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Business Observer Thursday, Apr. 1, 2010 12 years ago

Flat Lands

The management style at one of the most prominent publicly traded companies on the Gulf Coast is flat. Fortunately for long-term shareholders, the company's returns have definitely not been.
by: Mark Gordon Managing Editor

When Al Carlson talks about the management philosophies at Sun Hydraulics, he nearly talks himself out of a job.

“If you have a very imperial organization, than the CEO will be very important,” says Carlson, the president and chief executive of Sarasota-based Sun Hydraulics. “If you have a flat system, [he isn't] that important.”

Sun Hydraulics' system is flat as Florida grasslands. That means the valve manufacturer is devoid of job titles, hierarchy and formal job descriptions. Decision-making is shared in groups and clusters.

The company's implementation of the flat system, also called horizontal management, has translated well to its financials over the long-term. The lone exception was last year, when Sun Hydraulics was pounded by the recession and saw a 45% drop in revenues.

But prior to that plunge, the company had become one of the few consistently successful publicly traded companies in Sarasota and Bradenton based on revenue growth, profit margins and share price. The company was founded in 1970 and went public in 1997.

Annual revenues, for example, were up more than 80% from 2004 to 2008, when the company went from less than $100 million to nearly $180 million. Profit margins have more than doubled in that time frame while the company's share price has climbed from the $6 to $7 range at the end of 2004 to more than $25 a share last month.

Nonetheless, while the company's management system has been lauded over the years, it's not without its challenges. The recession, for one, forced the company to cut back some hours and institute a furlough system. The company has about 600 employees in Florida.

And Sun is growing internationally, where it does 60% of its business. Flat management can be lost in translation outside the U.S., the company has learned. “As the company gets larger, it gets harder to do it,” says Carlson. “So you have to work harder at it.”

The company currently has operations in seven countries, including the U.S. The division in Germany, says Carlson, is run closest to the Sarasota headquarters in terms of management style, while the Korean unit seems to have the toughest time adapting to the system. Koreans are hierarchal by nature, says Carlson.

The use of a flat management system has also garnered Sun Hydraulics a steady stream of media attention over the last 25 years. Publications including Forbes, Fortune and BusinessWeek have all written about it.

But the definitive text on the company's management was written in 1991 by a group of Harvard Business School professors. The school ran a case study on the company in the April 4, 1991 issue of the Harvard Business Review. The publication has since run several updates on the company, including one in 2003 and one last May on how it handled the recession.

The following is an overview of the original Harvard Business Review case study.

'Best interests'
Bob Koski founded Sun Hydraulics with the assistance of his friend and colleague John Allen. Koski spent the 1960s working his way up at Dynamic Controls, one of the first hydraulic valve manufacturing companies in the country.

Koski, according the case study, wrote a 34-page report in 1970 named “Sun Hydraulics Corporation: Plans and Objectives.” He gave the report to a few bankers in Sarasota and some family members he thought might want to invest in the company.

“Koski had also been called a maverick and an idealist,” the case study states. “In 1970, at age 40, he left Dynamic Controls. His goal was to create a new company that would avoid the human relations problems and pitfalls he had observed virtually everywhere in the world of organizations.”

Koski told the Harvard team that the most obvious culprit in standard organizations was the organizations' own hierarchy chart. That type of thinking, argued Koski, forced “individuals into defensive, unproductive and damaging behavior patterns, which prevented the organization from responding to changing business requirements.”

Hierarchy, job titles and formal job descriptions presented another problem in the typical corporate structure, Koski thought. He called it ossification, or the idea that an overdone focus on the company's procedures and job descriptions can lead an individual to put his own agenda over the best interests of the company.

“By not having an organization chart that people only look at sideways to see who is above whom, and by not having job descriptions and titles, it might be possible to defer that process of ossification,” Koski says in the study.

Koski died Oct. 11, 2008 in Sarasota. He was 79 years old.

'Fast decisions'
Carlson, meanwhile, a graduate of Harvard Business School's Advanced Management Program, joined the company in 1996. He was appointed the company's third president in 2000.

But those titles are mostly for Securities and Exchange purposes. Ditto for the company's chief financial officer, Tricia Fulton, who joined the company in 2006 and was immediately impressed with the management structure. Fulton is a graduate of Harvard Business School's General Management Program.

“We don't complicate things here,” says Fulton. “That helps us make faster decisions.”

The decision-making process was one of six key elements Koski wrote about in his 1970 essay. According to the Harvard case study, those points were what Koski hoped would differentiae Sun Hydraulics from other companies. The elements include:

• Horizontal Management: The lynchpin of the process. “People would be expected to decide for themselves, based on widely shared information on operations, how best to contribute to the company's objectives,” the study states. “Both manufacturing and office personnel would be expected to work with others in the organization as they deemed necessary to accomplish their tasks.”

• Eliminating Intimidation: Koski believed titles such as purchasing agent and quality control inspector contradicted his management belief system. Those titles forced people into one-track thinking and intimidated others, be it outside suppliers or employees. Without that intimidation factor, Koski thought people would be forced to solve problems and issues together.

• Operational Communications: Koski, according to the case study, longed to see a company “dismantle the power structure that controls operational communications.” That would ensure everyone has equal access to the information they need to complete their jobs.

• Group Self-Management: Koski believed a horizontal management system with open communications would lead to a natural formation of clusters among employees. These groups would develop their own polices and procedures to fit the goals at the time. “Where necessary,” the study states, “these groups would perform the control functions that were usually built into the hierarchy in other companies.”

• Decision-Making Process: In his past work experience, Koski discovered that the decision-making process frequently got bogged down because of power struggles. Those struggles were based on pre-defined roles Koski aimed to eliminate.

• The Ideal Employee: Koski thought a potential employee's ability to judge how good he would be at a given job or task was crucial.

“It seemed to him that much of most managers' day-to-day activities was spent resolving problems created by people who were not good judges of their own competencies,” the study states. “Without these problems, there would be little need for managers as a separate class of employees.”

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