Lighting A Fire Under Polaris

CEO Tiller is pushing the ATV maker into new markets in a bid to boost sales

In a way, a visit to Polaris Industries Inc.'s (PII ) Roseau (Minn.) plant is like a trip back in time. In a town of 2,800, some 2,000 people work for the company, and rush hour along its main drag, state highway 89, occurs three times a day, when each shift ends. These days, the assembly lines putting together the company's all-terrain and utility vehicles are based on Japanese manufacturing principles, and inventory is delivered directly to the factory doors real-time -- but layoffs are nearly unheard of. Many of its workers love the products so much that they drive them to work.

From Polaris' Medina (Minn.) headquarters, near Minneapolis, CEO Tom Tiller laughs that the company sometimes sounds "kind of 1950s." But that had some appeal to the 43-year-old when he decided to sign on in 1998, leaving a promising career at General Electric Co. (GE ) that had him traveling to 50 countries a year. Tiller wanted to run his own company and saw a lot that he liked at Polaris. Its engineering group in Roseau had consistently turned out innovative products that had pushed it to the No.2 spot in ATVs against such tough competitors as No.1 Honda Motor (HMC ) and Yamaha Motor -- and had also strengthened its sales of snowmobiles and other recreational vehicles. The company had little debt and made products that Tiller, who started snowmobiling at age 7, liked.


But there was plenty of room for improvement. Executives had missed their budget five years running when Tiller arrived, a lack of focus that had left its stock flat. For the company to grow, Tiller knew its view of what was cool had to move beyond what might be useful in the cold, flat farmland of Roseau, some 280 miles northwest of Minneapolis, to a much wider world. While he saw a chance to apply some of what he had learned at GE to goose performance, Tiller didn't want to lose the employee passion that had led to many of its breakthrough products and remarkable productivity: Polaris has revenue per employee twice that of rivals. With price tags of $3,000 to $10,000 per vehicle, that gives Polaris a huge boost. "How do you get a good company to the next level while protecting, nurturing this wonderful culture?" Tiller asks.

So far his answer -- a blending of GE-style discipline, new blood, a focus on broader markets, and loyalty to his workers -- seems to be working. Despite a growing national movement to highlight the environmental and safety problems posed by ATVs and snowmobiles, the company is thriving. Under Tiller, sales have risen from $1.2 billion in 1997 to an estimated $1.8 billion this year. More impressive, net income has climbed from $31 million to an estimated $135 million. Heartened by 26 straight quarters of meeting or beating expectations, shareholders have bid the stock up 274% during Tiller's tenure, compared with a 12% drop for the Standard & Poor's 500-stock index.

Supporting that performance have been a number of home-grown leading-edge products -- starting with the hugely popular Sportsman ATV, which enthusiast engineers created in the mid- 1990s by adding independent rear suspension to a classic ATV.

But the process of creating new products at Polaris had been seat-of-the-pants. The Ranger utility vehicle, a cross between a jeep and a golf cart that can hang on to a hill at something that feels close to a 90-degree angle, went through two development cycles, first as a six-wheeler then as a popular four-wheeler. Yes, Polaris ended up with a great product, but Tiller wanted to make the process more efficient. Now he ties development to market research, much of which is done far from the Midwest.

He has also funded a new research-and-development center, scheduled to open next year in Wyoming, Minn., closer to Minneapolis, in the hopes of attracting a broader range of engineers and designers. Tiller says they currently have to interview 100 engineers to fill a single job opening in remote Roseau. Tiller has also imported executives from big companies like Honeywell (HON ), General Mills (GIS ), and GE, and has brought compensation up to more competitive levels. "Before, we were constantly looking for diamonds in the rough," says Bennett Morgan, a 17-year veteran who oversees the company's largest division, its $1.1 billion ATV business.

The development of the Predator 500 is a model of what Tiller is moving toward. Introduced in 2002, it's an ATV aimed at the sports and recreation market with a buglike front panel and easy-to-spot front shock absorbers, which improve its ride and handling, and deep-tread radial tires. From the beginning, the Predator, which retails for $6,200, followed a different path from vehicles such as the Sportsman, which had been born, tested, and produced in Roseau. To perfect the Predator, meant for use on a lot of terrains including desert, managers conducted field research in the sand dunes of Southern California, with prototypes wrested from the engineers earlier than usual. The idea was to make sure they were on the right marketing track. And the testing led to changes, including enhancing the more angled, buglike look.

To reach the fashion-conscious sports enthusiasts, Polaris launched a viral marketing campaign with provocative postings on enthusiast Web sites such as "Honda for sale, Predator coming." The company would sneak vehicles into popular testing grounds, where leading-edge riders began to agitate for sneak peeks. Predator captured 15% of its segment of the market during its first year, according to Polaris, compared with 1% to 2% for a typical new entry.

Tiller would like many more such wins, and has set a goal of reaching $3 billion in sales by 2009. To get there he wants waves of new products in a leaner, more profitable dealer network with a global expansion that is already starting in Western Europe. The French Alps are a long way from Roseau, but Tiller thinks Polaris is ready for the move.

By Nanette Byrnes in Roseau, Minn.

    Before it's here, it's on the Bloomberg Terminal.