The Great Game of Business: The Only Sensible Way To Run A Company
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By: Jack Stack
Rating: A+
Chapter 1: Why We Teach People How To Make Money
What is the Great Game of Business?
The best, most efficient, most profitable way to operate a business is to give everybody in the company a voice in saying how the company is run and a stake in the financial outcome, good or bad.
In business, the only way to be secure is to make money and generate cash. Everything else is a means to that end.
People are told what to do in an 8 hour workday, but no one ever shows them how they fit into a bigger picture and how each department affects another. Most importantly, no one tells people how to make money and generate cash. Most employees don’t even know the difference between the two.
The biggest barrier is ignorance.
What lies at the root of all this is ignorance about business. Most people who work in companies don’t understand business at all. They have all kinds of misconceptions. They think profit is a dirty word. They think the owners just slip it into their bank accounts at night. They have no idea that more than 40% of business profits goes to taxes. They’ve never heard of retained earnings. They can’t conceive how a company might be earning a profit and yet have no cash to pay its bills, or how it might be generating cash and yet be operating at a loss.
There is a better way, the way businesses have been run for a long time - with the financial statements.
Reason # 1 for Playing the Game: We Want to Live Up to Our End of the Employment Bargain.
There is no security in ignorance. The only way to know if your job is safe is by looking at the financial statements.
Reason # 2 for Playing the Game: We Want to Do Away with Jobs.
We don’t want people just to do a job. We want them to have a purpose in what the hell they’re doing. Set up the work to be a step on the path to something else, then it takes on a new meaning. It becomes more than just a job.
Reason # 3 for Playing the Game: We Want to Get Rid of the Employee Mentality.
We want to become a more educated, more flexible organization. We can respond instantaneously to changes in the market.
We can do all that because we have a company filled with people who are not only owners, but who also think and act like owners, not like employees.
Reason # 4 for Playing the Game: We Want to Create and Distribute Wealth.
If you have people who know how to make money, your entire team will win every time.
Chapter 3: The Feeling of a Winner
There are at least two conditions that have to exist before people are ready to learn about business.
Management has to have credibility.
Employees have to have some fire in their eyes. They have to want it!
Pride before ownership.
For people to feel like winners, they must have pride in themselves and what they do. There is no winning without pride, just as there is no ownership without pride. Pride is all about caring. If you don’t care, you’re not going to do what is necessary to be a winner or an owner.
Host an open house for your employees. Invite their moms, dads, and kids to come in and see where they work.
We want our people to wear our colors all the time. Give them caps, shirts, and jackets. Let them be proud of their company.
Keeping work in its place.
We don’t want people to work more than 40 hours a week. That’s enough. People should have balance in their lives. If they do, they’ll be happier. Working all the time doesn’t help the business, not over the long term.
Chapter 4: The Big Picture
Your people need to be able to go back and forth between the small and big picture.
Each of the managers should have a list of ten accountabilities they’d be expected to meet in the course of the year. The message is: if I don’t do these things as well as I can, I’m not doing my job.
The Big Picture is all about motivation. It’s giving people the reason for doing the job, the purpose of working. If you’re going to play a game, you have to understand what it means to win. When you show people the Big Picture, you define winning.
Move people around. (Cross-training)
It is an effective technique for getting people to look beyond their specialties and get a direct, firsthand sense of the Big Picture.
Draw a Picture.
Don’t just tell people about the Big Picture, show it to them. Use charts, graphs, pictures, etc.
Chapter 5: Open Book Management
When I talk about open-book management, I’m referring to the practice of communicating with people via the numbers.
Open book management keeps people focused on the important issues facing a company. It takes down walls. When you communicate with people through the financial statements, knowledge gets to them quickly.
It takes the emotions out of the business.
When you have bad news to deliver, the numbers are crucial. It’s hard to share bad news. Often the person delivering the bad news puts it in the best possible light out of fear. But if the message doesn’t get through, the problems only get worse. You want to give the bad news clearly without getting people down. You can do that with numbers.
You have to give people the bad news and the good. It’s the only way to build trust, and you must have trust.
Teaching
Our scorecard is a set of financial statements, notably the Income Statement and the Balance Sheet.
Start with the income statement.
Highlight the categories where you spend the most money.
Break down categories into controllable elements.
Use the income statement to educate people about the balance sheet.
The balance sheet is the company’s thermometer. It lets you know whether you’re healthy or not. An Income Statement tells you how you got that way and what you can do about it.
Chapter 6: Setting Standards
The trick is to be able to evaluate your numbers, to make sense out of them, to know what to do with them. For that, you need standards.
A standard is the number to shoot for in any particular category you are measuring.
Tip # 1: Do you know your critical number?
It is the number that, at any given time, is going to have the biggest impact on what you’re doing and where you want to go. Pay attention to what keeps you up at night. Better yet, ask your people what keeps them up at night.
Tip # 2: Build a standard cost system.
You must have a standard cost system that tells you what your costs should be in every aspect of your operation. To improve, you need to know how much you should be spending, not just how much you’ve spent in the past.
Checklist for Standardizing Costs
Am I purchasing supplies in the right quantities? Using the right suppliers? Checking other sources?
Is this specific operation really necessary? What would happen if I didn’t do it?
Have I created ways for people to contribute their ideas about reducing costs? Do people feel they are part of the process?
Most importantly, will people buy into these standards? Have I given them every opportunity to debate the standards? Do people think the standards are theirs? Do people own these standards?
Tip # 3: Look for the reality behind the numbers.
What behaviors are producing these numbers? What can we do differently to change them?
Tell the story of what has been happening in the company to produce these numbers. Educate your people using the stories. Then open the floor up for feedback to change them.
Tip # 4: Find sources that can help you develop standards.
Tip # 5: Look for the profit in problems.
Businesses always have problems. Numbers tell you where the problems are, and how worried you should be.
Chapter 7: Skip The Praise - Give Us The Raise
Celebrate every win.
Celebrate every win, even the small ones. If you celebrate a small win, people will follow it up with another one, and another, and another.
Bonus Program!!!
Every year, we figure out what is the greatest threat the company faces, and we get the entire workforce to go after it in the bonus program. In effect, we put an annual bounty on fixing our weaknesses.
Give everyone the same set of goals.
Let them all have the same objectives, and make sure they have to work together to achieve them.When the company wins, we all win!
We don’t all get the same percentage though. Most managers and professionals are eligible to earn bonuses totaling up to 18% of their annual pay. For everyone else, the maximum bonus is 13% of annual pay. The reason is simple: we want people to move ahead, to take more risks, and to shoulder additional responsibilities. If they do, it’s important that they get rewarded.
Stick to Two or Three Goals - and Get Them from the Financials.
You should only have two or three goals over the course of a year. But choose a goal that people can only meet if they do five or six things right.
You want goals that make the company stronger by eliminating weaknesses. As it turns out, you can get all that by choosing your goals off the financial statements.
Set the profit targets and the maximum bonus payouts.
Decide on a Balance-Sheet goal.
Set the targets on the Balance-Sheet goal.
Protect your equity.
Give People the Chance to Win Early and Often.
Set the baseline at the lowest point that still guarantees the company’s security. “We figure, for example, that a pretax profit margin of 5% is the lowest we can have without getting into trouble.”
Make sure people have the opportunity to take home a significant portion of the additional profits generated under the bonus plan.
Make it possible for people to earn bonuses frequently enough to keep them involved in the Game. (i.e. Quarterly)
Start with a small bonus pool and let it grow as the year goes on, so that people have the opportunity and the incentive to meet all the goals - and earn the entire bonus - right up to the end. We avoid these pitfalls by increasing the stakes as the year goes on and by rolling any unearned bonus from one quarter into the pot for the next quarter. As a result, people stay in the game right up to the last whistle. We can win one quarter at a time, or we can pull it out on a Hail Mary pass in the final seconds.
Don’t Pay the Bonus Unless It Is Earned (But Do Everything You Can to Help People Win).
Chapter 8: Coming Up With The Game Plan
How do you set up an orderly planning process that becomes part of the Game rather than an ordeal - that encourages everybody to participate, that makes sure each person is consulted about the decisions affecting his or her job, and that produces consensus on the final results?
Show people their stake in the process.
Decide what winning means. Ask people:
What do they think they can accomplish in the coming year?
How much can they increase sales and production? Do they want to?
What concerns do they have about the company?
Are there problems that should be fixed?
Do they want more space?
Do they need new tools?
Do they want additional perks or benefits?
Determine what your sales are likely to be in the coming year.
Figure out what it’s going to cost to produce these sales and how much cash you can expect to generate as a result.
Decide what you want to do with the cash.
Choose your bonus goals for the year.
By “game plan”, I mean a lot more than the typical budget that tells people how much they can spend in each expense category. I’m really talking about a complete set of financials for the coming year - Income Statement, Balance Sheet, Cash-Flow Analysis, capital plan, inventory plan - the whole bit.
Our annual game plan has 8 documents.
Income Statement
Balance Sheet
Cash-Flow Analysis
Sales and marketing plan
Capital plan
Inventory plan
Organization charts
Compensation plan
We give ourselves more than six months to produce the plan.
July: Hold an Early Sales Meeting
A presentation about your expectations for the next 18 months.
August: Put Together the Sales Plan; Work on the Standard Costs
September: Present and Debate the Sales Plan
Spell it out for people. Show them exactly what they will have to do to fulfill the sales plan. Make it easy for them to participate in the debate. If they don’t have a chance to contribute, they won’t take responsibility for the plan, and you may make mistakes that could have been avoided.
October: Agree on the Costs of Executing the Sales Plan; Start to Target Wants and Worries
November: Figure Out What to Do with the Cash; Zero in on Bonus Goals
“Look, if we execute this plan and meet our standards, we should be able to generate this much cash. What do you think we ought to do with it?”
December: Decide on the Bonus Program; Submit the Final Plan
We have never made “quality” a bonus goal, although it always appears on our list of potential threats. We can’t figure out how to measure quality so that the results wouldn’t be subject to manipulation. As a result, we address the quality issue through other programs, and we use the bonus program to go after things we can quantify using the financial statements.
To do this, you must completely throw open the goal-setting process and let people choose their own goals. Then you can spend the rest of the year talking to people about not letting themselves down.
Skeptics
“These targets sound very nice and orderly, but business just isn’t that predictable. You must constantly be running into unexpected opportunities and problems. What if a new customer shows up in May and throws all your plans out of whack?”
If you come to our monthly staff meetings you’ll hear person after person reporting numbers that are off the projection by $100 or less. Monthly sales vary less than 5%, even in a volatile year.
When People Set Their Own Targets, They Usually Hit Them.
Chapter 9: The Great Huddle
If Nobody Pays Attention, People Stop Caring. This is where we put into operation all the principles of open-book management. This is where you communicate the game and teach people how to act like owners.
Keep It Regular and On Time.
Keep your weekly meeting on the same day and time every week.
Hold It Frequently Enough to Stay in Control of the Numbers.
It does not HAVE to be weekly.
Put a Name and a Face on Every Line in the Income Statement.
Make someone directly responsible for every line!
Invite Anyone with Something to Contribute.
Have a Fixed Format, But Don’t Be Boring.
Be a Leader, Not a Boss.
I never want people to think they are reporting to me so that I can tell them what to do.
Make Sure the Numbers Get Out.
Insist That People Write It Down.
Review and Practical Guide
The Critical Number. The Overarching goal of the game. Your team has to understand what it means to win.
For this bonus plan to work, you will all need to feel very confident in your ability to understand and to teach it to your people. If you don’t believe in it, nobody will.
Our bonus plan needs to ensure the long-term financial security of the company, then share a significant portion of the gain. To me that’s job security first, then bonus.
We’d like to provide our people an opportunity to earn up to 20% of their wages in a bonus. Half of the bonus, or 10% of their wages, will be tied to the company’s overall profit. The other half will be tied to us improving our biggest threat to the business. This way we’re keeping people focused on how the business makes money, and what they can do to impact that, as well as eliminating a weakness in our business.
We make payouts progressive, so people will stay engaged. We’ll start with 10% of the pool in the first quarter, and progressively ramp it up. Plus, it’s cumulative. In other words, if you miss a bonus one quarter, you can make it up the next.
Period
Period Payout
YTD Payout
% of Salary
1st Qtr.
10%
10%
1% to 20%
2nd Qtr.
20%
30%
1% to 20%
3rd Qtr.
30%
60%
1% to 20%
4th Qtr.
40%
100%
1% to 20%
It’s not about who can access the numbers, it’s about who can influence the numbers. That is why we give ownership to each line item. People are accountable for each line.
When we come out of our Huddle, we see the whole field before us. We know who is where, and how the game is unfolding, and what each of us has to do to make sure we keep moving closer to the goal line.
Overview of the Principles and Practices of the Great Game of Business
The Goal
Improve business results and the lives of the people who drive those results….
The Strategy
...by creating a “business of businesspeople” who “think, act, and feel like owners”
Every Employee…
Should be given the measure of business success and taught to understand them: Know and Teach the Rules
Should be expected and enabled to act on their knowledge to improve performance: Follow the Action and Keep Score
Should have a direct stake in the company’s success and risk of failure: Provide a Stake in the Outcome
Next Action:
Start now!
Educate your team on how they fit into the big picture.
Set up an incentive plan so that everyone is marching towards the same goal.