purpose, it serves the same function. It makes the work the people do meaningful; It kind of reminds them how their contribution matters and why they should care about giving their best effort.

What sets companies apart is the extent to which the higher purpose is woven into the fabric of the business. It has to be a constant presence, a part of everyday life of the company, that people never lose sight of, let alone forget about, as often happens with mission statements.

The second imperative for creating a culture of intimacy involves reminding people in unexpected ways how much the company cares about them. The crucial word there is “unexpected.” These days most companies realize how expensive it can be to replace an employee and how critical is to retain a good one, and they use a variety of tools to let people know that they are wanted and appreciated – performance bonuses, special benefits or perks, flexible schedules, recognition awards, parties, promotions, and so on.

“I’ve concluded that the best approach is to pay people well and on a rational basis. And then do things like the barley harvest and trips to Europe and the courses and dinners and the ball games and the company van you can borrow over the weekend if you’re moving. Those things form a package that’s a little vague but that’s clearly there for you to count on.”

“The fewer written rules, the better…”

The third imperative concerns an attribute that, at first glance, you might think companies have little control over, namely, collegiality. I’m referring to feelings that employees have toward one another, the mutual trust and respect they feel, the enjoyment they get out of spending time together, their willingness to work through any conflicts that might arise, their collective pride in what they do, and their collective commitment to doing it well.

…another characteristic of companies with mojo, namely, their leader’s awareness of the little worlds they are creating internally. To be sure, every business is, to some degree a society in microcosm with its own rules, its own hierarchies, its own standards of right and wrong, but that society is usually viewed as a byproduct of something else, rather than a primary focus of the business.

The leaders of these companies spend an extraordinary amount of time and energy working on the systems and processes that create the culture and shape the community, they do it with the consciousness of the kind of society they wish to have. In effect, they are attempting to build a better way of life in their own little corner of the globe.

 

Chapter 6 – Galt’s Gulch

It’s been noted that every new business represents an attempt by its founder, or founders, to reorder the world in some way. The great majority of founders do so, however, without giving it much thought; And very few, indeed, think about how far they can go in reordering the world – which is not surprising.

If people haven’t already thought about how they want the business to look, act, and feel 10 years in the future (as they probably should have), they’re unlikely to spend much time thinking about it while they’re struggling for survival. Should they be fortunate enough to get beyond survival, one of two things usually happens. Either they are so overwhelmed with problems and opportunities that they don’t get around to thinking about the bigger picture, or they become so focused on strategy and tactics that they neglect ask basic questions about the kind of culture and organization they want.

“Creating and nurturing a work environment that frees coworkers to grow and reach their full potential is the primary purpose of the company,” notes one Reell document.

…the company publicly pledged to always do what was right; strive for continuous improvement; help coworkers be all they could be; follow the Golden Rule; seek inspirational wisdom… especially with respect to decisions having far reaching and unpredictable consequences; take action only when it is confirmed unanimously by others concerned; And meet various specific commitments to coworkers, customers, shareholders, suppliers, and the community. It was a tall order … The company even created the working group mentioned above called The Forum, to make sure it was living up to its promises and to recommend corrective action where it fell short.

“In the course of being compassionate, you can’t relinquish your responsibility to be unmerciful when it’s necessary… You know, life is unfair but merciful. You can do everything right and get a brain tumor. Business is unmerciful but usually pretty fair. People who go broke often bring it on themselves. For a company to succeed, everybody has to do their bit, and you have to insist on it.”

“You should feel really worried if you’re not profitable,” he said. “If you have an established company and you don’t have profits, you’re doing something wrong. There’s a hole somewhere. Profits are not optional in business, if you don’t have them, you’re dangerously close to going broke.”

As you walk through the place, you can’t help but notice all the signs in the walls. They read like ersatz fortune cookies. “One who sails by on excuses will drown in a sea of mediocrity.” “When we take care of customers, we take care of ourselves.” “Only as good as our last frame shop.” “A happy customer is the best job security you can get”. The things are from Goltz. They’re all original. “I don’t plagiarize,” he said, “I’m telling people about the business. I think it’s a big failure of management, not getting people to understand what they’re doing here.”

“Every couple of months I get new employees together and tell them the history of the company, why we’re here, and what to do if a problem arises. I say, call me on it if I’m full of it, if anything turns out to be different from what I’m telling you.”

“Small businesses don’t have enough meetings,” said Goltz. “I believe everyone in the company should meet at least once a week. You need that direct contact.”

“I want the Y employees- people who want to put it in the extra effort, who want responsibility and job satisfaction. For them, you need to run a tight ship. Like insisting that people show up on time. The good people resent it when other people come in late.”

“I finally figured out that managing isn’t just about learning how to motivate people. It’s also about learning how not to demotivate them.”

“You could be doing bonus plans, holding rallies, having parties to build morale. Then you scream at someone and throw it all away. Did I scream when I was younger? Yes. I didn’t understand the role of the boss. I had to learn the difference between a mistake, which I can live with, and haphazard conduct. Backing into a pole is a mistake. A crooked label is careless. “

“I really believe that the secret to business can be summed up in two words: leverage and control. I have always been good at the leverage part- growing into new businesses, leveraging the assets we have…control is another story. It’s about knowing what’s going on and making sure what you want to happen actually happens.”

…both the Goltz Group and Reel Precision Manufacturing pride themselves on the number of long-term employees they have and the low turnover rate among those who join and make the grade.

“I take pride in my work, great pride, and I would never compromise it, certainly not for money. The end result is not the check. It’s how beautiful the customers look, how special they look, and how proud I feel. It’s a sense of accomplishment.  How would I get that if I’m Calvin Klein?”

The environment was deliberately informal… There are no barriers. Everybody hears everything.

“We still want to succeed in creating the kind of work environment that we find is the most successful in and efficient, that gives people positive feelings and allows them to be the most creative,” said Chuba. “One thing we know now is that we need to hire key people a little earlier and immerse them in the way we want to work. We’re also trying to get a better feel for the real estate market and see what kind of space is available so that they won’t have the physical barriers we had to deal with this time. If we do a few things like that, we think we can be more efficient, earn more money, and do a better job of making it work…”

By keeping this size of the permanent staff down and shrinking back to the core group after each project, the company was also able to minimize the losses between jobs. As a result, it had no trouble generating plenty of cash – so much, in fact, that the rest of the industry couldn’t help taking notice.

Every Friday, the employees get together in the auditorium, where Hughes and the other managers update them on the bids for television commercials, the status of feature film development, and what’s happening with cash flow. Once a quarter, he just gives a lesson on the financial statements and goes over the budget. Among other things, he tries to get people to understand the difference between positive cash flow and profit- the crucial distinction in a company that finds it a challenge to simply break even each year.

“The cash forecast is key to me,” he said. “I don’t rely on the income statement. We do a quarterly close and I used the cash forecast to calculate our needs. If the revenues aren’t there, we have to lay people off. With 85% of our costs in people, we can’t cut enough just by being frugal, not even if we slashed healthcare.”

But you can get away with leaving things vague and mysterious only if you make sure you’re ultimately in control, which means identifying and holding onto- the critical levels of power.

“Everybody knows who’s in charge around here, but there are slightly vague ideas exactly who’s in charge of exactly what,” he said.” Of course, what really exists may be quite different from my perceptions. But, that’s what I like to think exists.”

Good management in a small company involves a certain freshness and responsiveness and natural feeling that is by definition partly unspoken, unarticulated, undefined.

 

Chapter 7 – Pass It On

UNBT had been founded on the heretical notion that a company’s growth, has organic, almost preordained limitations, and that, if you exceeded those limitations and grew too fast, you would undermine your ability to provide excellent customer service, create a great workplace for your employees, and maximize shareholder returns. “We could grow faster, but it would cost us everything,” he told her. “In the bureaucracy of growth, you lose your distinctiveness”.

It was a place where people were encouraged to use their judgment and take initiative, and not just the senior managers.

“What will kill this company first is a bunch of people running around with the noses stuck in the rule books and manuals,” he said.

He’d paid them well give them an ownership stake, buy generous benefits, and throw in perks like the fancy cafeteria and various special “Unbank” awards. Above all they would have fun and freedom to do their best. The result was almost no turnover, not even among tellers, in an industry where the typical teller turnover rate is about 50%.

He was only interested in long term customers who would do all their banking with UNBT…Once customers were accepted, however, they received a level of service they simply could not get anywhere else.

He was simply unwilling to pursue growth for its own sake. He believed that, as long as he kept an eye on the ball, growth would take care of itself. It was a matter of logic in principle, and he said he would apply the same approach even if he went altogether different business. “It’s like you’re sailing down a river with many tributaries running off,” he told Conlin. “Yes, you pause to consider a tributary and whether it’s part of your voyage, but keeping you on course is the knowledge of where you want to be at the end of the trip.”

However difficult it may be for a company to hang on to its mojo as it struggles to find its way in the turbulent business environment, it is infinitely more difficult to do while simultaneously undergoing a transfer of ownership and leadership… To begin with, it almost always requires the owners to make significant sacrifices. Among other things, they must be willing to accept a lower price for their stock than they could get if they simply sold to the highest bidder.

Even if the owners are willing to sell the company for less than they might otherwise receive, there is still the problem of finding buyers with the vision, the passion, and the talent to guide the business while continuing to nurture the qualities that have given it its mojo in the past. Most likely, those people are already working in the company. They understand better than anyone else what it takes to create mojo in that particular business because they’ve been part of making it happen. But are they capable of doing on their own? Do they have the necessary leadership skills? Are the resources available to provide them with the support they need? What about the finances? Is it even possible to arrange a buyout? Is enough cash being generated to cover what would be owed to the previous owner- or to a bank that put up the money to do the deal- without crippling the company?

Given both the complexity and the emotional ramification of the issues involved, there’s no wonder that most owners of private companies put off dealing with succession as long as they can- often until some life-threatening event forces them to face up to their mortality. By then, their options may be limited.

Of course, estate planning addresses only one side of the succession issue- making it possible for your chosen successors to keep control of the company when you’re gone. That side is certainly important, as the statistics on the survival rates of family businesses can attest. Only about 30% of them make it through to the second generation, and 3% to 5% through the 4th generation.

The other side of succession has to do with the transfer of leadership. There was more to it than finding the right CEO, or even the right management team. Just as important was having a clear well-articulated vision that was ingrained in the day-to-day life of the business.

A company has to move from being entrepreneurcentric to being visioncentric. The goal is that, by the time we’re gone, the vision will be secure.

Thanks to the various tax breaks Moreover, founders who sell to an ESOP can often do as well as, or better than, they would if they sold to an outside party- and control stays in the company … The downside has to do with two sets of liabilities that you take on when you start an ESOP. First, there’s the money that the ESOP usually has to borrow to cash out the founders… The second set of liabilities is potentially even more dangerous, mainly because it’s frequently overlooked. When contemplating an ESOP, people tend to forget that, if it works out as intended, the shares held by all the employee-owners could be worth a lot of money in the future- and eventually the employee-owners leave and expect to get paid.

In any such transactions, there’s always the risk that the unscrupulous owners will take advantage of the company, piling on more debt than it can handle, getting the cash out early, and leaving employees holding the bag.

“If we don’t grow enough, we may have to sell. But, you know, it’s the same thing that makes the ESOP great. People become motivated to increase the stock value. That creates the liability and also the ability to pay off the liability. We have a lot of opportunities to grow, and our culture is taking advantage of them and we invest. Some people don’t agree with that. They rather take the profits than reinvest them, but they stand out like sore thumbs around here.”

“When I drive home at night, I think all the way about what we’re doing- the products, how much better we can make them, how much more value we can add, how much more profit we can get from them. I get excited. I want to turn the car around and come back. A lot of that has to do with the people, and being part of an organization that people respect, which goes back to the core values. I grew up with the core values, so they feel right to me. Without the ESOP or the open-book management, I might not be as interested.”

“What sold him,” he says, “was the authenticity of the three founders, the transparency with which the company operated, and its fundamental values and purpose. There didn’t appear to be many secrets in the company. When he asked about debt, the founders had readily shown him the balance sheet and income statement. They had also made it clear that their first purpose wasn’t maximizing shareholder wealth- it was the growth and development of people. They wanted a business environment that promoted harmony between work life and personal life.”

Ironically, the managers had expected that the biggest challenge would be to get employees to understand the opportunities and responsibilities of ownership, but they discovered that it was the founder’s children and grandchildren who had the hardest time coming to grips with what it meant to own stock. If they didn’t have much direct contact with the company, their emotional ties to it- and to which unique way of doing business- were week.

The question is, Who owns the sacred trust… Is it the legal heirs or the spiritual heirs?

“Those who want the stock will get it,” he said. “Those who aren’t so interested in it will give it up. The ESOP is the only shareholder that has a real appetite for stock. That’s the overarching dynamic. I think we should make it easy for those who want to leave and for those who want to stay to stay.”

Mojo does not insulate a business from the marketplace. Small Giants must adapt to changes in the competitive environment just like every other business. Then again, they usually have an easier time of it, thanks to the same practices and beliefs that give them their mojo to begin with. But, ironically, the founder’s very success, and the mystique surrounding it, can often become a significant obstacle to the leaders who follow them, especially when it becomes necessary to make fundamental changes in the way a company does business.

So how do you convince people that fundamental changes are necessary when the old ways appear to be working so well? How do you arouse people to action when they feel comfortable with the way things are? And how do you overcome the reverence people have for their beloved founder?… One of his first moves was to open the books to the managers. Up to that point, only a handful had known the company’s actual profitability… He brought 53 people together from all over the company and challenged them to define what business they were really in, what value they should be offering customers, and what changes they would have to make for the company to be the best at what it did.

It was a major change in perspective, and it required the company to make a series of seven strategic bets, as Murdock called them: 1) embrace reality; 2) define the strategies; 3) get the people right in the in place; 4) get marketing into the company; 5) harness technology; 6) change the culture; and, 7) improve operations.

“There was no them. There was just us. If we wanted to have our bonuses, we had to generate them ourselves. That was a tremendous change and met a lot of resistance at first.”

“We are wary of our success,” he said. “We know that new problems and opportunities arise every day and that our best hope is to move forward with humility and courage. We believe we will survive and prosper, but we are never sure of the next step.”

There are, of course, some founders in our sample, for whom succession is not in the cards. It’s pretty much a foregone conclusion that their company’s mojo will last only as long as they themselves are involved because the business can’t survive without them.

 

Chapter 8 – The Art of Business

To me, the owners and leaders of these companies stand out for being remarkably in touch with, and focused on, what most of us would probably agree are the good things in life. By that, I mean that they are very clear in their own minds about what life has to offer at its best- in terms of exciting challenges, camaraderie, compassion, hope, intimacy, community, a sense of purpose, feelings of accomplishment, and so on- and they have organized the business so that they and the people they work with can get it. When outsiders come in contact with such a business, they can’t help but feel the attraction. The company is cool because what’s going on inside it is good and it’s fun, it’s interesting, it’s something you want to be associated with.

“I think you need to feel in your gut that whatever you do is the most interesting, exciting, worthwhile thing you could be doing at that moment. Otherwise, how do you convince anyone else? If I thought storing boxes on shelves was boring, I would never have been able to attract the great people I work with, and we wouldn’t have been able to accomplish what we have done.”

The difference between the Small Giants and everyone else lies in their refusal to let go of the passion and their success in keeping it alive … So how do they do it? To begin with, they understand that you can’t measure the value of what a company does by looking at how big it is and how much profit it generates… Instead, the Small Giants focus on the relationships that the company has with its various constituencies- employees, customers, community, and suppliers. Why? Partly, no doubt, because relationships are rewarding in of themselves, but perhaps also because their strength reveals the degree to which people are inspired by the company, and its ability to inspire them is the best measure of how they perceive the value of what the company does. If they are as passionate about it as the founders and leaders, the financial results are likely to follow.

But the small Giants also know those relationships are fragile. They depend on a level of trust and intimacy that’s easily lost. All it takes is a little neglect. If you allow yourself to get distracted, if you stop working on whatever it is that ties you to the people you do business with, the intimacy will vanish, the trust will dissipate, and the bonds will it road.

It’s easy to fall into the trap of thinking that if you’re maximizing growth, you’re also maximizing success.

In addition, getting caught up in the growth game helps to assuage one of the least recognized and most underrated hazards of company building: boredom. Once you move beyond the acceleration of the startup stage and the growth phase, you find yourself facing the kind of management challenges that a lot of entrepreneurs consider, frankly, boring. If they’re smart, they bring in other people to help. Meanwhile, they themselves try to figure out what to do next, what to do that they really enjoy, what to do that can recapture the excitement they have already begun to miss.

Much in the same way that a Symphony is the end result of a composing process, any great product or service is the end result of its own particular creative process, and whoever is doing in creating must love the process as much as the end result.

“I guess I’m like a lot of entrepreneurs,” he said. “When I’m told something is impossible, I want nothing more than to go out and do it. That’s what I like, doing things other people think are impossible. Is not so much that I want to prove something, at least not to anyone but myself. But for people like me, business is sort of a puzzle. We believe there’s a solution to every problem, and we think we can figure it out if we can just visualize what needs to be done.”

In business as an art, the end result is an experience, and the quality of the experience reflects the relationships between the different participants, as well as a specific medium of expression.

They demonstrate that it’s possible for the business side and the creative side to live in harmony, rather than constantly fighting each other, as tends to happen everywhere. What makes it possible at the company’s priorities. There is no doubt in anyone’s mind that the business is the means people are using to pursue their passion, and not the other way around.

There are some people who want more out of business than a typical company offers. It’s too boring for them. It’s too limited. It is not worth the sacrifice. They have a passion, or perhaps just a burning idea, and they don’t want to let their life slip away without ever getting around to it. So, they build companies that allow them to pursue their passion And follow their bliss, and they don’t forget why they went into business in the first place and how they got where they are.

Much has been written about Germany’s Mittlestand, the small to midsize, mostly family-run businesses that are often described as the backbone of the German economy. I’m not sure we can say the Small Giants are the backbone of the American economy, but they certainly are at its heart and soul, and they’re setting a new standard for excellence on Main Street.

 

 Companies Interviewed For This Book – The Small Giants: