Small Giants: Companies That Choose to Be Great Instead of Big

by Bo Burlingham

I concluded that to be successful over the long term, the company has to have and maintain: (1) steady gross margins that it protects; (2) a healthy balance sheet, as reflected in the current, cash-to-debt, and debt-to-equity ratios, among other measures; and (3) a sound business model governing how the company delivers value to customers and earns a profit in the process.

That investment had put Reell in a difficult position going forward. The company had gone from coping with volume to needing volume, which had increased the pressure to make further concessions on price.

Could it have been saved? John Hughes pondered that question. Like Reell’s leaders, he had waited until the last minute to order a layoff out of fear that it would destroy the culture he had worked so hard to build. “And, well, you know, instead we’re in bankruptcy,” he said in his Life After Pi interview. “So I ended up destroying Rhythm & Hues anyway. So, you know, maybe I should have done something along those lines in order to have tried to preserve Rhythm & Hues.”

The layoffs had made a mockery of Reell’s “primary purpose” of having “a work environment that frees coworkers to grow and reach their full potential.” It didn’t help that, in an attempt to limit the pain, the leaders had failed to cut deep enough on the first and second layoff, necessitating a third one and thereby prolonging the general sense of uncertainty and anxiety.

As Elizabeth Conlin put it in her Inc. article, UNBT had been founded on “the heretical notion that a company’s growth has organic, almost preordained, limitations,” and that, if you exceeded those limitations and grew too fast, you would undermine your ability to provide excellent customer service, create a great workplace for your employees, and maximize shareholder returns.

“We could grow faster, but it would cost us everything,” he told her. “In the bureaucracy of growth, you lose your distinctiveness.”

Evidently customers loved it: UNBT’s customer turnover rate was less than a third of that at other banks in the area.

From the fifth year on, return on equity was 14 percent or higher, and shareholders received 30 percent of the after-tax profits in the form of dividends—5 percent more than the average payout level of other banks its size. In the future, moreover, when the bank hit its goal of 15 percent market share, the dividend payout would go up to 40 percent, as the bank stopped investing in expansion.

Those kinds of numbers made for loyal shareholders. In fact, people who’d invested in UNBT’s 1980 IPO still owned 63 percent of the shares eleven years later, and 65 percent of the shareholders were also customers.

“Yes, you pause to consider each tributary and whether it is part of your voyage, but keeping you on course is the knowledge of where you want to be at the end of the trip.”

That point was not lost on Gary Erickson of Clif Bar. In his book, he went out of his way to remind readers that estate taxes alone can force a business to be sold. If you’re the sole owner of a debt-free company worth, say, $30 million, it will go into a trust upon your death, and your estate may owe as much as $15 million in taxes on that single asset. Unless other arrangements have been made, there’s only one way the estate will be able to come up with that money: by selling the business. There’s also only one way to avoid such a fate: by planning well in advance what will happen to the company when you die.

You may, for example, be able to buy life insurance that would cover the taxes due, provided you keep it outside the estate. In any case, you need an experienced estate planner to advise you in such matters.

the survival rates of family businesses attest. Only about 30 percent of them make it through the second generation, and 3 percent to 5 percent through the fourth generation.

He and Kit eventually came up with five “aspirations” that encompassed their vision for Clif Bar: sustaining the brands, sustaining the business, sustaining the people, sustaining the community, and sustaining the planet.

They also developed statistical measurements they could use to determine how well Clif Bar had done on each particular aspiration in any year. It was all part of the succession process, Erickson said. “A company has to move from being entrepreneurcentric to being visioncentric. The goal is that, by the time we’re gone, the vision will be secure.”

Selling to an ESOP is, in fact, becoming increasingly popular as a way for private-company owners to cash out of their businesses. Thanks to various tax breaks, they can often do as well as, or better than, they would if they sold to an outside party—and control stays in the company.

But there are caveats. An ESOP is unlikely to do much for a company if it is not combined with some form of participatory management such as The Great Game of Business, the system of open-book management developed by Jack Stack and his colleagues at SRC Holdings Corporation, in Springfield, Missouri. Ownership, after all, is not just about having an equity stake. There are responsibilities that come with it. If employees don’t understand those responsibilities or have the opportunity to act on them, the ESOP is at best a retirement plan for them.

It’s also important to be aware of the liabilities you take on when you set up an ESOP. First, there’s the money that the ESOP usually has to borrow to cash out the founders. It gets the stock only as the loan is repaid. That debt can represent a significant burden for the company, sometimes more than it can bear. The second set of liabilities is potentially even more dangerous, mainly because it’s often overlooked. When contemplating an ESOP, people tend to forget that, if it works as intended, the shares held by all th...

you might wonder what happened to the ESOP during the company’s six-year struggle to survive. “It was like a starved cow in a drought,” said CEO Kyle Smith. “The law says that you have to at least pay the interest on your repurchase obligations. We abided by the rules, but we couldn’t afford to put enough money into the ESOP to keep it healthy. That made the ESOP a joke. Nobody cared about it. It wasn’t a good benefit. I had been there a couple of years, and I’d look at my statement and think, ‘Oh, great, I’ve got enough here to buy a cup of coffee.’”

But, ironically, the founders’ very success, and the mystique surrounding it, can often become a significant obstacle to the leaders who follow them, especially when it becomes necessary to make fundamental changes in the way a company does business.

And after five very tough years, the company finally emerged from its purgatory, growing 5 percent in 2003, 7 percent in 2004, and almost 10 percent in 2005, while having the most profitable years in its history. The operating details told the story. In 1991, the lead time from ordering to shipping was 12 weeks; by 2003, it had shrunk to 3.3 days, and by 2004, to a single day. On-time delivery had ceased to be a problem, as the percentage of products shipped when promised went from 80 percent in 1991 to 99.7 percent in 2003. Whereas it had once taken two weeks to customize an award, by 2003 the work could be done in two hours.

It was pretty much a foregone conclusion that their companies’ mojo would last only as long as they themselves were involved because the businesses couldn’t survive without them. I’m referring specifically to the two companies built around the unique talents of artists, namely, Selima Inc., the dress company of Selima Stavola, and Righteous Babe, the music business of Ani DiFranco.

Although it’s hard to imagine now, there was a time when it was not considered a compliment to be called “entrepreneurial.” Back in the 1950s, 1960s, and 1970s, entrepreneurs were generally looked upon as shifty characters with little or no redeeming social value. The media ignored them, academia deplored them, and their companies got no more respect than they did. When people talked about business, they were referring to large, well-established, publicly traded companies. Smaller, private companies were regarded as fringe elements, and therefore unimportant by definition.

“I kept thinking that the entrepreneur is like an artist, only business is the means of his expression. . . .” he said. “He creates [a business] from nothing, just a blank canvas. It’s amazing. Somebody goes into a garage, has nothing but an idea, and out of the garage comes a company, a living company. It’s so special what they do. They are a treasure.”

“You’re not just writing for a rational person. You are writing for someone who has the soul of an artist, and his expression is business.”

After spending time in and around these small giants, what can we say is the essence of the mojo they all have? The answer, I believe, has more to do with the people than with the businesses. To me, the owners and leaders of these companies stand out for being remarkably in touch with, and focused on, what most of us would probably agree are the good things in life. By that, I mean that they are very clear in their own minds about what life has to offer at its best—in terms of exciting challenges, camaraderie, compassion, hope, intimacy, community, a sense of purpose, feelings of accomplishment, and so on—and they have organized their businesses so that they and the people they work with can get it. When outsiders come in contact with such a business, they can’t help but feel the attraction. The company is cool because what’s going on inside it is good, it’s fun, it’s interesting, it’s something you want to be associated with. From that perspective, mojo is more or less the business equivalent of charisma. Leaders with charisma have a quality that makes people want to follow them. Companies with mojo have a quality that makes people want to be part of them.

Your work should be something you enjoy. My client has to be someone I enjoy. It all comes down to, are you happy with yourself when you tackle a new day?”

To begin with, they understand that you can’t measure the value of what a company does by looking at how big it is and how much profit it generates. A company’s record of growth and the consistency of its financial returns may tell you something about the skill of its management team, but they say little about whether or not the business is contributing anything great and unique to the world. Instead, the small giants focus on the relationships that the company has with its various constituencies—employees, customers, community, and suppliers. Why? Partly, no doubt, because the relationships are rewarding in and of themselves, but perhaps also because their strength reveals the degree to which people are inspired by the company, and its ability to inspire them is the best measure of how they perceive the value of what the company does.

It usually happens, however, when a company’s leaders begin focusing on growth or financial return, not as by-products of a well-run business, but as goals to pursue for their own sake. And if you sell equity to people outside the company, you will probably have to start viewing them as goals to pursue for their own sake—because you will owe those people a good return on their investment. Hence, the small giants’ commitment to remaining private and closely held.

The financial indicators are, after all, the most convenient, and objective, measures of success available. It’s easy to fall into the trap of thinking that if you’re maximizing growth, you’re also maximizing success. It feels like you’re winning, and who doesn’t like to win?

getting caught up in the growth game helps to assuage one of the least recognized and most underrated hazards of company building: boredom.

If they’re smart, they bring in other people to help. Meanwhile, they themselves try to figure out what to do next, what to do that they really enjoy, what to do that can recapture the excitement they have already begun to miss. The problem is, the move that feels right to them may turn out to be harmful to the company.

“We have three bottom lines at Zingerman’s—great food, great service, and great finance,” said Ari Weinzweig. “Potentially, they could all conflict. We could increase our profit by cutting back on the quality of our food. We could improve our service by having a lot more staff on hand, but then we’d go broke. We want to bolster all three bottom lines, and we have limited time, which is a nonrenewable resource. So we spend it thinking about improving each of the three, one at a time.”

For all the money in the world, people can’t give you the ability to say, ‘No.’”

There was no question that it existed to serve art. That was the reason they decided to start putting out CDs by other artists, even though the vast majority would never do better than break even. “We always had the pipe dream of it growing beyond me,” said DiFranco, “and of us being a legitimate label with other artists—independent, renegade artists who need help with distribution. If that can be self-sustaining, and if we can be a mechanism for artists to get their work out to an audience, that’s what I want.

Looking back, they realized that Hammerhead had been able to make this transition from VFX company to moviemaker for one reason: its size. “By staying small, we could maximize our agility,” said Dixon. And agility turned out to be the key to survival.

They wound up improving their average margin by an astonishing 50 percent. “We couldn’t have done it without Berwind,” said Marshall. “Just that exposure to a different mind-set, a different understanding of what can be achieved in business, really gave us the confidence to say, ‘Yeah, anything’s possible here.’”

Clif Bar was not only an even more extraordinary company in 2015 than it had been when I first visited its old headquarters in 2003, but it was a significantly larger one as well. It had averaged 21 percent compounded annual growth for the previous decade. Its workforce had quadrupled in that time, from about 100 employees to more than 400.

“Here is the headline of my life right now: trying to use growth as the engine to build our culture, which is completely the opposite of what I always feared—that growth would hurt our culture,” he said in 2015. “I have made a 180-degree turn. I now see that sensible, well-paced growth is essential to advance your culture. Because culture needs to grow. The worst thing you can do is to try and maintain culture.”

Meyer blamed himself for creating the problem. “I built the company like you raise a family, and in a family nobody ever leaves. I put too high a premium on making sure that nobody left. That was great to a point. Loyalty between a company and its senior leaders is a really wonderful virtue. But businesses are not families.

Meyer was saying, in effect, that growth is important because it produces change, and change creates opportunities to do better, provided you recognize them. Ten years before, he hadn’t been looking for those opportunities because he had been focused on keeping the culture the same and feared that growth would inevitably lead to its dilution. What he’d learned was that the real threat to the culture was not dilution but stagnation, which could be avoided by taking advantage of the opportunities created by growth to continually improve the culture.

The combined revenue of the ZCoB businesses was, in 2015, more than twice what it had been in 2005, having risen from $25 million to $56 million. Its profits had more than doubled as well. There were 525 full-time and 166 part-time employees in 2015, up from 258 full-time and 139 part-time in 2005. Meanwhile, four new companies in the community brought the total to 11 different local food-related businesses, including a candy company, a working farm and event venue, and a Korean restaurant. There was also a new vision, Zingerman’s 2020, superseding Zingerman’s 2009. “Ninety percent of it was just reaffirming the original vision,” noted cofounder Paul Saginaw. The new vision did, however, place a stronger emphasis on achieving racial diversity and environmental sustainability than the earlier one had.

greatness is not a destination, but a journey, and it never ends.

The essential book on employee ownership, for example, is Equity: Why Employee Ownership Is Good for Business by Corey Rosen, John Case, and Martin Staubus.

For the experience of making employee ownership work, you should read A Stake in the Outcome: Building a Culture of Ownership for the Long-term Success of Your Business by Jack Stack and yours truly.

For more about open-book management, check out The Great Game of Business: The Only Sensible Way to Run a Company, also by Jack Stack and me, as well as Open-Book Management: The Coming Business Revolution and The Open-Book Experience: Lessons from Over 100 ...

For improving financial literacy in your organization, the best book out there is Financial Intelligence: A Manager’s Guide to Knowing What the Numbers Really Mean by the la...

The writings of Robert K. Greenleaf have had a major influence on many of the small giants—especially his booklets The Servant as Leader and The Institution as Servant. Both are available from th...