Building A Bridge To The Future

Worthington Industries' second-generation CEO wants to preserve the company's culture, while driving changes needed for success in the 21st century.

When he needs a haircut, John P. McConnell doesn't have to travel very far from his office in the headquarters complex of Worthington Industries Inc. in Columbus, Ohio. Five of the buildings on the firm's main campus -- including several manufacturing plants -- have barber shops. Two barbers, both on the company payroll, rotate between the shops -- offering haircuts for the modest price of $4. "I get mine styled," grins McConnell, the 44-year-old chairman and CEO of the steel-processing-and-fabricating company that is approaching $2 billion a year in sales. The almost-legendary $4 haircut is a company perk available to all employees, who are permitted to schedule visits to the barber on company time. It symbolizes the respect that the firm long has shown for its employees, as well as a desire to ensure that workers are well-treated. The Columbus complex also has a medical center staffed by three doctors. Many of the Worthington plants have workout facilities. And the company has had an employee profit-sharing plan since 1965. Profit-sharing payouts to production workers, which averaged $13,240 in 1998, typically represent from 30% to 40% of annual compensation. Worthington Industries' paternalistic culture is rooted in a philosophy based on the Golden Rule. A small plastic card carried by each employee spells it out: "We treat our customers, employees, investors, and suppliers as we would like to be treated." It is a philosophy that has served the company well since it was founded in 1955 by John H. McConnell, who retired in 1997, turning the chairman's reins over to his son. Launched with an $1,800 investment, Worthington Industries has chalked up steady growth. Last year it reported revenues of $1.76 billion and marked its 31st consecutive year of dividend increases. Like other scions of industrial dynasties, the younger McConnell has had to live with the inevitable comparisons invited by the succession from one generation to the next. "You've got to go out and earn your stripes," he says. "And there always will be some people who resent that you're here and who feel like you've never done anything to earn it. But most people are not of that mind. They are more interested in what we are doing, where we are going, and how we're getting there." McConnell, who became CEO in 1993, has been earning his stripes since 1976 when, as a college student, he spent his summer vacation working as a general laborer in the firm's steel-slitting mill in Louisville. "I was a slitter's helper for a while," he recalls. "They liked giving me the nonglamorous jobs." After college he worked in other company positions, including an inside-sales stint with Worthington's cylinder-fabrication division. Over the years, he continued to prove, to his father and to his immediate superiors, that he was ready for the next step up the ladder. Now that he's at the corporate helm, perhaps the single biggest challenge he faces is that of positioning Worthington Industries for continued growth and profitability in the 21st century, without trampling on the culture, philosophy, and policies that have propelled nearly half a century of success. It's no trivial task in an increasingly global company that has been responding to significant changes in its marketplace by implementing major restructuring initiatives and investing heavily in new production facilities. "We've talked about change a lot over the last six years," McConnell says. "And starting in calendar 1997, we started making more dramatic steps -- selling off some companies and refocusing our metals-related businesses. We've been concentrating on building the company and getting it ready for the next 25 or 30 years." Since mid-1998 Worthington has divested seven operations, including a $200-million-a-year automotive-plastics unit. Meanwhile, it acquired cylinder-manufacturing operations in Austria, Portugal, and Czechoslovakia and launched a restructuring of its steel-processing business. The 7,500-employee firm now operates 53 facilities in 11 countries. In addition to steel-processing operations, such as slitting, galvanizing, and annealing, Worthington has fabrication units that produce automotive-aftermarket stampings, metal framing for structural uses, metal ceiling-grid systems, laser-welded steel blanks, and pressure cylinders. The cylinder business, which represents about 20% of total sales, is the world's No. 1 producer of portable cylinders for propane fuel. It also makes freon cylinders for the refrigeration/air-conditioning market and small pressure cylinders for helium used to inflate party balloons. In the last four years the company has invested more than $1 billion in new manufacturing facilities -- the bulk of that money going to plants in Delta, Ohio, and Decatur, Ala. The Delta facility includes a 500,000-ton hot-rolling mill, plus hot-dip galvanizing, pickling, and slitting operations. The Decatur plant, which went into operation in 1998, has a 1-million-ton tandem mill, along with pickling and slitting lines. Along the way, the management team has introduced significant organizational changes as well, such as centralizing company-wide purchasing and creating a more centralized structure for the steel-processing business. Such changes might tend to create the impression that the firm is straying from its cultural roots, but McConnell is determined to preserve the key elements of the philosophy -- and the entrepreneurial spirit -- ingrained in the company during his father's tenure. "My father was a great role model," he says. "He grew up in West Virginia and worked in the steel mills there. From his early experiences, including growing up during the Depression, he had a pretty clear focus on what it was like to be a worker and what a business ought to do. You have to focus on your customer. And then you have to create an environment for the employees where they also want to focus on the customer. If you combine those two things, you have a successful company. "One of the things we didn't want to injure in the [restructuring] process was the culture itself, which has created a group of people who are willing to do just about anything for the company. We had a mind-set that we were not going to risk disrupting the culture. As a result, some things may have taken a little longer to do. "When I talk to our employees," McConnell adds, "I often say that, in some cases, success is our worst enemy, because you don't want to give up what you think has gotten you here. But to keep the momentum going, we have to do some things differently, because we are a different company today." John Christie, who became Worthington Industries' president and COO this year, says he has been impressed by the flexibility that McConnell has shown "in sticking with the core values, but tweaking them" to make the company better. "You have to build a 21st-century company today," asserts Christie. "You can't have a better tomorrow if you are looking at yesterday all the time. But you still have to remember where you came from." Prior to assuming the No. 2 position at Worthington Industries, Christie headed the McConnell family holding company -- known as JMAC Inc. -- which owns a sizable minority stake in the publicly traded firm, along with other manufacturing investments and Columbus' new hockey team, the Blue Jackets, which will make its NHL debut next year. During an earlier stint as president of the Columbus Chamber of Commerce, Christie became well acquainted with the company founder -- fondly referred to as "Mr. Mac" -- and his business philosophy. "He was bound and determined that his customers would be served with the highest quality and with the best prices, and that he was going to follow the customer," Christie says. Significantly, that emphasis on following customers has been a driving force behind the restructuring that the younger McConnell has spearheaded. Consolidation in industries served by the Worthington Steel division, for example, has focused attention on the need to present a consistent face to each customer. "Where we had a plant on the East Coast that served one customer and a plant in Ohio that served another customer, now those customers are owned by the same people. So a lot of coordination has to go on to make sure that we service the accounts the same way," McConnell points out. It doesn't make customers very happy, he notes, if they discover that they're paying different prices for the same item in different locations. "We just can't afford to let that happen." "Larger companies have been acquiring many of our smaller customers," adds Ralph Roberts, president of Worthington Steel Co., "and they want to have one face and one line of communication to Worthington across all of our businesses and all of our products." That is a major reason for the steel-division restructuring that will shift some decision-making responsibilities out of the hands of plant-level managers. The multifaceted transformation involves changes at three levels. From a product-line standpoint, six strategic business units (SBUs) have been created, each responsible for planning and strategy development for a specific steel product line: cold-rolled strip, cold-rolled sheet, hot-rolled steel, hot-dip galvanized, specialty coatings, and "tolled" products. Executives in charge of the SBUs will have responsibility for global marketing, trend analysis, and pricing strategies. In addition, an operational realignment that groups steel plants into five regions based on geography or product similarity is expected to eliminate administrative redundancies. Joint-venture facilities will be incorporated into the regional structure. Finally, sales personnel have been realigned into regional territories, but given total-product-line responsibility. "The salesperson in a region will be able to deal with a customer across our entire steel-group product line," Roberts points out. The regional sales forces will represent all six SBUs, but report to a single sales vice president. Because all of the managers assigned to key positions in the new structure have "come up through the existing system," he's confident that the firm's entrepreneurial spirit will not be jeopardized. Among the benefits of the steel restructuring, Roberts says, will be increased leverage in purchasing and in working with vendors. "I don't want to create a program at the divisional level and then have each operation decide whether or not it wants to participate." In exploring strategies for the steel business, he adds, "it became very obvious to us that we were not going to be able to achieve all of the objectives -- both financial and strategic -- that we want to achieve with our [old] structure. We saw the dynamics of our market changing, and we need to adjust to that. We need to have a clearer focus on our customers." The sales realignment, he believes, will provide that focus. Worthington's size gives it an advantage in the highly fractured steel-processing industry, Christie asserts. "With its size and buying power, Worthington is well positioned to take advantage of what I think is going to take place in the market -- further consolidation and increased customer requests. Customers are shrinking their supplier base, and they want their suppliers to do a lot more for them." That is one reason, he adds, Worthington has invested in a wide range of processing capabilities. However, the firm's heavy investment level has created a bit of a drag on the bottom line. While net sales soared by 56.6% over a three-year period from 1996 to 1999, the growth in earnings has been less spectacular, and relatively uneven. In part, that resulted from the way accounting rules treat new-plant investments, McConnell points out. Although initial construction and start-up costs are capitalized, "when a new facility reaches 10% of capacity, you have to switch everything over to the income statement," he notes. "At 10% of capacity, you aren't making money, yet you're carrying the cost on the income statement -- the interest, depreciation, all of that stuff. "Our Delta and Decatur mills are the largest facilities we've ever built. As they ramp up, they are generating sales dollars, but it takes a while to get them to the point where they break even and start making money. . . . For the next three years, we will be concentrating on bringing up the growth that we have in place. And we've got a lot of it in each of our businesses." As examples, he cites the overseas acquisitions by the Worthington Cylinders Corp. division and steps taken by the Pittsburgh-based Dietrich Industries Inc. unit (acquired in 1996) to seize opportunities in the emerging market for residential steel framing. Currently, commercial construction markets account for most of Dietrich's business. While more rapid earnings growth might make a better impression on Wall Street, McConnell thinks the overarching priority is to invest in future growth. "We are very mindful that we are a public company," he says. "But I think you have to invest for the long term whether or not the market likes it -- because people who don't, lose." Through joint ventures and acquisitions, Worthington has become a more global player in recent years. In 1998 it purchased an Austrian company, Jos. Heiser, the leading European producer of high-pressure cylinders. This year it acquired the manufacturing assets of Portugal's Metalurgica Progresso de Vale de Cambra Lda. and the Czech Republic's Gastec spol a.r.o., both makers of gas cylinders for heating and industrial applications. A Brazilian joint venture, in partnership with a local gas producer, makes propane tanks in Brazil. The company's introduction to overseas manufacturing came in 1992 when it formed a joint venture with Armstrong World Industries Inc. called Worthington Armstrong Venture (WAVE). The project combines Worthington's ceiling-grid manufacturing capability with Armstrong's ceiling-board products. "Armstrong had an established presence globally, and the joint venture gave us an opportunity to learn a lot as we built plants around the world," McConnell notes. There are now three WAVE plants in Europe and one in Shanghai, China. "As China and other regions of the Asian rim developed, Western architects were designing more of the buildings, which incorporated our type of suspended ceilings to hide heating and air-conditioning ducts," explains Roberts, who headed the WAVE unit until two years ago. "It was a way for us to begin to learn, with a minor investment, basically what it took to do business in Asia." Another joint venture with a strong international flavor was initiated in 1991 with Thyssen Inc. NA, the North American subsidiary of Thyssen Krupp AG, Germany. It created TWB Co. in Monroe, Mich., to produce laser-welded blanks for the automotive industry. Through laser welding, different sizes, thicknesses, and grades of steel are fused into a single flat steel blank to enable production of lighter, stronger, and more economical stamped automotive components. Since its formation, the joint venture has added three additional minority partners -- LTV Steel Co. Inc., Bethlehem Steel Corp., and Rouge Steel Co. Despite its heavy involvement with steel, Worthington Industries has resisted the urge to integrate backward into raw steelmaking, although it has held a minority stake in Rouge Steel, an interest it has been shedding in recent years. In the early 1990s Worthington contemplated making a major investment -- in the $600,000-plus range -- to build its own minimill to produce medium-thickness steel slabs. "We had been looking at various sites," McConnell says, "but we weren't comfortable that that was the right approach." In 1995 the company scrapped the minimill plan -- in part because two similar new ventures emerged: the Trico Steel Co. joint-venture minimill in Alabama and the North Star BHP Steel LLC plant in northern Ohio. "Our rationale for getting into the minimill business was to guarantee a good source of supply in a future [steelmaking] technology,' McConnell explains. "But we decided that if we could accomplish that with a supply agreement, then we would. And that's what we were able to work out." Rather than invest in its own minimill, the company opted to build its Delta plant next to the North Star BHP facility. Similarly, it located the Decatur plant near the Trico mill, which is owned jointly by LTV Steel, British Steel PLC, and Sumitomo Metal Industries Ltd. In retrospect, McConnell is convinced that the decision to nix the minimill was a wise one. "There is no question that it was the right way to go," he says. "We're in the business of adding value to steel and transforming steel. We're not in the business of making steel. "We don't want to talk in terms of how many tons we produce. We want to talk about how many dollars we make." Thanks to the long tradition of profit sharing at Worthington, most company employees would no doubt agree.

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