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Published: July 1, 2001

 
 

Jack Stack’s Story Is an Open Book

At SRC, nobody wanted to relinquish control to an outside group who might misunderstand their Great Game, and its requisite investments in training and huddle time. They trusted themselves and their hard-won business sense more than they trusted anyone else, and they wanted to build a legacy business that could live longer than they would. They also disliked the option of putting cash aside for buyback time; they wanted cash available for growth when they needed it, not tied up in reserves. There had to be an alternative — a way to use the built-in entrepreneurial incentive of the SRC system to keep creating enough wealth to allow them to buy back their shares

Then Mr. Stack found his inspiration — in a story from a Springfield neighbor named Mike Ingram, a fireworks importer who had trekked into the Chinese hinterlands to visit the manufacturer firsthand. Expecting to see a factory, he had emerged over the crest of a hill to see a village spread out before him, with hundreds of little huts. The huts were the factory. If one hut exploded, the others could continue operating. “We too were protecting a village, just like the fireworks manufacturer,” Mr. Stack recalled. “So we broke our village into huts as well.

The first “hut” that SRC spun off, a marketing organization, failed rapidly. But in 1986, the second new company took root. It was called Engines Plus Inc., and it remanufactured junked oil coolers, a critically important part for rebuilt engines. SRC’s own engineers had never quite figured out how to build them, so Mr. Stack figured he could create his own supplier. If SRC needed cash suddenly to buy out shareholders, it could sell this expendable subsidiary and keep the main company solvent for a while longer.

They invested only $6,000 and underwrote a $54,000 loan, thus starting Engines Plus with a 9:1 debt-to-equity ratio (not quite like the government of Poland, but still harsh). Thus, if the new company succeeded, its share price would rise dramatically, too. And in fact, Engines Plus went from $286,000 in annual revenues to $7 million within a few years. It’s now worth more than 250 times the original investment.

Engines Plus was the first of the SRC affiliates; the number of companies has grown at an accelerating pace ever since. The original purpose was more than fulfilled; cash generated from the affiliates has enabled SRC to buy back the shares of retiring employee-shareholders without having to sell any of them (at least so far). Since the various companies can share resources (like a collective health care fund that replaces health insurance), their overhead is also lowered.

Of course, it’s not quite so simple. Over the years, SRC has evolved a variety of strategies to keep the plan from running away with itself and endangering either the employee-shareholders or the company. For instance, there’s a provision that stock sales will be paid out over 10 years. SRC funds an extensive 401(k) retirement plan in addition to the stock, so that if all the SRC companies tank together, retirees will still be protected. (“We hope that each employee will put away 10 percent of his income in 401(k)s each year,” Mr. Stack says.)

The company maintains investments in fixed assets, like real estate, that can be sold off in a hurry if need be. And in good times, like last year, the company buys back its stock from the ESOPs ($12 million in the last repurchase) so that the ultimate liability goes down. “If we had a retirement crunch, we’d have to scramble, but we’d have weapons to scramble with,” says Mr. Stack. He is also considering taking one company public, just to see if there is a way to do it and keep the basic principles intact.

 
 
 
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Resources

  1. H. Thomas Johnson and Anders Bröms, Profit Beyond Measure: Extraordinary Results Through Attention to Work and People,The Free Press, 2000
  2. Chuck Kremer, Ron Rizzuto, and John Case, Managing by the Numbers: A Commonsense Guide to Understanding and Using Your Company’s Financials, Cambridge, Perseus, 2000
  3. Jack Stack and Bo Burlingham, The Great Game of Business, Doubleday, 1992
  4. Jill Albrinck, Jennifer Hornery, David Kletter, and Gary Neilson, “Adventures in Corporate Venturing,” s+b, First Quarter 2001; Click here.
  5. Lucien Rhodes and Patricia Amend, “The Turnaround: How a Dying Division of International Harvester Became One of America’s Most Competitive Small Companies,” Inc., August 1986; Click here.
  6. The Great Game of Business: www.greatgame.com