Jack Stack, President and CEO of SRC Holdings Corp, shares why every CEO should value competitive data, build strategy with input from all levels of their organization, and how to use this information to plan for the future.
Episode with guest: Jack Stack
President & CEO - SRC Holdings
(This episode was recorded in January of 2021.)
Key Episode Take-Aways:
1. Breaking down the wall between CEOs and employees. (click to jump to this topic below) I think there's these walls that develop where we're trying to get people to work harder for less money, right. And I don't think that's true at all. But I would say that a majority of the people feel that way.
2. Putting a plan in place that allows you to have balance in your life. (click to jump to this topic below) So, what I try to do is, I try to give them a decision to make, you know, do you want to take this definition of an entrepreneur that you have? Okay, you got to give it everything you have. Or do you want to balance your life? I think if you get balance in your life, the numbers will come.
3. Understanding reality to help eliminate as much future pain as possible. (click to jump to this topic below) You know, understand reality, okay. Because now they're at the position where they run out of powder. And they've done everything right. And they now have got to decide, do I want to live this life the rest of my life? Or do I need to figure out how to be free of all the obligations that I took on to get to where I'm at??
Continue scrolling to read the full episode transcription.
Welcome to the "Change the Game Podcast, where we share stories of open-book management and highlight capitalism at its best. Thank you for tuning in to this episode of the "Change the Game" Podcast, with very special guests Jack Stack. In this episode Jack explains why every CEO should value competitive data, build strategy with input from all levels of their organization, and how to use this information to plan for the future. Here's your hosts, Rich Armstrong and Steve Baker.
Steve Baker 0:30
Welcome back to the "Change the Game" Podcast where we are changing the game by doing business differently. And we're highlighting stories of capitalism. at its best. I'm Steve Baker. And as always, with me here is Rich Armstrong, the President of the Great Game of Business and co-author of our new book Get in the Game. How are you Rich?
Rich Armstrong 0:48
I'm good, Steve. How are you?
Steve Baker 0:50
Very well. I'm very excited because today we have a very special guest. Jack Stack, our founder and CEO of SRC Holdings has been consistently our highest rated podcast. So, we're really excited about what we're going to talk about today. For those of you just joining us who are not familiar with Jack, he's been around SRC since before the buyout from international in 1983. The worst corporate buyout in American history, by the way, Inc. Magazine calls him the smartest strategist in America. We know him as the father of open-book management, and he hates all of those descriptions. He's got a new book out, called Change the Game: How to Save the American Dream by Closing the Gap Between the Haves and Have Nots, along with Darren Dahl his co-author. Jack, welcome, glad you could be here. How are you?
Jack Stack 1:39
Good to see you guys.
Rich Armstrong 1:41
Steve Baker 1:41
Doing well. Jack, today we want to talk with you about planning. At SRC, that's always included high involvement planning, and within that the sales and marketing process, we know that planning can be a real challenge for companies.
Rich Armstrong 1:55
You know, it is it is interesting, how challenging it is to get, you know, good solid entrepreneurs, you know, CEOs to value the level of time and depth we go in to understand our marketplaces. You know, they do it more in kind of a haphazard way, you know, or they just do it from their own kind of thinking rather than really forcing that as a discipline in the organization. And I'm just curious about your thoughts on that.
Jack Stack 2:27
I think that, I think what they miss is the leverage of understanding the competition or the leverage to understand the marketplace.
Rich Armstrong 2:38
Jack Stack 2:39
Too many people think rules come out of HR, rules come out of CEOs, offices, or CFOs offices. Okay. So, there's this really tough wall that develops between the worker and their participation in terms of the leadership of the company, okay.
1. Breaking down the wall between CEOs and employees.
I think there's these walls that develop where we're trying to get people to work harder for less money, right. And I don't think that's true at all. But I would say that a majority of the people feel that way. Whereas if they really understand that it is the marketplace that sets the wages, sets, the rules that the government sometimes sets the regulations in terms of why change is occurring. If they don't understand there's all these outside influences that really affect it, just not bad leadership, or just not bad direction, okay. I think, you know, significant problem inside of a company, and you're not getting an advantage you know, for people finding out their competitive data and saying, well, they may be doing because they just probably work smarter, work harder than we do. Okay. I think when you get them, to teach them that we want to pay more money, and we want to pay more wages, so we thought there was some long-term security. And we want you to participate in trying to figure that one out, okay. If it isn't as a result of engagement, and understanding and collaboration and cooperation, and that's how you're going to get to efficiency and productivity. And it's really what's productivity is going to be really what's going to propel any type of an organization. And, again, I just think it's something that you miss, you miss the stimulus of wanting to play against somebody. You miss the stimulus of wanting to be better than the marketplace. It's all a tag on to get to the 10-year plan now, right? You know, it's getting them to sign up on the bottom line that, you know, yeah. They're going to, we're going to, we're going to learn from other people. We're going to learn from maybe somebody else's warranty policy that's been millions of dollars in order to be right at warranty policy, when we can just say, Well, why don't we just use that warranty policy? And, you know if there's no, they don't own it. I mean, it's open. And, you know, I mean, I think the hunger to find out is lost. And not having that competitive analysis of the marketplace. People without that think you set the rules. And it's not, you're going to sit there you play a game by rules and scorekeeping and stake in the outcome. You got to spend a little bit more time, I get, I always felt the signing you know, telling them what game they're going to get in, right? And who's the competition in that game? And, you know, where do you rank relative to the competition? And is this the school you really want to go to be great? Or, you know, I think you're just missing how to engage everybody inside your organization by not doing it, right. So then link in competitive data, that hunt for knowledge, okay. And we've seen it so many times where we will take a financial ratio, build a critical number, and then they'll start peeling back the critical number. But the first thing they do is see where they compare in terms of their own industries or marketplaces. And when somebody has a, somebody has a better, let's say, inventory turn than they do, then they target in to try to figure out well what are they doing that I'm not doing? And sometimes the answer is so simple, okay. That most people will say, why didn't you ask, you know, and so what we do is we ask the people, and we get the engagement, we get the buy in.
Rich Armstrong 6:21
Now, that's good, that's good. I think it is making sure all your people in the organization understand how difficult it is to kind of keep that competitive edge, you know, over a given time and a lot of employees don't have the opportunity to see how difficult that can be.
Jack Stack 6:37
Well, how do you tell somebody something without having something to compare it to? Okay, like, they won't even know what they're getting, unless they could compare it. I mean, we have the highest, I think, bonus program and salary and hourly ranks I've ever heard of, okay. But how are they really going to know that's a benefit unless they compare it to somebody else, right?
Rich Armstrong 7:05
Jack Stack 7:05
The rules are established outside of the normal channel that they think the rules are established by. Okay, it's a free marketplace that basically sets the rules. And all we're trying to do is figure out what are the aspects of the marketplace that we need to be good at, in order to be able to succeed. I just think it's a matter of the honesty and the transparency, of telling people the truth and what it takes to succeed.
Rich Armstrong 7:29
No, it's good. Another planning questions. You get an opportunity to see a lot of business plans not only internally here at SRC, but externally I'm just curious, what do you look for in these business plans that give you confidence, you know, a strong well thought out strategy?
Jack Stack 7:49
It varies between startups and ongoing concerns, and older generation companies that just want to sell, because they've ran the Game a long time, and it's now for them to leave, okay. In the startups I look at this is a true story I look at what impact is it going to have on our family? I know that sounds a little crazy, okay. But I've seen these guys put together plans that they're going to have to go 365, you know, they're going to have to go 8,760 hours in a given year. And they're going to squeeze out elements of their life, they're going to take on the pressure that of someone we just talked to, that says that when you ask your family to invest in your business, and the whole integrity of paying it back as quickly as possible, and then when you fail, having that burden of guilt in terms on you so. I mean, I look at yes, I can understand financials, they're not really hard to understand once you've been doing them as many times, we do them, okay. And we do them an incredible amount of time. I mean, I can see all that stuff, and I can see all the moving parts and questions and moving parts, okay, but what's it going to do that person's life? Okay. And so, I'll back off to startups. Okay, I'll tell them we're crazy and tell them they're going to, they're putting their house on the marketplace, okay, they got three kids, okay. And so, I will take more of, you know, guys, take this from an old man, but your life is going to go by really, really fast. And this thing about, you know, well I'll have an understanding that I'll be able to be balanced in terms of the deal. Not the deals that I've seen, okay. The deals are just so loaded with explosives, that I try to get them to come off that high, you know that everything looks really good when you start a plan and then the next day you get to make it, then changes things entirely. Okay. And it's the same plan, okay. And so, what I try to do is back them down and saying look you don't need $2 million of equity. You need a $200,000 loan, okay. $200 million dollars in equity, a refusion of cash and your company's going to change. You're going to owe everybody everything, alright. I mean, your family's not going to be a priority, your priority is trying to feed your family and feed everybody else at the same time.
2. Putting a plan in place that allows you to have balance in your life.
So, what I try to do is, I try to give them a decision to make, you know, do you want to take this definition of an entrepreneur that you have? Okay, you got to give it everything you have. Or do you want to balance your life? I think if you get balance in your life, the numbers will come, you'll be more successful in terms of that, you know. In terms of ongoing concerns, you know, the biggest challenge, of ongoing concern is nobody wants to dilute. Okay, their founders, their owners, okay, and they want to hold on as much as they possibly can. You have a lot of valuations that are really, really high, you know, too high. And it doesn't really give people the opportunity to be able to get the deal done. So that deal doesn't necessarily get done, okay, because they don't overcome those challenges going in. And yet, at the same time, they know that their growth is limited, right? Do we talk about no man's land? There's so many of the ongoing concern, someone once said, 60% of small businesses today are out of cash, okay, so they're living in that I did everything right, I scaled, I did the right thing, and I'm out of cash. And now I'm going to have to sit here and I can't get any bigger. Because I'm feeding the beast, right? I'm feeding the dead, I'm feeding the angel capital, I'm feeding my mom, and I'm feeding my kids. Okay, and so the biggest, toughest thing about them is to convince them on what a fair evaluation is, and stories about entrepreneurs that we know that started with nothing, built an incredible opportunity, and then end up with less than what they started, but the pie got to be so much big, because it's a tough thing to sell people. But we try to, you know, we try to teach them that small, that middle ongoing concern market, okay if your next thing is this, don't price it at such a level that you're not going to be able to, once again, you know, get in the same position you are in right now, all right. You needed breathing room, if your evaluation is too high on the front end, you're going to have less breathing room on the rear end. And you're going to go back to that no man's land. So, avoiding the no man's land, by asking those ongoing concerns is give me a five-year plan. Tell me what you want to be when you grow up. Okay. So, we really handle them a lot differently than the startup sorry. And then you have the companies that have been families for a long period of time. Where I see that that is going to be a fertile ground for many of these ESOP companies, okay, they may use their ESOPs that they will be selling with each other. And I believe that you're not going to be able to fund a deal at the high evaluations they want today. So, there's got to be another alternative. So, I think these joint ventures are going to be really, really key. A lot of times you form a jump venture because you say to yourself, wow, at the price if that person wants his business, and let's say it's 2 million or $5 million, you could start it for $100,000 you know. So, now what you're doing is you're teaching them diversification, you're just beginning to understand and opening up the key cabinet with these guys that have been doing it for 30 years the same way. I mean, it what I'm seeing in their business plans is jeez, we kind of would like to be a little bit like SRC, we'd like to have these little entities, these little businesses, these little opportunities, we could sell them and then we could bring liquidity on our balance sheets and we could pay our ESOP obligations and they're totally different than the ongoing concerns of the startups. Okay. That's what we look at we look at business plans.
Rich Armstrong 13:52
That's good education.
Steve Baker 13:55
Jack Stack 13:56
Most of the stars we try to protect them from themselves. Yeah.
Rich Armstrong 14:01
I guess we should mention because you mentioned it several times is no man's land. There is a book by the same name for the audience by Doug Tatum which is really kind of sets that strategy how to bridge that no man's land, so really good book.
Steve Baker 14:17
Okay, I didn't expect that but that was beautiful right there. I fully expected it to be a one sentence answer [Laughter]. Stats generator, overhead absorber. [Laughter] That's what I was waiting for.
Rich Armstrong 14:31
That's the obvious.
Jack Stack 14:33
I don't, I think it's eliminating as much pain as possible. Okay, and it has to do with future pain. I mean, everyone started the deal and you're telling them how sick they're going to be. That's an interesting self, you know. And obviously, everybody especially when you're young, you're invincible to everything that’s around you, okay. So, you got to teach reality and that's so damn hard to do.
3. Understanding reality to help eliminate as much future pain as possible.
You know, understand reality, okay. Because now they're at the position where they run out of powder. And they've done everything right. And they now have got to decide, do I want to live this life the rest of my life? Or do I need to figure out how to be free of all the obligations that I took on to get to where I'm at?
Rich Armstrong 15:20
Jack Stack 15:20
Okay. totally different.
Rich Armstrong 15:22
I think you gave me a similar message back in the early 90s when I wanted to manufacturer guitars. [Laughter]
Jack Stack 15:29
We looked at it. And we didn't say no.
Rich Armstrong 15:32
And you also said, don't fall in love with your product kid, fall in love with your people.
Jack Stack 15:37
Yeah. Right. I don't know what you did for that information [Laughter]. Simply we did not discourage you from turning in a business plan manufacturing guitars. Let me ask you a question, from the time that you had to go back and put that plan together, why did you not make guitars?
Rich Armstrong 15:56
Because I didn't have the people.
Jack Stack 15:58
Oh, so the who becomes.
Rich Armstrong 16:01
The guy that knew exactly how to build guitars? Probably we didn't have enough confidence in each other. I don't think.
Jack Stack 16:08
I think that came out while you're trying to plan the ability there.
Rich Armstrong 16:14
Jack Stack 16:15
Those are lessons we're trying to encourage people that if you have a plan, you can learn those lessons, and you may save yourself from a lot of problems in the future, right?
Rich Armstrong 16:26
Steve Baker 16:27
Well, everybody, let's keep the conversation going. Be sure to send us your questions and your stories, your best practices, ideas and challenges and victories. That is capitalism at its best. And remember, join the community. Be a part of it. Thanks for joining us, and we'll see you next time.
The "Change the Game" Podcast is produced by the Great Game of Business. To learn more, visit greatgame.com.