Top of the News: Commentary
A CEO WHO KEPT HIS EYES ON THE HORIZON
Most chief executives are loath to give up power before they must. Not Cummins Engine Co. Chief Executive Henry B. Schacht. At 59, with mandatory retirement six years away, Schacht decided to avoid the distractions of a lengthy transition. So on July 12, he stepped aside as CEO to make way for a successor. Why not hang around until pension time? "What I'd like to do is irrelevant," he says. "I have to do what's best for Cummins."
It's fitting that Schacht's departure was made with an eye toward the future. His 21 years atop the nation's largest diesel-engine manufacturer were defined by a passion for looking ahead. It allowed him to go toe-to-toe with the Japanese in the early 1980s and win--while many of his peers were in full retreat. Schacht invested in technology, expanded into new markets, and upgraded the skills of employees. And when raiders threatened to sidetrack his goals, he recruited investors willing to back his vision. Says David Hoyt, an executive vice-president at Frigidaire Co.: "He has an ability to sense future trends and respond faster than anybody I've met."
Schacht leaves with an important message for Corporate America: The long-term view pays off. During the past two years, his near decade-long restructuring has begun delivering handsome profits. On July 20, the company reported that profits for its second quarter, ended July 3, rose 35%, to $66 million. Last year, Cummins earned $177 million on sales of $4.2 billion. This year, analysts expect profits to jump 35%, to $240 million. Shareholders who stayed through the tough times saw their stock double in 1993, to 1015/8, before a 2-for-1 split.
NEW VENTURES. To say that Schacht labored long and hard would be an understatement. Beginning in the late 1970s, Schacht began overhauling his company. He started benchmarking Cummins' performance against rivals such as Komatsu Ltd. long before it was the rage. And he made Cummins an early advocate of quality initiatives and just-in-time inventory systems. From 1985 to 1993, sales per employee increased 63%.
Just as important, Schacht spent a lot of time repositioning Cummins. During the 1970s and early 1980s, it dominated the North American market for heavy-duty diesel engines, with a 50% market share. But Schacht and his team figured that demand would fall as the market matured, so he pushed the company into new ventures, including engines for light trucks. Last year, these midrange engines, which go into Ford Motor Co. and Chrysler Corp. trucks, accounted for 39% of sales. The sweetest irony of all: In 1993, Komatsu asked Cummins to build midrange engines for its construction-equipment line.
None of this was without cost, of course. When the Japanese invasion seemed imminent, Schacht took a radical step: He cut prices 30%. That kept rivals from gaining but savaged Cummins' bottom line. Until last year, the company had lost money nearly every year since 1986. And Cummins stumbled in 1988 when it introduced a line of heavy-duty engines riddled with flaws. That allowed rival Detroit Diesel Corp. to snatch market share it has never surrendered. Then raiders, eyeing the company's rich cash flow, began circling.
PATIENCE. To his credit, Schacht stayed the course. He drove down costs by restructuring, and when sharing the pain was called for, he didn't hesitate. In 1989, he instituted across-the-board pay cuts and whacked his own salary 15%. To ensure that Cummins would have the financing to continue investing for the future, he sold 20% of Cummins in 1990 to three customers--Ford, Tenneco, and Kubota. "The notion of patient capital was defined by Hank," says Arvin Industries Inc. Chairman James K. Baker.
And more than many chief executives, Schacht has paid attention to his people. Cummins offers as much as 100 hours of training to workers annually, and its factories operate on a team system that puts power in the hands of those who work the assembly line.
Perhaps his most important achievement is the staff he leaves in place. "He has left the company in the hands of strong people," says Tenneco Inc. CEO Dana G. Mead, also a Cummins board member. Of course, in Henry Schacht, they've had a good teacher.
A SAVVY MANAGER'S PRIMER
How Henry Schacht revved up Cummins
--Met challengers' pricing and battled for market share
--Redesigned factories to cut costs and boost productivity
--Embraced work teams from the factory to executive row
--Sold a 20% stake to three big customers--Ford, Tenneco, and Kubota
--Created a clear path for management successionKevin Kelly