Chapter 7: The Business Enterprise
The Special Machine Tool Enterprise
What follows is an effort to elevate the discussion of the individual Yankee ingenuity characteristics of passion, imagination, courage and the “find a way” mentality to the enterprise ownership level. Ownership in this context is the assumption of responsibility for an organization including, but not limited to, actual ownership.
A fact of business life is that every “for profit” enterprise must consistently and competitively improve shareholder value to survive. In the case of a public company, the shareholder makeup is constantly changing, based on the Wall Street perception of shareholder value; that is, track record and prospects for the future. Most of the time, they are investors without personal or sentimental attachment to a company or to an industry.
Those of us who own stock directly are those investors or shareholders. Many more of us are shareholders as part of mutual funds, retirement plans, or those who have insurance policies whose assets are invested in stocks. So most of us, as owners of companies, expect not just security in those investments, our assets earned from our life’s work, but a competitive return as well. Most would agree that is not an unreasonable expectation.
But shareholder satisfaction alone does not assure enterprise success. In fact, there are two other constituencies that are equally important. While the shareholders in one form or another exert the most direct, day-to-day influence on enterprise operations, the other two also apply very direct but different pressures on those operations. One of those influences is the customer, who must find competitive dynamic value in product or service offerings. The third influence, if you accept the philosophy of this writing so far, are the contemporary employees who must be able to satisfy the promises of “W3” competitively.
It’s important to note that a common denominator for the three constituencies is the adjective “competitive.” With all things considered, why should any of the three continue involvement in the enterprise with less? This is pretty basic stuff, right? Enterprise results must consistently and competitively satisfy all three.
That is a serious challenge for the cyclical and highly competitive special purpose machine tool industry and others like it. Add to that the industry’s intense capital needs and its innovative nature and associated risks, and its investment attractiveness is further diminished. In the case of public companies, financial analysts see to it that all risks to solid and consistent returns are well-known. What matters is a track record of consistent success along with a favorable economic outlook.
Every organization, whether religious, political, or business, has a “personality,” planned or not. Many times, it is simply a reflection of the founding entrepreneur’s personality or that of current management. It is really the responsibility of management to shape the company personality for success. It may be an energy-packed, “find a way” environment with a “bring on the competitors” attitude. It may be a TGIF or a TGIM kind of organization. Even sub-divisions of larger organizations have their own unique personalities, which may or may not coincide exactly with the larger entity. The company personality is reflected in the way the particular entity functions and, of course, in its effectiveness in achieving its objectives. It also leaves an impression on prospective customers, prospective employees and prospective investors.
Many companies have a prominently displayed mission statement and maybe a companion policy statement of their intended integrity or values profile. While a lot of thought and effort may have gone into their choices, they may not be an accurate reflection of the real life personality of the organization. It may be just wishful thinking without thoughtful investment in the human capital and an actual operating philosophy that supports the statements that will make it truly effective.
So what does a desirable organization personality look like, and how can it be developed? The venture capitalist got it right when he required management knowledge and expertise and employees to be passionate about the company mission and its products before committing capital investment.
The statements of mission and values are an important start. They must be realistic, concise and something with which people will identify. The basic elements of success should be embodied in those statements.
Enterprise success (author’s definition):
Price, quality and technologically competitive products - dynamic value (for customers)
Competitive returns (for shareholders)
Competitive “Why We Work (W3)” rewards (for employees)
The mission and values statements are the rumble strips at the edges of the highway that will help keep us awake and headed for the enterprise objectives. The speed at which we travel toward those objectives is determined by the energy levels generated internally. The ingredients of Yankee ingenuity are implicit in the elements of success. However, they should be explicitly mentioned as well, as they will generate and inject that energy into the enterprise personality. It may be difficult to be concise with all these things to include. However, the concepts of continuous refreshing of organizational spirit and minimal rules, traditions, regulations, and standards, things that keep an organization energetic, vibrant and youthful (no reference to individual age), should be included.
If the organization’s mission statement contains those points and is able to individually achieve them, then by definition, it has succeeded.
A large part of business public ownership belongs to institutional investors. They are mutual funds, pension funds, etc. who invest unemotionally using statistics, forecasts, and trends and require consistent and competitive returns. Even the largest special machine tool companies are probably not large enough on their own merits to interest institutional investors. Insiders and smaller investors are the most likely public owners of companies like special machine tool companies. They will also require competitive returns although some cyclicality may be tolerated.
In the case of a private company, which typically would be owned by someone who understands the business and all the positives and negatives, some patience with results is possible, but sooner or later there must also be payback. In rare cases, a poor financial performance can be allowed to extend for some time, depending on the depth of the sentimental attachment and commitment and the expected turnaround timing.
During the good years for the industry, when most special machine tool companies were closely held, they did well and were profitable most of the time. There were some good years and some not so good years, but on average it was a good business to be in for the typical owner, but probably a less attractive one for the typical Wall Street investor.
One of the largest five largest special purpose machine tool companies during the 1970s took an order for a system to produce disc brake rotors for one of the Big Three auto companies. The machine for the finishing operation was proposed using a whole new approach. There were two traditional competitors who were both well-liked by the customer and offered a more traditional approach. This new approach made the entire project more competitive than the competitor’s offerings. In the eyes of the customer, the risk was whether or not just one machine, for the finishing operation, could accomplish the required production volume. In the view of the owner/entrepreneur, it wasn’t a severe risk. He guaranteed that if it did not meet the requirement, a second machine would be provided at no cost to the customer. The system performed well at the required production rate with one machine.
That same company won an order for piston production equipment from a well-known small engine builder. There were two machines involved, valued at several million dollars. A competitor acquired this company as this order was entering its final assembly phase. The machines languished in the assembly and tryout stages. The acquiring company’s president at the time did not have a machine tool background and wasn’t sensitive to the fact that piston equipment was a specialty of that acquired company. When choosing people to be retained following the acquisition, he missed the specialty competence and focus that would be required.
As it turned out, another factor, perhaps too subtle for an inexperienced manager to see, had a serious negative effect on the project. The equipment was purchased for upgrading production and quality of a current set of piston products. With proper focus from knowledgeable people from the beginning, the equipment could have met the letter of the piston product tolerance requirements and probably met the delivery date requirements as well. As it was, some of the specific capability needs, statistically, fell short and time ran out.
This kind of thing can happen, but if the need is there on the part of the customer and knowledgeable people are involved at the management levels of the supplying company, compromises can normally be reached. The difference here was that the customer had the capability to produce those pistons on current equipment. It seemed that his production demands had tailed off and his capital could be better utilized on other projects. The project was very late and unable to meet the letter of the purchase order requirements, and he canceled the order. It was a disaster for that fiscal year.
This was a failure due to project management and lack of focus, not a technology problem. Had the rotor project not had the focus or attention, it would have failed as well, since there was a technology stretch involved. The owner knew his organization could get the job done if properly focused, and he would see that it was.
A pure public company would have some difficulty with both of these examples. An outsider’s view of the risks associated with the level of continuous innovation makes bankers and investors very nervous. The philosophy of offering advanced competitive products to worldwide customers at some level of risk differs greatly from having to impress distant financial analysts monthly. The objective is to win orders that may be challenging but with the knowledge that it will lead to opportunities to profit from the experience
It is also a very capital intense business, requiring capital to fund the actual order production, potentially in the range of millions of dollars. It also turns over at a slow rate due to equipment deliveries that may be 12 to 18 months or more. The facilities required are very capital intense as well.
Historically, the owner/entrepreneur had a special rapport with several levels of management in key customer organizations. That was important to both sides, as both had very high stakes in the outcome of these projects. Those relationships continued over many years and projects and were proper in every way, the result of mutual respect and mutual support. They followed subsequent generations of management on both sides, and frequently resolved otherwise impossible conflicts. If such a relationship had existed and communications were working, the piston project probably would not have failed, even if it had fallen short of the letter of the requirements.
In a recent business year, a family-owned American special machine tool company announced to its employees that it would break records for that year for business volume and for profits on that business. That same announcement said that all those profits would be reinvested in the company for engineering and manufacturing facilities, which was not unusual for that company. The facilities prior to that announcement were already among the finest in the business. That same company has provided the most advanced special machine tool products of any competing company anywhere in the world.
The success of this company would likely be measured differently from various perspectives. The announced profits would seem modest to many; however, the shareholder value improvement would be significant, whether public or private. The net worth of the company was improved, its sales volume grew, and it became well-positioned in the global marketplace for the sale of its products. It was not unlike some public companies that do not show bottom-line profits year after year, but at the same time shareholder value increased competitively by growth and expansion through acquisition and its resulting market positioning.
A special machine tool company as a division of a larger multi-industry corporation can succeed under a management philosophy similar to investors favoring diverse portfolios. That is to say, the good and not so good years will still yield favorable results over time and provide the advantage of diverse corporate holdings for overall stability.
Corporations that demand specific levels of profitability year after year from all divisions, under threat of spin-off or organization-ravaging cost cutting measures, will not be a good parent. There will always be good and not so good years in the special machine tool business. There are times when two or more new automobile product programs occur simultaneously, and times when few significant programs are active. In the lean years, orders may be pursued which will require a technology leap to counter aggressive competitors. There will be difficult decisions on how to endure a low or no profit year, and to keep the organization together. That’s very hard to accept in many demanding corporate cultures, but it is a driver of progress.