Don't mess with success.
Like many successful operations, Timken Co. was reluctant to change the formula that made it a leading manufacturer of steel and bearings. But when the U.S. economy nose-dived and foreign competitors muscled in on Timken's turf in the early 1980s, the company found itself on the brink of disaster.
In her new book, Timken: From Missouri to Mars - A Century of Leadership in Manufacturing, business historian Bettye Pruitt describes the struggles - and successes - of the company since its beginnings in 1899. The book was commissioned by Timken Co.
The following excerpts from Timken describe the steps taken by Timken's leaders, Tim Timken and Joe Toot, to rescue the company in the early 1980s. Chairman Tim Timken and then-President Toot slashed salaries and staffing; sank more money into new technology and research and development; restructured the company into business units; and opened decision-making to outside influences.
The industry as a whole was hard hit - six of 50 U.S. bearing plants were closed or sold, and between 1980 and 1984 alone some 13,000 jobs were lost. Timken laid off 2,000 hourly employees in 1982 and 1983 and reduced salaries by 6 percent across the board in 1984. In August 1985, amid continuing layoffs, Joe Toot announced that the company would cut its salaried staff by 500. That was followed in January 1986 by permanent salary reductions of 10 percent for all officers and 8 percent for others, with future raises to be merit pay only.
In December 1986, facing the company's worst-ever operating loss, Joe and Tim decided to close the Columbus bearing plant. The AP bearing plant would remain, but the rest of Columbus operations would phase out and shut down entirely by 1989.
Timken's leaders remained committed to investments essential to improving the company's competitiveness. R&D expenditures rose steadily, both in absolute terms and in relation to revenues, from $14 million (0.7 percent of sales) in 1978, to $35 million (3 percent of sales) in 1986.
The latter percentage was comparable to the amount spent by technology leaders in manufacturing, such as TRW, General Dynamics and General Electric, and was far above the level of the steel industry, in which R&D spending averaged about 0.5 percent of sales in the 1980s.
In addition, Timken invested heavily in computer technology. It linked its offices worldwide with personal computer and intelligent terminals, and it developed new, more powerful information systems to schedule and coordinate manufacturing that placed terminals for data entry and retrieval right on the factory floor.
In 1984 and 1985, the company was also hiring and training personnel at Faircrest (the Canton, Ohio, steel plant that opened in 1985). But it cut all other spending to the bone.
Joe and Tim believed the steps they had taken would eventually return Timken to a position of leadership.
Meanwhile, they were still largely in a survival mode. The year 1986 brought the company's largest-ever operating loss and its lowest stock prices in a decade.
The fourth quarter was 'sheer hell,' recalled Tim. 'I think we wondered a little bit at that time whether we could remain independent.'
In December, the board of directors declared a special dividend of one shareholder right for each share of Timken common stock. Each right, exercisable in the event of a takeover attempt, permitted the owner to buy a share of newly issued stock for $135.
With the large stake controlled by the Timken family and additional shares owned by nonfamily officers and directors, the company could feel reasonably secure. But it was an action that expressed the deep concern of the time.
Another initiative in 1986 that would be beneficial in the long run but was initially quite painful was the restructuring of the company into business units. Announced in December 1985, it was to be completed by February 1, 1986.
In reality, it rolled out over much of the year, right along with salary cuts and staff reductions. Virtually everyone ended up reporting to someone new. As one outside observer described it: 'Layer by layer, managers were promoted, demoted, retired or reassigned. ... Disruptions were inevitable as individuals, departments, plants and even whole divisions waited to see for whom they would be working.'
For an organization that had evolved along a familiar path for some 40 years, the changes were wrenching.
By the mid-1980s, however, most large corporations with multiple lines of business and international operations had already taken the step of replacing functional organizations with business units.
By design in a functional organization, only a very few people at the top had a view of the business that embraced marketing, manufacturing, engineering, and R&D, combined with a grasp of the company's financial position. The senior managers of each division were primarily focused on achieving excellence within their own functions.
The setup had served Timken well for a long time and, in particular, had supported the policy of sustained investment in manufacturing and research in a way that business units, competing for corporate funds and more driven toward financial performance, might not have.
But, even in a company with only two major lines of business, functional divisions made it difficult to respond effectively - and quickly - to the challenges posed by an environment of oversupply and strong competition.
Moreover, Timken had simply become too big to depend on just two men at the top for business planning and strategic thinking.
No one understood that better than the two men at the top in the 1980s. In setting up the decision-making process that led to the Faircrest plant, Tim and Joe had opened the door to managing the steel division as a distinct business. They had also raised the standard for strategic planning.
And, by structuring the team as they did - bypassing the existing divisional leadership - they had implicitly set aside the functional organization as inadequate to the task. Those were all significant departures in a tradition-bound company, and they laid the foundation for the larger changes that followed.
Most significant of all, however, was the opening up to ideas and influences from the outside. That had really begun in the mid1970s with the dawning recognition that Timken had been surpassed in some critical areas of product quality.
In the late 1970s, Herb Markley had taken the first step by bringing in the industrial engineering firm of Alexander Proudfoot. As Joe Toot recalled, it was a wake-up call to learn from Proudfoot that Timken did not have all the best manufacturing practices.
That was followed by the worldwide benchmarking exercise for Faircrest and the collaboration with leading-edge consultants in developing plans for the new plant.
Before, said Tim Timken, the feeling had been that 'if you had to rely on consultants, you didn't know what you were doing.' Now, he and Joe had stood that idea on its head. They wanted to collaborate with outsiders who could, in Joe's words, 'show us what the best practice among leadership firms really was.'
That was their purpose in working with McKinsey & Company on the corporate reorganization. Tim and Joe knew how they wanted to restructure the firm; Timken sold its rock-bit division, which accounted for less than 1 percent of its annual sales, and it reorganized into two new business units, bearings and steel.
At Joe's urging, with the goal of maintaining Timken's functional excellence, the restructuring also created four corporate centers: finance; personnel administration and logistics; technology; and strategic management.
McKinsey's role was to help Timken implement those changes. Its approach was straightforward: get the senior people in each unit in place, then move downward layer by layer, allowing the managers at each level to participate in designing their organizations and selecting the personnel who would report to them.
Yet from McKinsey also came the message that not just the structure but the culture of management had to change if the reorganization was to achieve its goal of improving the company's performance. The consultants brought an analytical approach to thinking about that problem. This was the McKinsey 7S Framework, which included 'hard' factors - strategy, structure, skills, systems, and staff - but also critical 'soft' factors - style and, most important, shared values.
In the business bestseller, In Search of Excellence, Thomas J. Peters and Robert H. Waterman, Jr., who originated the 7S Framework, noted that one of its main contributions was 'to remind the world of professional managers that 'soft is hard',' that is, that cultural factors are at least as critical to success as strategy and structure. The course of change at Timken from 1986 into the 1990s would prove that point conclusively.
Reprinted by permission of Harvard Business School Press. Excerpt from Timken: From Missouri to Mars - A Century of Leadership in Manufacturing by Bettye Pruitt. Copyright 1998 by The Timken Company. All rights reserved.