This series looks at the importance of corporate culture as a competitive advantage. The first question one should always ask about any company you are considering for investment is, what is its competitive advantage? Ricardo Semler runs SEMCO, which is renowned for its special culture. In this series we examine SEMCO?s culture at the hand of Ricardo Semler?s brilliant book, Maverick.

Chapter 31: Collapse

?Well, we had created a company as flexible as any we knew.? ?Ricardo Semler

I believe that bad times are good. It gets companies into shape and gets rid of excess. Although it is easy for me to say, since I am not the one who has to receive the pink slip, it is nevertheless true. However, if you think that you have endured rough economic seas then try this on for size. In the first 11 years that Ricardo Semler led SEMCO, Brazil?s economy had,

two good years,

three transitional years, and

six dreadful years.

Inflation averaged 400%!!!! It fluctuated between 1,600% and 100%!!!! From 1986 to 1990 Brazil endured 5 economic shocks plans, knocked three zeros off its currency twice and on two occasions changed the currency altogether!!!

Sounds like fun doesn?t it? Phew! I am glad I don?t have to prove my company?s fitness in an environment like that.

This is one of the best chapters of the book, but you will have to read it yourself, because I won?t do it any justice. The long and the short of it is that the workers realized that they were facing very challenging times. Turnover dropped by 35% in some years and generally the country was in crisis. A hurricane blew through some major shipyards, which were very important SEMCO customers. The next thing SEMCO knew it was without customers, had uncollectables and inventory that was coming out of its ears. This is one of the situations where you can truly say push did come to shove. If you followed the series then you will know that SEMCO had a very loyal workforce and very importantly it was a workforce with a feeling of company ownership. They had profit-sharing arrangements and had a lot of influence in the strategic direction of the company for a number of years already. Due to all this, the current crisis was not only management?s problem, but everyone?s.

One of the workers came up with the idea of insourcing all the work that was previously outsourced. They would clean the toilets, do deliveries themselves and even buy and cook the food in the cafeteria. However, this would go hand in hand with a cut in salary and the workers also demanded a 40% cut in management?s salaries. Guess what? They got the cut in management?s salaries!!! SEMCO was adamant not to lay off any workers, because it believed that when the economy picked up again that they would be in a vastly superior position to their competitors. What is also very impressive is that SEMCO took what it calls Robin Hood style wage cuts. This means that the higher paid workers, take larger cuts to make it easier on the lower paid workers that could not afford to cut any more. It is very noble and very rare. However, I cannot help but think how strong the fabric of this type of company must be if its workers and management get to cooperate in such a manner. I would hate to compete against such a company. Most importantly, if this is not a competitive advantage then I don?t know what is!

Chapter 32: Launching Pad

?Implementing the Satellite Programme wasn?t easy or quick. But I think it has helped us remake SEMCO into a company that can float on the roughest seas, without taking on water or having to force the crew to abandon ship. - Ricardo Semler

The sad news is that the measures, covered in the previous chapter, was not enough. More was needed. So SEMCO came up with the Satellite Programme. SEMCO ventured in this direction before. SEMCO was sitting with workers that it could not employ and plant that it did not utilise. It had the obvious option of firing workers and to sell some plant and equipment. Both would prove to be very costly exercises. Still SEMCO would probably have to get someone outside the company to do the work that these workers and plant did every now and then. So management and workers came up with the idea of setting up workers in their own businesses. SEMCO supported the workers by leasing the plant and machinery to them. It gave them business support from all its departments, which covered everything from tax advice to inventory control. By doing this SEMCO outsourced to people it knew, trusted and loved doing business with. It could reduce wage bills and capital investment without disenfranchising the workers or compromising the production capabilities of SEMCO. As Ricardo Semler says above, it was not easy or quick. For me, the important part is that it was a solution that was dreamt up by management and the workers, together. It was probably also the only workable solution available to the company. It attests to the deep commitment in this company, by EVERYONE, to make things work. I said it before and I will say it again. ?I would hate to compete against such a company. Most importantly, if this is not a competitive advantage then I don?t know what is!?

Chapter 33: Rebirth

?A small hole can sink a big ship? ? Ray Krinker (Price Waterhouse)

So after a substantial number of workers, plant and equipment were committed to the Satellite Programme, the factories were getting empty. SEMCO consolidated and got rid of excess factory space. It was not an easy exercise on an emotional level, but then you know what they say about business and emotion. Existing factory units maintained their autonomy and were allowed to contract with each other for space. One factory unit thought it could do better elsewhere and simply moved out of one of SEMCO?s existing premises when their lease came to an end. SEMCO was really getting rid of all its major capital investments with the Satellite Programme and focussed more on assembly, engineering and marketing. It sounds a bit like the evolution Coca Cola went through when it split out all its bottling plants, which is also the most capital-intensive part of the business. Today Coca Cola pretty much controls marketing, innovation (engineering) and production of the syrup. We all know how profitable Coca Cola is.

Suddenly SEMCO was also in a much better position to grow. It was doing so much more (moving product) with so much less resources. However, Ricardo Semler is quick to warn us of the pitfalls of growth. ?Much about growth is really about ego and greed, not business strategy.?

What I found even more interesting was his comments on growth through acquisition. This is his summary in three sentences on SEMCO?s experience after it studied more than 100 firms, negotiated with 15 and bought 4.

?Growth through acquisition is exciting, glamorous and ulcer inducing.

The company you buy is not very similar to the one you thought you were buying, and never like what they told you.

Buying small, family firms is a certain way to skip the ulcers and go straight to bypass surgery.?

As I have recently found with my investment in JJB Sports Plc, acquisitions are very rarely value enhancing. It acquired TJ Hughes, which operates in a different field, two years ago for ?45m and recently sold it for ?55m. I suppose a compounded growth of 10% is not bad, but then the existing operations paid the price with overall profits down substantially. Management owned up to their mistake and are no refocusing.

Whatever you are up to, I hope it is profitable and ethical!

Mr. B

(20.1%/6.5)

mail_mrb@yahoo.com

Posted: 2003/12/04 17:00 View Archive