Cover Story: october 06

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by Ellen M. Heffes and William M. Sinnett

 

Interviews with five senior executives of high-profile, branded private companies, yield six principles for sustainable growth that can apply to any business in any industry.

 

So maybe Tom Peters had it right after all. Back in the 1980s, business guru and author Peters and co-author Robert Waterman, in their blockbuster In Search of Excellence, flipped the corporate pyramid 180 degrees, placing the customer on top. “Keep it simple, stupid,” they wrote. What a concept!

When it comes to growing and sustaining a business, those that build strategies around putting their customers — and even their customers’ customers — first are the ones that consistently sport growth charts with lines going one way over time: up.

The mantra “if you don’t grow, you die” is likely the one that keeps senior managers awake at night. Whether a startup or multinational giant, public or private, every company has growth on its agenda. Even companies as huge as $75 billion Cargill Inc. or $90 billion Koch Industries Inc. — the two largest U.S. private companies in revenues — are constantly concerned with growth, and growth’s partner: sustainability.

Private companies, many very small, are the norm in U.S. business. The American Institute of Certified Public Accountants (AICPA) reports that 99.7 percent of incorporated businesses in the U.S. are private companies; and, of a total of almost 13 million U.S. businesses tracked by Hoover’s Inc., all but perhaps 15,000 are privately held.

So how do private companies sustain growth? What advantages or disadvantages do private companies have versus public companies for nurturing sustainable growth? And what are the prime drivers for growth in different businesses? Is it product/s or services? Is it the people and policies? Is it process? Or cash flow?

Financial Executive and Financial Executives Research Foundation sought to find out what strategies some of the top U.S.-based private companies employ that keep their growth at consistent double-digit numbers — even for some century-plus-old companies, signifying they’d weathered several economic storms.

We spoke with senior finance executives from Cargill, Carey International Inc., Koch, SAS and S.C. Johnson & Son Inc. — all brand-name leaders and in business for a combined 455 years. Four of the five remain strongly family-managed companies, but have gone far beyond the image of the non-sophisticated mom-and-pop shop. And while all are in different industries, dealing with different issues, they share one common concern: how to drive and sustain growth.

Indeed, discussions with these leaders have resulted in extrapolating six key principles relating to sustained growth that apply to all:

§      Know your core capabilities — and “stick to your knitting;”

§      Hire world-class people — and give them world-class benefits;

§      Anticipate customer needs — and be a solution provider;

§      Use debt only for major expenditures — if debt is used at all;

§      Measure the profitability of every detail of every business; and

§      Reinvest, reinvest, reinvest.

 

Know your core capabilities — and ‘stick to your knitting’

 

Every business starts out with a purpose, but that original purpose can often get deflected as changes occur, both internally and externally. It’s clear that knowing its core capabilities, and sticking to them, is central to Koch Industries’ spectacular success. “You can’t put us into one industry, because we represent many different types of industries,” says Koch Executive Vice President and CFO Steve Feilmeier

“We view ourselves as ‘capability-bounded,’ not ‘industry-bounded.’” Indeed, he adds, “That is one of the benefits of being a private company; we can be in multiple industries if we think that those fit.”

The foundation of the Wichita, Kan.-based company was formed in 1927 when Fred C. Koch invented a new method of refining petroleum, modern day “hydro-cracking,” and expanded that around the globe. Thus, its roots are as an engineering company providing technology cap-abilities to other refining companies, and the root of its capability is refining process engineering.

Fast-forward to 2006, and you’ll find a $90 billion company of 80,000 people in nearly 60 countries. It’s in businesses related to refining and chemicals, pulp and paper and packaging, as well as having significant interests in minerals, fertilizers, ranching and financial services.

“The common theme of all our industries is owning, developing and adding value to process technology,” says Feilmeier, who’s been with Koch since 1997. All Koch’s businesses have one thing in common, he explains: “We take large commodities that need to be processed by large sophisticated manufacturing or process facilities, and we convert those commodities for an end-user that requires a significant trading capability to take them to market.”

For example, taking crude oil and processing that in a complex, multi-billion dollar refinery, then turning that into refined products, is viewed as being similar to taking trees (a big bulk commodity) and processing those into or through very large sophisticated pulp and paper operations into products that people use every day. Here, Feilmeier refers to the company’s December 2005 acquisition of Fortune 500 company Georgia-Pacific, the maker of Dixie cups, Brawny paper towels, etc. A second substantial acquisition was bringing Invista into the Koch family from DuPont in 2004.

For Minneapolis-based Cargill, its roots as a grain-trading company have provided an anchor for growth in several directions. Founded in 1865, it moved to processing of grains as well as trading. By the 1950s and ‘60s, it went global, and after the fall of the Iron Curtain in 1989, it moved from North America, Europe and Japan into countries like Russia, China, East Germany, Poland and India.

 

Simultaneously, says Robert L. Lumpkins, its just-retired vice chairman (CFO until two years ago), “we moved from exclusively food commodities to financial assets,” and he concedes to being “the guy who started us down that path.” Additionally, energy was added as a trading commodity. During this phenomenal growth, he says, the process went from simply buying a commodity in “A” and selling it in “B,” to changing the form of it, adding more value and more complex processing to micro ingredients. Thus, sums up Lumpkins, “We’ve added commodities, geography and complexity to the processing we do.”

Cargill is now a $75 billion company with more than 140,000 employees in more than 60 countries, with a 12 percent compound growth rate over the last 50 years.

Carey International, the largest chauffeur transportation service in the U.S., operates in a fragmented industry of a few large players and a slew of mom-and-pop “airport-runners.” Founded by J. Paul Carey in 1921, with one Packard touring car, it was purchased by Vince Wolfington in the early 1970s; he grew it from $20 million to $200 million before he left, about two years ago. Revenues are now about $300 million. 

 

Carey’s uniqueness is that it’s the “premium provider,” says Mitchell J. Lahr, executive vice president and CFO. It has about 1,000 employees in 18 facilities in the U.S. and London, as well as a large franchise network and a string of affiliates. Washington, D.C.-based Carey offers — besides its core professional chauffeurs driving custom-made Lincoln Town Cars and  Mercedes — logistics for many of the Fortune 1000, as well as growing meeting and events-planning options.

Carey aims to make doing business with it easy and seamless. It moves  thousands of people for IBM’s software institute in Las Vegas, and evacuated many thousands of people during last year’s Hurricane Katrina in New Orleans. Its operations are backed up with state-of-the-art information systems, under Lahr’s supervision.

If Carey doesn’t have a location where it is needed, it subcontracts with a network of affiliates. It is from this network that it identifies potential acquisition candidates, what Lahr calls “tuck-ins,” where “we simply bring their book of business into the fold” — a very critical component of its growth strategy. “We don’t want their overhead or buildings. We just want their customer lists and key employees.” Lahr says it’s a very accretive growth strategy.

 

At family-owned and operated S.C. Johnson, Executive Vice President and CFO W. Lee McCollum says, “Brand leadership is very important in our industry.”

Racine, Wis.-based S.C. Johnson is a global producer and distributor of consumer packaged goods for products sold through grocery and drug mass-merchant retailers in more than 100 countries — familiar brands like Windex, Pledge, Drano, Scrubbing Bubbles, Ziploc bags and Glade Air Fresheners. While a substantial private company — with revenues of approximately $7 billion — it pales in relation to worldwide competitors like Procter & Gamble Co., Reckitt Benckiser and Unilever.

Chairman and CEO Fisk Johnson is the fifth generation of the Johnson family to lead the company (founded in 1886) of about 14,000 employees. An early global player, S.C. Johnson launched its first subsidiary in the U.K. in 1916.

Along with the importance of brand leadership, McCollum says new products are vital to the company’s growth. This is accomplished via a balance between organic internal development (new product development) and select acquisitions. S.C. Johnson needs to constantly stay on top of its markets, recognizing that some products have relatively short life cycles due, in part, he says, to the rate of innovation in their categories.

Also, some products are subject to changes in consumer lifestyles and habits. For example, S.C. Johnson was founded as a parquet-flooring company that later developed Johnson’s wax. During the 1950s-60s, floor wax was the heart of the company. “Lifestyles have changed,” explains McCollum. “[Now] not many people enjoy getting down on their hands and knees and polishing floors,” he quips.

 

So, clearly, new product innovation  has become the driver of the company’s growth, says McCollum. “We put significant effort into understanding consumer habits and needs into our R&D capabilities.” One recent acquisition was the global insecticide business of German company Bayer, and an acquisition about five years ago yielded Ziploc bags from Dow Chemical Co. Select acquisitions are considered, he says, if they have the potential to make the brand number one in its category.

In the very competitive software business, SAS has found a successful niche and delivery format to both satisfy and keep customers. The Cary, N.C.-based company is in the business of providing software enterprise intelligence platforms and solutions. It has developed a menu of products in the much-needed business-intelligence (BI) space (particularly in the banking, pharmaceutical, telecom and retail industries) and sells its products via annual service contracts to customers serving more than 40,000 sites in 109 countries.

 

With much consolidation in the industry, says Vice President and CFO Don Parker, “companies want to buy software from large, stable vendors. They want a company that invests heavily in R&D [and] is financially stable.” Celebrating its 30th anniversary (it was founded by James Goodnight and John Sall in 1976), SAS, with $1.7 billion in revenues, has more than 10,000 employees in 400 offices worldwide

SAS is not acquisitive, says Parker. “I’d say we’re sticking to what we do best. We have enough high-quality products and we feel that we can grow and be successful with organic growth, without having to go out and acquire other companies and try to gain market share or just acquire customers.”

 

Hire world-class people — and give them world-class benefits

At SAS, turnover runs about 4 percent, in an industry where turnover averages around 20 percent. Parker, who’s been with SAS since 1993, says SAS keeps a very loyal and motivated staff by providing world-class benefits. Part of that includes a commitment to families and healthcare (on-site child care; health center and programs for wellness and elder care).

SAS CEO Goodnight is quoted as saying, “Ninety-five percent of our assets drive out the front gate every evening, and it is my job to make sure that they come back.” Thus, Parker says, the company provides a “total value package that competes with public companies,” and it provides an environment that fosters creativity while encouraging integration of business objectives with employees’ personal needs. Salaries are also benchmarked to ensure competitiveness.

The industry faces labor shortages that are “challenging to any high-tech company. There simply aren’t enough qualified high-level statisticians and computer scientists being generated from American universities to meet our talent needs,” Parker says, noting it can often take as much as a year to fill certain positions. So, while SAS has moved some R&D and product-development operations offshore (where the talent is in India, China, U.K., Denmark, Japan and Germany) he says that as a global company, placing R&D functions in other geographies shows we are “making a commitment to innovation in those areas and to higher levels of customer interaction.” He adds that workers are employed by SAS and that no developers in the U.S. have lost their jobs in order to move functions offshore.

“The main thing,” says S.C. Johnson’s McCollum, “is to compensate people competitively with the market for the best talent.” His company has all the compensation tools available to others. “We don’t have stock that is valued daily by the market, but we do have annual bonuses, long-term incentives and ‘phantom shares’ that are valued using a formula.” In addition, senior officers received restricted shares of the company stock as part of their package.

McCollum, who’s been with the company for 33 years and CFO for 10 years, believes it’s important to work for a company with two dimensions. One is being successful and known as being successful in its industry (read, opportunities for growth). “We devote a lot of time to succession and development of individuals.” In finance, individuals go through rotations, including international opportunities.

A second dimension is culture,  where “welfare of the employees is a high priority. There is never a major decision that we make as a company in which impact on employees isn’t one of the first things we talk about.”

At family-owned Cargill, “talent strategy is fundamental to everything we do,” Lumpkins says. “People bring expertise, people carry the culture, people have the relationships with their customers and our suppliers.” He says Cargill offers compensation that’s comparable to public companies.— “we have to.” Bottom line, he says, “people are the enablers of this big, complex enterprise, and the company makes a long-term commitment to people. This is a meritocracy.” Indeed, Lumpkins, who started as a summer intern in 1967 was hired in 1968, and has stayed.

Koch’s culture is driven by Market Based Management (MBM), a trademarked system, developed by Charles Koch, that enables divisions of the business to operate as autonomous, profit-maximizing units  that reward employees who think like entrepreneurs.

A primary challenge, Feilmeier says, is “hiring the right people, putting them in the right positions and then paying them like entrepreneurs.” As for compensation, he logically likens employee pay to how entrepreneurs get paid in a free-market: by having society give people more property for the value they create (called profits). So, employees get to keep a portion of the value they create — with no caps — which can amount to substantially more than just salary. However, if they destroy value, like an entrepreneur, they’re not going to have any property. In addition, longer-term incentives, called “performance units” are offered.

At Carey, it’s a different story. After growing substantially in the 1990s by acquisition, it went public in 1995, only to go private again in 2000, in a leveraged buyout. That buyout is driving its growth strategies, not for a long-term family commitment, but for the owners, who obviously want to raise its value and sell it at some unknown point in time.

“When private equity takes a public company private, it will be a leveraged company,” says Lahr. In such a case, “You want to hire the best people to get the job done.” There’s been a big management shift, and the quality executives brought in (including himself, in 2001) are “not content in a normal maintenance-type environment. They want to be challenged,” says Lahr.

 

Anticipate customer needs — and be a solution provider

Without customers, you might as well not bother to open your doors. And while this is obvious, the five companies here specifically build business strategies around their customers — and their customers’ customers.

Cargill’s television ads say it all: “We collaborate, create and succeed with our customers.” Lumpkins says Cargill has positioned itself to be a solution provider, and sometimes the solutions are not just the products, but in the risk management around the products. For example, Cargill sells food products to consumer packaged goods and food-service companies such as Nestle, General Mills, McDonald’s, Pepsi and Coca-Cola. “With some, we use our trading skills to work with them to manage their energy risks (running their facilities, transporting goods).”

Being a private company has limitations, he says, “so we’ve found some interesting ways to address the limitations.” One is to partner in a particular business. For example, in its palm plantation business in Indonesia, Cargill is partnering with the government of Singapore’s investment arm. Also, it runs a hedge fund, which initially consisted of only its capital. Over the years, the fund has grown to billions of dollars from third-party investors; it’s now a full-fledged asset-management business, managed by Cargill, and with Cargill a minority investor, and makes a significant contribution to the company’s profits.

At S.C. Johnson, McCollum says that “dealing with the rate of change in today’s world and making sure we understand the customer’s needs and wants” are the biggest challenges, and that speed to market is very important.

Facing a consolidating global customer base (in the retail trade), customers are “getting larger and stronger all the time,” says McCollum, referring to giant retailers like Wal-Mart Stores Inc. and Carrefour in Europe. As those retailers grow by acquisitions, it “puts an entirely new dynamic on how we deal with those customers,” [since] you can’t necessarily deal with them on a country-by-country basis.

For SAS, three customer-oriented policies are woven into the fabric of its culture: its commitment to long-term customer relationships (annual customer surveys, 24-hour tech support and access to latest releases, as part of service contracts, with no extra fees); commitment to quality (SAS is known to delay a release until a product meets its rigorous standards. “Our CEO believes that customers should not be the ones to ‘debug’ software”); and long-term commitment to employees.

Parker says, with its license revenue model, about 75 percent of existing customers buy additional software every year — new applications or products that they don’t have, and new products for expanding in areas of the company that may not have used SAS software. So, he says, customers expand the number of users and the number of products that they use.

“We try to stay ahead of the market by developing those new products, and we develop long-term relationships with our customers.” For SAS, it’s all about “treating the customer right and developing the products they need — not what you think they need.”

Carey basically has two classes of customers: naturally, the ones who sit in the limos, but, more strategically,  the procurement department at the Fortune 1000 companies. It’s this customer that is being courted, with expanded technology tools, the result of significant sums of money spent over the last 24 months to improve the customer experience. Lahr says the chief information officer is now accompanying the national sales team to meet with clients, asking, “Can we work things out electronically, as opposed to paper?”

With more sophisticated customers, Carey is responding with an improved Web site and an improved billing and collection experience to  “better understand their ground-transportation spend,” he says.

Koch spends much time studying better ways to satisfy customer needs. The philosophy, explains Feilmeier, goes back to Joseph Schumpeter, the economist who coined the theory of “creative destruction” (that creative destruction is real, and the markets ultimately destroy everything because people invest in new ways to do things — and if you don’t continue to do that internally, eventually it’s going to happen to you).

He believes that this destruction is happening at a much faster rate than ever, which ultimately benefits society and consumers. “Technology is evolving, and the Internet is making knowledge transferable and much more transparent. It’s easier for things to improve at a faster rate than ever before.”

 

Use debt only for major expenditures — if debt is used at all

When Koch decided to acquire $21 billion Georgia-Pacific, Feilmeier says it didn’t make sense to finance it with 100 percent equity, since it was a time when the debt markets were “as cheap as they’d been in 40 years.” So, a certain amount of debt made sense, he says. Georgia-Pacific came with $10 billion of debt, which was assumed by Koch. “We added a bit more debt, because we were not comfortable with more than $8 billion of equity in any one investment,” he says.

Having previously worked in the public-company arena (for PepsiCo), Feilmeier says he prefers not to use high-yield markets, because “you become a public filer, which begins to diminish some of the benefits of being private.” Thus, Koch is not required to file any reports with the Securities and Exchange Commission (SEC).

The long-term goal with any acquisition, he explains, is to capitalize the company with more than enough equity for it to run its businesses without worrying about liquidity. The debt target for “any of our companies is no more than two or three times its EBITDA (earnings before interest, taxes, depreciation and amortization).”

Lahr says that to finance growth, Carey “either uses existing working capital or our credit facility with our lender group.” Acquisitions, he says, need to be very accretive. “We don’t have very long payback terms on these.” Most, he says have two-year paybacks.

“We do not have any debt on the balance sheet,” states SAS’s Parker. “Our buildings at our campus are paid for, and the acquisitions that we have done were funded with cash.” He concedes that position probably limits the size of the deals SAS can do. “We probably haven’t done an acquisition above $50 million.” However, he reiterates, SAS has primarily an organic approach to growth, with acquisitions used only to fill gaps in its technology.

S.C. Johnson has a commercial paper program that is backed up by syndicated bank agreements, and it has used private-placement borrowing extensively. McCollum explains that some of the debt is tradable 144A debt, sold directly to sophisticated investors and traded in blocks of $1 million or more, so no SEC filings are required.

“When we borrow money to make a significant acquisition,” he says, the focus is on getting the balance sheet back in shape over a two-to-four-year period “so that we can do it again.” He notes a history of having done that three or four times in a row, so “we generally have access to the debt markets that we feel we need.”

 

Measure the profitability of every detail of every business

Lahr says that at General Electric Co. (where he worked for 13 years early in his career), one of the best functions was financial planning and analysis. So, upon his arrival at Carey almost five years ago, he implemented systems to report on product line and customer profitability statements. “We give executive management the data they need to make the right decisions.” Also under his purview is mergers and acquisitions. He says he works with in-house counsel, as well as a dedicated team, to perform due diligence and associated analysis. The team works with site general managers to identify and prioritize potential acquisition targets.

McCollum says the fact that his finance staff is quite small likely begs the question: How do you maintain control and objectivity? It’s done in two ways. First, it’s driven by a set of strategies that characterize a world-class finance function.

These include: controlled discipline (no surprises, everything gets discussed and issues get surfaced and addressed early); business partnership (finance people are embedded in the businesses); external orientation; maintaining an active training and development program; and a focus on emerging issues.

Second, while people are embedded in the business units, employee rotation is controlled centrally. In this way, people remain objective “because in the next job, it’s going to come back to haunt them if them don’t,” he says.

Parker says of SAS: “We in finance see ourselves as partners with the business units. We help them run their organizations more effectively in order to reach their goals.” This is done by helping them identify their objectives and monitoring associated costs, and keeping them informed about their business performance.

One of the most important things, he says, is helping them predict their future performance, allowing them to shift resources, if necessary, to meet objectives and targets for the next year. Also, finance provides valuable key performance indicators and benchmarks about how SAS is doing, as well as how competitors are doing.

Also, Parker says SAS  tracks revenue for employees, sales efficiency, ratios, growth of sales year-over-year, and expense and revenue growth. And, as one might expect, SAS uses its own products. “We do all our budgeting and planning and analysis and reporting, using our own products.”

Koch’s Feilmeier says the company’s finance people need to “measure everything we possibly can, down to the lowest possible level that is profitable.” It’s key, he says to make sure you’ve got excellent accounting that is based on economic principles. “We need to know the profitability of not only each business, but also the profitability of each plant and even each truck.” The business-unit CFOs need to understand their business as well as the CEOs do. “They’re not just running numbers for people in the back room.” The CFOs at Koch, he says, “get to be part of the entrepreneurial team.”

 

Reinvest, reinvest, reinvest

The Koch family reinvests 90 percent of the earnings back into the company. As for how that’s fostered growth, Feilmeier explains that “since 1961, we’ve grown by about 1,900 times.”  It’s a consequence of being private, he adds, “and being able to reinvest our earnings.”

Cargill retains most of its cash flow in the company. It reinvests 80-85 percent of its roughly $3 billion in cash flow, while paying out modest dividends. Being private has its advantages, notes Lumpkins. “We are long-term, cash-flow driven; we’re disciplined because of our cash limitations,” he says, conceding that “there’s no question that we have missed opportunities for lack of a stock currency.” There are times when cash is king and other times when shares are king, he comments. One downside to being private, he also concedes, is negative implications on the company’s debt rating and debt capacity. “But all that being said, it’s worked pretty well for us.”

McCollum says S.C. Johnson finances its business the old-fashioned way: “We make and retain profits.” It does not issue equity, but, as discussed earlier, it utilizes the debt markets.

SAS has financed its 30-year, double-digit growth totally through internally-generated cash flow. Twenty-four percent of revenues is plowed back into R&D, which Parker says “gives us the ability to develop new products to fuel our growth,” by growing products and improving existing products. That, he says, perpetuates customer acquisition and retention.

 

Ellen M. Heffes is Executive Editor of Financial Executive and William M. Sinnett is Director of Research for Financial Executives Research Foundation (FERF).

 

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