Sun Hydraulics Corporation

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Sun Hydraulics Corporation

1500 West University Parkway
Sarasota, Florida 34243
U.S.A.
Telephone: (941) 362-1200
Fax: (941) 355-4497
Web site: http://www.sunhydraulics.com

Public Company
Incorporated: 1970
Employees: 678
Sales: $94.5 million (2004)
Stock Exchanges: NASDAQ
Ticker Symbol: SNHY
NAIC: 332999 All Other Miscellaneous Fabricated Metal Product Manufacturing

Sun Hydraulics Corporation is a Sarasota, Florida-based designer and manufacturer of high-performance, screw-in hydraulic cartridge valves and manifolds, crucial components in fluid power systems used to control force, speed, and motion. The products are used in a wide variety of construction, agricultural, and utility equipment; machine tools; and material handling equipment. Although more expensive than conventional hydraulic valves, Sun's screw-in cartridge valves use a two-piece floating style construction that offers equipment designers greater flexibility, better performance, and a longer life span. In addition to a pair of manufacturing facilities in Sarasota, Sun also operates plants in the United Kingdom, Germany, Korea, and China (through a joint venture). Aside from its innovative products, what sets Sun apart is its unusual organization, the subject of three Harvard Business School case studies. The company has no private offices, job descriptions, or organizational charts. The only job titles are state mandated due to Sun's public status. Employees are granted a great deal of discretion to implement changes as they see fit. The corporate culture has been a primary reason why Sun has enjoyed steady growth since 1970 in spite of dips in the economy along the way.

Founder's Frustration with 1960s Corporate Bureaucracy

Sun's founder, Robert E. Koski, was instrumental in the growth of Mentor, Ohio-based Dynamic Controls, Inc., maker of fluid power control products. After starting out as a product engineer in 1959, over the course of the next decade the Dartmouth College graduate worked his way up through the ranks, including stints in industrial sales, marketing, and product development. Ultimately he became vice-president and director of corporate development, the number 2 position in the organization behind the founder. During that stretch of time Dynamic Controls grew from $600,000 in annual sales to $5 million, but Koski became frustrated with the way the company grew in terms of organization and culture. Not only with his employer but elsewhere he encountered companies that he believed were organized to stifle human contributions. He developed his own management theories, as well as a new hydraulic valve he wanted to pursue, but found no backing from management at Dynamic Controls. Instead, in early 1970, at the age of 40, he quit, determined to launch a company to implement his ideas.

Taking an engineering approach to starting a business, Koski spent most of the first year planning and designing. He elected to stay in the fluid control business with which he was familiar, believing there was room for entry, and selected the name Sun Hydraulics Corporation. He also decided to locate his business in Sarasota, where his former employer had a satellite operation producing hydraulic systems for pleasure boats. Another hydraulic manufacturer also was operating in the area, and he believed he would be able to attract talented people, especially those unhappy with life at a hierarchical company—precisely the kind of employees he wanted. Moreover, Sarasota was growing and offered excellent transportation options. Koski conceived of a horizontal organization to the business, hoping to avoid the "ossification" that resulted from the reliance on a typical vertical organizational chart. At Dynamic Controls, he told Harvard Business School for one of its case studies, people had been given titles, but "as the company outgrew their capabilities and needed to hire or promote more talented people who would appear on the organization chart as their superiors, there was no place the old-timers could go that would satisfy their egos. They had to leave. They could not stay and save face with all the other employees. They had to leave." As a model, Koski looked to the way the DuPont Chemical Company ran its laboratories during the 1920s and 1930s when there was a shortage of trained scientists. Out of necessity senior and junior scientists were teamed together and given a great deal of latitude to move from project to project. It was a system that resulted in a period of great innovation at DuPont. For Sun, Koski envisioned a company with no hierarchy, titles, firm job descriptions, reporting relationships, or even close supervision. In the words of a Harvard Business School case study, "People would be expected to decide for themselves, based on widely shared information on operations, how best to contribute to the company's objectives. Both manufacturing and office personnel would be expected to work with others in the organization whenever they deemed it necessary to accomplish their tasks. 'Horizontal management' would encourage the formation of 'natural clusters' or groups to achieve whatever work had to be done." As a further reflection of employee freedom and self-imposed reliability, Sun also would forego the use of quality inspectors. All employees were to take responsibility for the quality of their own work.

Koski wrote out his ideas in a 34-page business plan that he sent to four Sarasota-area banks and other potential investors. In it he described his management philosophy as well as an overview of the fluid power components industry and the Sun product and a detailed ten-year projection of financial and other criteria. He offered three levels of growth projections—pessimistic, realistic, and optimistic—in terms of sales, the number of employees, and the amount of floor space needed. Koski secured the financial backing and launched Sun in 1970 with his wife and one employee. After ten years, Koski looked back and found that with inflation taken into account Sun had come within a percentage point of his optimistic projection.

New Plant Needed by the 1980s

Overall, Sun grew in an orderly way despite the loose structure. The original plant built in 1970 was expanded in 1975, and then in 1980 the company opened a new plant five times as large as the original one. The company turned a profit after its second year and over the course of the first 15 years sales improved at an annual clip of 30 percent to 35 percent, at a time when the industry average was 25 percent. Sun also was better able to weather an industrywide slump in 1982 and 1983 and avoided laying off any employees. In addition, Sun was able to price many of its products 10 percent lower than the competition yet recorded profits that were about twice as much as the industry average. It had a stellar reputation, recognized for its innovative design, quality workmanship, and ethical business dealings.

Although the shape the company culture would assume with so few rules in place had been far from predictable, there was no doubt that Koski's management principles—or lack of them—played a major role in the company's success.

In the office area only the controller and his assistant had enclosed offices, while everyone else, including Koski, relied on workplaces separated only by waist-high walls. Meetings were impromptu, generally growing out of a conversation that required input from other employees. In the shop there were a dozen family groups, each with one informal lead person, who generally emerged naturally. As much as possible the company avoided the use of such titles as supervisor, foreman, and manager, only relying on them as a way to help newcomers to know where to go for help. Employees also were cross-trained in a natural way. They helped out as needed and switched departments as their interests changed. Within a family group, many of the members were able to do all or most of the jobs within it. The shop employees worked four ten-hour days, then used their own discretion about coming in on Fridays and Saturdays to work overtime, and they did not necessarily have to be working in their own departments.

New employees were hired to fill a "vacuum" when one became apparent, but the main qualifications were personal and it was not a given that the new employee would even fill the vacuum. As a Harvard Business School case study revealed, "One engineer, who had been hired with a product development function in mind, had 'become intrigued with the computer' in his first days on the job, and since he concentrated entirely on creating new programming applications." In another instance, a market-oriented engineer spent quite a few months " 'wandering around' learning more about the market. [Colleagues] were certain that one way or another his wandering would be of benefit to the company."

By 1985 Sun employed 170 people and despite its growing size had been able to maintain its cherished corporate culture. One concern was that the company was overly dependent on Koski and his vision for the company, that unless a way could be found to make him less important on a personal level the company would lapse into conventionality with his departure.

Over the next several years Koski made a conscious effort to remove himself, and Sun began to function with only a modicum of input from him. Not only was the Sarasota operation proving that his personality was not the key to the success of his business model, but the company also was able to create similar structure in new operations, launched in the United Kingdom in 1985 and Germany in 1990. In Sarasota, in the meantime, Sun added 100 employees between 1985 and 1991. During this period Koski also groomed his successor, Clyde Nixon.

Company Perspectives:

Sun Hydraulics offers the most comprehensive line of screw-in hydraulic cartridge valves and manifolds in the world. These products provide machine designers the opportunity to develop unique, reliable solutions for hydraulic control applications.

A Cornell University-educated engineer and former Naval officer with a Harvard MBA, Nixon had first met Koski in 1979 when as president of a hydraulics manufacturer, Double A Products Co., he attempted to buy Sun. Koski was not interested in selling, but the two men established a business relationship: Koski was eager to find another company to serve as competition in Sun's high-performance niche because many end users were reluctant to switch to the type of valves and manifolds Sun had to offer if there was only one supplier. The two companies forged an alliance in 1982 but three years later Double A was acquired and the relationship was severed. In 1988, looking for a new challenge, Nixon contacted Sun and Koski invited him to join the company and take a year to "wander around and see what he thought he could do." Despite being offered three other more conventional job offers, Nixon opted to work for Sun. At the end of his year-long "wandering" in Koski's view, or "apprenticeship" in his own mind, Nixon took over as president.

Controlling Growth in the 1990s

As Sun entered the 1990s it had to find a way to harness its growth in a number of ways. Employee initiatives resulted in new shop floor scheduling software and robotics that was far ahead of the work being done at many university and national laboratory centers. But the technology was complex and had to be maintained. Still, when the company experienced an electrical problem that shut down the scheduling system for a month, Sun was able to maintain production around 80 percent; other companies likely would have been forced to shut down production entirely. Employees also were lax about buying equipment and services on their own, often neglecting to tell the accounting department. Improved purchasing procedures were instituted, but Koski and Nixon were hesitant to tamper too much with the latitude afforded employees that was such a vital part of the company's culture and success. Sun continued to develop innovative products. Rather than try simply to satisfy customer needs, the company developed products that the customers did not know they needed—yet. As Koski told the Harvard Business School case writers in a 1991 follow-up study, "I think some of our new patented products will still be recognizably in use a hundred years from now. It's difficult for me to picture how these products could have been developed in a large hierarchical company." Many of these cutting-edge products were not even listed in the company catalogue. Rather, customers simply learned about them by word of mouth and the company lost a great deal of sales simply because other potential users were unaware of the products. As a result, Sun took steps in the early 1990s to publish a comprehensive catalog on a more timely basis.

Sales grew from $32.4 million in 1993 to more than $55 million in 1995 when the company launched an international expansion into Europe and Asia. Sun experienced a frustrating 1996, due in large measure to limitations in capacity. Nevertheless, the company was not deterred from taking the next step in its development: going public in January 1997. In a televised interview on CNNfn's Street Sweep, Koski explained the decision to file for a public offering of stock: "It's the rite of passage as far as I'm concerned because we need to be a multinational company. Our multi-national customer-partners need to know more about us and it was time to get it done and we were free at the moment." The offering also allowed some insiders to cash in equity and the stock was now available to use as an incentive to retain key people—but was not to be used to recruit people. All told, the offering netted $18.3 million, with $10 million going to existing stockholders and the balance used to pay down debt and for general corporate purposes. To conform with the requirements of being a public company, Sun had to assign titles to people—chairman, president, vice-president, secretary, and treasurer—but it continued to march to its own drummer. Business cards did not use the titles, and even the typical "Letter to Shareholders" in the annual report became "Observations from Bob Koski and Clyde Nixon," in which Koski penned a few thoughts followed by Nixon's response.

Sun opened new plants in Sarasota and Germany and hired 100 new employees in 1997, when sales grew to $64.2 million and net income amounted to $4.7 million. In 1998 Sun acquired its Korean operation, the first acquisition in company history. The price of the company stock was stagnant but did not affect the way management ran the company, although they were somewhat mystified over the workings of the market, an experience that would only heighten with the years. To alleviate the capacity problems of the mid-1990s, Sun began making signifi-cant investments in capital equipment to take advantage of spikes in demand during business cycle upturns. The company also established an important alliance with a German company, Rexroth, which would become a customer and developer of Sun's unique screw-in valve system. Again, the goal was to create a competitor in order to create a greater share of the $650 million cartridge valve market.

Sun's sales approached $80 million in 2000, but then demand began to dip and the economy slumped. Rather than retrench, Sun invested for the future and waited for conditions to improve. In a joint venture with a distributor it also established a plant in China to take advantage of the explosive growth in that country's manufacturing sector. In addition Sun opened sales offices in France and Kansas City, where it also planned to eventually establish a manufacturing capability to produce certain products made by the U.K. operation. By having a domestic plant producing the items, delivery times could be significantly shortened. Although sales declined over the next few years, the company remained profitable.

Business turned around significantly in 2004, when sales jumped from $70.8 million the prior year to $94.5 million, and net income increased from $2.17 million to $7.83 million. The price of the company's stock also began to climb. As Sun entered 2005 the price soared, increasing 96 percent in a matter of 28 trading days to significantly more than $30 before ebbing somewhat. The year was clearly shaping up to be even better than 2004, and the investments made in the late 1990s positioned Sun to enjoy ongoing success.