Sun Hydraulics: Shattering the Morass of Middle Management

“You’ll meet them all again on their long journey to the middle.”

That’s the late, great Philip Seymour Hoffman reading Lester Bangs in Cameron Crowe’s thinly veiled autobiographical film Almost Famous.

Bangs is contextualizing the struggles of the film’s protagonist, William — his would-be protégé and Crowe’s stand-in. William is a precocious adolescent promoted to high school two years early by his well-intentioned and proud but tone-deaf mother.

No big deal, according to Bangs, because rock ‘n’ roll, the stuff of William’s dreams, “… it’s over.” And soon it’ll be off to middle management.

In this cinematic moment, Bangs expounds that “middle” is another word for “mediocrity.” There are two ways to understand what he’s saying to William.

On the one hand, we’re all destined to become mere cogs in the machine — “middle managers,” bureaucrats.

On the other, by the mid-1970s, the driving ethos of rock ‘n’ roll had already been corrupted by commercialization and made rigid by commodification.

In real life, Bangs was a bit of a misanthrope, but at the same time, he also appreciated the power of Don Van Vliet/Captain Beefheart-like genius to inspire.

Mediocrity is the product of homogenization, and those are the signs that mark the road to “the middle.”

But there are also visionaries like Bob Koski, whose hand-written business plan for Sun Hydraulics Corp. (SNHY), an $800 million-market cap Nasdaq company, is the very template of anti-bureaucratic leadership.

Sun Hydraulics has been profitable for 44 consecutive years. Over the last 10 years, it’s generated a 450% total return for shareholders, including a 240% increase in the share price.

Compare that to the performance of the major equity benchmarks — the Nasdaq Composite (135%), the Russell 2000 (61%), the S&P 500 (62%) and the Dow Jones industrial average (58%).

Sun has been “busting bureaucracy” from its very beginnings in 1970.

And now it’s being recognized among a “vanguard” showing the way to renewed productivity growth for developed-market companies and economies.

“More people are working in big, bureaucratic organizations than ever before.”

Back in the 1800s, the world needed bureaucrats, who were chosen from among the very few fortunate enough to be educated beyond mere literacy.

They brought specialized knowledge to what were, at the time, complex problems of organizing public functions in a new democracy. And they were experts at understanding the interplay of bigger and more efficient commercial operations in an emerging industrial power.

But in the modern age, even college graduates are a dime a dozen. There’s a lot of specialized management skill out there.

“Nevertheless,” as Gary Hamel of the London Business School and The Management Lab and Michele Zanini, Hamel’s colleague at The Management Lab, write, “the foundations of management are still cemented in bureaucracy.”

According to Hamel and Zanini, “An excess of bureaucracy costs the U.S. economy more than $3 trillion annually, and in recent years, that tariff has been growing.”

Indeed, they note that “more people are working in big, bureaucratic organizations than ever before.”

U.S. gross domestic product (GDP) as of the end of the second quarter of 2016 was estimated at $18.4 trillion. So bureaucracy costs approximately 17% of GDP.

There’s too much of it, and it’s a major factor choking productivity growth here and in other developed economies.

Hamel and Zanini have identified a group of seven “post-bureaucratic pioneers” — including Sun Hydraulics; Nucor Corp. (NUE), the most profitable steelmaker in the United States; privately held Morning Star, the world’s largest tomato processor; privately held W.L. Gore & Associates Inc., a $3 billion high-tech fabric company that makes Gore-Tex; Svenska Handelsbanken AB (SVNLF), a Swedish bank with more than 800 branches across Northern Europe and the United Kingdom; privately held Valve Corp., a pioneering developer of online games; and General Electric’s jet engine plant in Durham, North Carolina.

The experience of this “vanguard” suggests that doubling the ratio of employees to managers and administrators from 4.7-to-1 to about 10-to-1 “would free up 12.5 million individuals for other work that is more creative and productive.”

“The critical ingredient for success is creating an environment which enables employees to both identify opportunities and act on them.”

Hamel’s and Zanini’s September 5, 2016, piece in the Harvard Business Review also notes the “indirect savings” that would come from eliminating “low-value management processes” such as budgeting, performance reviews and internal compliance.

This “middle” — comprising about 12.5 million managers and 8.9 million “contributors” — eats up about 8.9 million worker years per year. Killing it would boost GDP per worker by 17.5%, from $120,000 to $141,000.

“Killing” isn’t really the right word, though. These 21.4 million “middle” workers would shift into “value-creating activities,” resulting in a $3 trillion boost to U.S. GDP.

In short, that’s how Hamel and Zanini propose to bust bureaucracy and, therefore, “reinvigorate productivity growth.”

Sun Hydraulics manufactures cartridge valves, manifolds, electrohydraulics, and integrated hydraulic systems for a wide range of industries, including heavy-duty construction machinery and complex robotic equipment used in the oil and gas and mining industries.

The company showed up on Hamel’s and Zanini’s radar because of steps it took during the economic downturn in 2001 to “maintain profitability and reduce labor costs without destroying the company’s innovative culture.”

Sun is certainly responsible for creating innovative products, such as its floating-style screw-in cartridge that performs better and is more reliable than other valves.

But in an industry that’s become increasingly standardized, Sun has distinguished itself by eliminating unnecessary positions and processes, thereby maximizing productivity.

Its creativity shows up in 44 consecutive years of profitability and in massive stock outperformance over the past decade.

Sun’s productivity is no accident. Its ethos is stated very simply but prominently on Page 3 of its 2015 annual report to shareholders: “The critical ingredient for success is creating an environment which enables employees to both identify opportunities and act on them.”

Bureaucracy is, to paraphrase Milton Friedman and infuse it with some Bangsian misanthropy, always and everywhere a productivity-killing phenomenon.

Sun was founded in 1970 by John Allen and Bob Koski, who wrote out the business plan in his own hand. It posted its first profitable year in 1972 and has been profitable every year since, through good times and bad.

From the very beginning, Koski was focused on creating a “healthy, self-managed and informal” corporate culture that would enable Sun to grow “steadily and gracefully” for the long term.

His theory of “horizontal management” encouraged employees to design and manufacture Sun’s products.

Allen Carlson, who was CEO from May 2000 to April 2016, summarized how Koski’s original vision evolved at Sun:

At Sun, we have no job titles, no hierarchy, no formal job descriptions, no departments, no budgets, no direct sales channel, no close supervision, and only some work instructions. We avoid reporting relationships, excess paper, and meetings. Our one rule is that there are no rules. We expect that people can decide for themselves, based on widely shared information on operations, how best to contribute to the company’s objectives. Information is powerful, so we broadcast it. Both manufacturing and office personnel are expected to work with others in the organization whenever they deem it necessary to accomplish their tasks. This lets “natural clusters” or work groups form and dissolve as necessary to get the job done.

Sun expanded overseas in 1982 with a distribution hub in Coventry, England.

In 1989, it scaled up its Coventry operation with the construction of a manufacturing facility, and also started distributing its products in Asia Pacific. In 1997, Sun debuted on the Nasdaq.

By 2000, it was regarded as the “BMW of the cartridge valve industry,” according to Carlson, with a “premium product, which goes faster than it needs to go, corners better, and costs more than any Chevrolet.”

Bureaucracy is, to paraphrase Milton Friedman and infuse it with some Bangsian misanthropy, always and everywhere a productivity-killing phenomenon.

But, write Hamel and Zanini, there’s “a small but growing number of post-bureaucratic pioneers” out there whose “experience suggests it’s possible to run complex businesses with less than half the managerial load typically found in large companies.”

Money Quote

“In most cases, being a good boss means hiring talented people and then getting out of their way.”
—Tina Fey, Bossypants

Smart Investing,

David Dittman
Editorial Director, Wall Street Daily

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