Dear fellow Hubbers, I admit I 'borrowed' this posting from another blog site, but it was just so good it needed airing here. I found it at http://theflyinghamster.blogspot.com. My comments follow at the end. Read and enjoy:The Unspoken Perils of Aggressive Cost Cutting in an Economic Downturn
Sure, we could spin yarns all day about the airline industry directly after 9/11. How 99% of them cut everything under the sun, and we can easily see where that got them (extinction for some, mergers for others, lower margins for all). Instead, let's focus a little closer to home, right here in our own backyard. There is a kitchen countertop fabricator in Kansas City, Top Master, Inc, that grew from dust to $12 million in 16 short years, 1984 to 1999. It then grew to $30 million from 2000 to 2006. To say Top Master was the dominant force in its industry - the 400 pound gorilla - is the understatement of the century. It was not only the largest fabricator in the Midwest, it was ranked in the top ten nationally.
This company was not only a market leader, it was often cited as the birthplace of the industry in a six state area. While many pointed to the local housing boom during the first half of this decade for Top Master's success, the truth is there was another factor causing the hyper-growth. His name is Tim Hovey, and he is the founder of Top Master. For 25 years he worked a singular plan diligently, and to perfection. He positioned his company - in four major areas - so that he didn't have to compete. In fact, until May 2006, there were only four competitors to speak of in the area. That, my friends, is market dominance. Tim grew his business rooted in just a few, core beliefs:
- He genuinely loved his customers. When he was in their midst, they hugged him. Some female customers were known to kiss him on the cheek when greeting him. That begs the question, "What would cause a customer to hug and kiss this man?"
- He loved his employees even more. The average tenure of his people bordered on 17 years. They could often be found in his office, simply discussing the activities of the day, or more likely, their personal lives. That begs the question, "Why would they stay at his company that long?" (hint: they loved him)
- He made it a top priority to be known locally and within his industry, to everyone and anybody - including the competition. I have personally spoken to people in the countertop industry from Florida to Las Vegas to Minnesota, and they all ask the same question: "How's Tim?" That begs the question, "Why would these people care about a man they hadn't seen or spoken to in years and ask how he is?"
- He understood the Carl Sewell principle, he of Customers For Life fame: whenever there was any kind of problem with a countertop, Tim could be called by anyone directly, day or night, at home or in the office, and would make the problem disappear - most always free of charge (spent money). That begs the questions, "As an owner, why would he make himself that available, and didn't he lose money doing that? Is that good business practice?"
In May of 2006, Tim decided to sell Top Master. He felt that he'd grown his baby to the point where it needed more know-how and expertise in areas that weren't strengths of his, things that were necessary if Top Master were to continue on its enviable trajectory. A group of investors - a blend of local and out-of-town venture capital folks - took over and instilled a couple of the new owners as Senior Management (a President and CEO, and a VP of Manufacturing). Neither of these gentleman in their previous careers had ever had meaningful contact with customers. They were both billed as production-oriented experts. Think "Lean Manufacturing." This area - higher productivity and expense reduction - was the primary opportunity for improvement according to the investor group. Tim Hovey was retained for transition's sake, but he was pushed aside internally - neutered, really - because it was determined by the new owners that he had nothing to offer them. Tim was not a Production genius, like they supposedly were. Tim simply cared about his baby. Well, a few interesting things happened on the way to the office for the new owners. First, the housing market bottomed out, the credit crunch became a reality, and the economy as a whole began to slide. Then, curiously, over a two-year span, 4o other competitors joined the fray. Yes, forty
. In fact, three moved in just this month. (they're spending money, not cutting costs)
This trend of competitors joining the local marketplace, in a time when the home improvement industry was taking an absolute pounding
, baffled the new owners. "Why are these people moving in?" they wondered. The new leadership group grossly underestimated three things:
- Tim Hovey was the Top Master competitive advantage. When they clipped his wings, the culture - the soul of the place - evaporated. The new owners hunkered down with their spreadsheets, each other, and did not - would not - engage customers or employees. Talk about a glaring, tactical error. It's not that the customers long for Tim, they simply want to know the new owners. They want to know that these new people care about them as much as Tim did.
- Their inexperience in a ruthless Market Share Fight. With no discernable competitive advantage - quality products were merely entry to the game - they began to lose market share - lots of it. Competitors recognized the Hovey void - i.e. the high level of customer service the company was founded on was now basically gone - exploited pricing opportunities and made inroads where they never should have been allowed to. Worse, the owners would not listen to the sales force and other company employees, who were pleading with them to act on any of the many recommendations that were presented that could have stemmed the tide.
- Top Management did they only thing they knew how to do: Cut Costs. There have been six layoffs in 18 months at Top Master. Over 100 people have lost their jobs, families left only to wonder what happened. An automated phone attendant replaced a live voice, there is no Customer Service department, customer's don't know how to get problems resolved, and the average person is doing the job of three people. Frustration is high, morale is low, and the customers are suffering. "Cash Flow - Break Even" has become the CEO's rallying cry. What? Huh? The last time I checked, a company will never expense it's way to profitability. The company's strategic plan, unbelievably, is: do nothing to increase revenue, simply reduce costs as market share evaporates.
In 2007, Top Master reported $24 million in top line revenue. In 2008, they are forecasting less than $20 million. In 2009, the forecast is $17 million. You do the math. Yes, the economy isn't great. Yet 40 countertop firms jumped into the pool, of their own free will and dreams of profits, and most are growing. Not all, but most. How can that be? It's simple, really. They saw an annual $60 million Kansas City countertop market - even in this bad economy - and set out to secure their share. They purchased (spent money on)
less labor-intensive equipment than Top Master - water jets, newer CNC machines, basically better technology that produces higher quality with less labor hours - could provide similar service (meaning below-average to poor), and could simply waltz in and win market share with lower pricing while maintaining their margins. Because of Top Master's size, their overhead (labor hours, facilities, inventory, fleet) is still an albatross in the job-costing equation. And with Tim Hovey gone - he left for good this past August - there was nothing to stop anybody with a sawhorse, some water, and a backyard from getting into the business. Of course, while there are some of those small companies, the real threat emerged from larger regional players who recognized an unbelievable opportunity. This much we know for sure: when times are tough, expenses must be reduced. Tough love is the hallmark of a great leader. But cutting into areas that negatively impact the Customer Experience - a company's Competitive Advantage - is simply poor management, poor leadership. If the bottom line is your God, and not customers, you will reap what you sow. Unfortunately for the legacy of Top Master, it appears that lesson may never be learned. Epilogue:
When Tim Hovey happens to run across a former Top Master customer, he still gets his hugs, and sometimes a peck - something he never refuses. After all, the man is affable, and he still loves his customers, and they will always see him as Top Master.
Me again: I think the bit of this story that got to me the most was Tim Hovey's core principles. He led that business like he meant it. How many times have we been to companies (even worked for them) where their values are plastered everywhere, but leaders just don't live up to them. Eventually there are consequences. Many years ago I used to work for a billion pount global composite insurer. It no longer exists. Why? Partly because lessons like the Top Master example get repeated and never learnt.