Of all the despairing images published when the New Economy went belly up, the one that most pierced the hearts of the hardworking folks at Herman Miller was a photo in the Houston Chronicle on December 3, 2001. It showed two newly pink-slipped Enron workers hauling the detritus of their offices to their cars. Their mode of conveyance? A pair of Aeron chairs.
During the dotcom heyday, any executive worth his stock options had one of the iconic, biomorphic, ergonomically engineered chairs. The Museum of Modern Art acquired one for its permanent collection. The Industrial Designers Society of America named it one of the "Designs of the Decade" for the 1990s. Malcolm Gladwell lionized them in Blink. Designed by Bill Stumpf and Don Chadwick in 1994, the Aeron chair was one of the Michigan-based furniture maker's most popular products. Internet companies ordered them by the truckload. In late 2000, the company was taking orders for 20,000 to 30,000 per week.
A year later, the chairs were going for a fraction of their $700 price on eBay and in liquidation sales. But that was hardly Herman Miller's only problem. The office-furniture industry and corporate America's economic well-being are as closely entwined as Thelma and Louise. And with telecom tanking, financial services tightening, and tech companies hitting the skids, Herman Miller joined them in going off a cliff. "We had a two- or three-year period where business dropped 45%; that was like an industry heart attack," says Michael Volkema, chairman of Herman Miller's board, who was the company's CEO at the time. "In 1995, when I took over, sales were under $1 billion. By 2000, they were $2.2 billion. By 2003, they were down to $1.3 billion. One night I went to bed a genius and woke up the town idiot. It was not a happy time to be in leadership."
In the face of what was shaping up to be a long-term siege—and losses of $56 million—Volkema and his team did what many in their shoes do: They took their lumps, with painful layoffs and cutbacks. But at the same time, they did something much more unusual for a rapidly shrinking company: They positioned it for a brighter future with tens of millions in R&D investment—much of it mighty speculative. Choosing to invest in what were essentially blue-sky ideas just when the company was downsizing the workforce and closing plants wasn't an easy sell. Try telling a factory worker that his job is being eliminated so you can fund something that may—or may not—pay off five years down the road. "Barely one out of 1,000 companies would do what they did," says Harvard Business School professor Clayton Christensen, author of The Innovator's Dilemma. "It was a daring bet in terms of increasing spending for the sake of tomorrow while you're cutting back to survive today."
Volkema and his team felt compelled to take that risk because they believed Herman Miller faced something much more serious than the industry's typical temporary downturn: With shrinking margins and the rise of Chinese furniture makers, they believed, they were confronting a permanently changed landscape. "We were concerned that, in the future, volatility in this business would increase, not decrease," says Brian Walker, now the company's president and CEO. "I told people, 'I don't know if I can explain this economically and in detail right now, but I believe that long term, if we are going to re-create ourselves again, we have to place some bets that are out of the ordinary,' " he says.
Five years after wrenching decisions that led to laying off nearly 38% of the company's workforce, scrapping several promising businesses, and shedding more than a million square feet of prime real estate, those bets are paying off. At this year's NeoCon, the business's annual June lovefest, Herman Miller will unveil the fruits of its R&D investments, introducing more products than at any time in its history. Among them: two complete "systems furniture" products (that's industry speak for cubicles and such), a groundbreaking LED lamp developed with Yves Behar, an environmentally friendly executive chair, a reintroduction of the George Nelson swag-leg collection, a stool to accompany the Aeron chair, and the second generation of its sound-muffling system. And that's not all. Several highly unconventional products are waiting in the wings for later in the year, the outcome of the projects begun deep in the company's slough of despond. In late March, Herman Miller, which is the third largest in its industry after Steelcase and HNI Corp., announced its ninth consecutive quarter of year-over-year sales growth, with sales up 11% over the previous year's tally and orders up 16% over the same time period. In 2005, the company posted net earnings of $68 million—triple 2003's—on sales of $1.5 billion.
In his first five years as CEO, Volkema more than doubled sales. Then they collapsed. "One night I went to bed a genius and woke up the town idiot," he says.
"Leadership is about doing the right thing, not the easy thing," says Volkema. "And although part of the right thing was reconfiguring the business for the current market opportunity, the other right thing was ensuring that when we got to the far shoreline, we had a future."
Ditching the Water Carriers
One of the first things a visitor to Herman Miller sees when entering the Design Yard in Holland, Michigan—the farmlike facility with stone walls and red silos that houses both the company's design studio and its executive offices—is a statue beside a small stone pond. Projected in the water by beams of light are the names of employees who have worked for the company for at least 20 years. The statue, called Water Carrier, is based on the Native American belief that every job, no matter how unskilled, is critical to the survival of the group. It's a philosophy that has been at the core of the company's values since Herman Miller and his son-in-law, D.J. DePree, bought out the shareholders of a little Midwestern enterprise called the Michigan Star Furniture Co. in 1923. Herman Miller currently counts more than 1,200 water carriers in its ranks.
So it was excruciating when Walker, then president of Herman Miller North America, confronted Volkema and the rest of the executive team in late 2001 and told them to quit hoping for a quick turnaround and start planning for brutal cutbacks. "Brian really heralded that this downturn was going to be longer and more significant than any of us were hoping to admit," says Volkema. "We kept thinking in a couple of quarters this thing would turn around."
Five years later, Volkema, a tall, slim man with wavy dark hair, an easy smile, and a modest manner, still seems anguished by the memory. "Ultimately, we had to tell 4,500 of our 12,000 employees that we no longer had work for them," he says, as he shifts uneasily in his chair, his shoulders hunching a little. "But we had to do something to make sure some of the folks made it to the other side." Gary Miller (no relation), EVP and chief development officer, chimes in: "It was god-awful."
Through a long series of meetings that took place daily in the villagelike space in which the leadership team's offices are clustered, the group debated its options. It finally settled on a set of strategic choices about which businesses the company was fully committed to supporting and which had to be sacrificed to save the rest. Out of the company's five primary initiatives, two would be jettisoned and three preserved. The decision wasn't easy; the two on the chopping block were growing businesses. One was Herman Miller RED, a ready-to-assemble line of furniture sold via the Internet. The other was SQA (simple, quick, affordable), a middle-market brand that had been growing nicely.
Meanwhile, there were wrenching human decisions to be made. In one case, both a husband and wife worked at a unit slated for termination. Should one be transferred to another business? As Volkema wrestled with that decision, he got an email from a manager reminding him that another employee was the only wage earner in his family. "There was a whole year when I didn't sleep through the entire night," he remembers wearily.
Volkema and Walker also insisted on delivering the bad news themselves. Walker still vividly remembers the day he and Volkema shut down their plant in Georgia. Afterward, workers came up to express their concern for the two of them. "I can't think of anything that would rip your heart out more than for these people, who you just laid off, to tell you that they hoped you'd be okay," Walker says. Then there was the real estate. Nearly 1.4 million square feet had to go, including some award-winning properties and one Frank Gehry-designed building.
"We had to tell 4,500 of our 12,000 workers we no longer had work for them. But we had to do something to make sure some of the folks made it to the other side."
At the same time, the team was already mapping plans to capture the next upturn. In office furniture, it committed to fast-tracking an expensive next-generation cubicle, My Studio. That system will debut at NeoCon. Douglas Ball, the system's outside designer, recalls getting a call from a Herman Miller manager. "She said, 'We're cutting back; we're hurting, but we're going to rebuild. We're going to put all our systems resources into one project, and this is the one.' "
Purple Pie In the Sky
Down a long hall in the Design Yard, behind a plain brown door discreetly lettered with the word "HMCOLab," is Herman Miller's top-secret R&D operation, enigmatically code-named "Purple." You must sign a nondisclosure agreement to get in. But when you do, you're likely to be greeted by EVP Miller, a furry Ewok of a man whose job is to be the company's chief disruption officer.
Back in 2000, the bosses had discussed how Herman Miller could expand beyond its core business. "Historically, the heart of Herman Miller has been about innovation," Walker says. "So we wanted to use that to create new vectors of growth that were not just about office furniture. We wanted to draw the circle bigger." And it was to be a big circle indeed. "Five years out, Mike wanted Purple projects to be two to three times the size of our current market," Miller says.
The areas Miller's team of engineers, designers, and business-development specialists identified as promising included environmental aesthetics (sound, lighting, and such), digital lighting, technology integration, redefining space, and the design and construction process—an area rife with wasted materials and effort that was begging to be reinvented.
It's an approach that takes a page from Christensen's book, which suggests that companies aim their innovation efforts at the jobs customers need to get done, rather than incrementally improving products they already produce. "In every disruption, you transform a task that used to be so expensive and complicated that only people with a lot of money could pull it off," Christensen says. "You make it so foolproof and idiot-simple that a whole new population that formerly didn't have the money and skill can now do it."
This year, for example, Herman Miller will debut a modular electrical system that delivers exactly on Christensen's promise: It allows users to easily move around data ports, phone lines, and lighting, and program them with a simple handheld device, making reconfiguring office space "idiot-simple."
The potential for some of Purple's innovations appears pretty substantial, and they certainly draw the circle bigger. But protecting what looked like pie in the sky back in 2001 took real courage. While Volkema refuses to quantify the company's investment, it was, he says, "not pocket change." And with Purple's profitability years away, Miller admits he occasionally had his own dark nights of the soul. "It would have been, by most standards, the obvious thing to cut," he says.
Looked at another way, though, it was exactly the last thing to cut. "We didn't want to just keep adding more and more dollars to make what we were already doing just a little bit better," says Volkema. "We knew that we get our highest margins and growth rates when we invent something new." It's a lesson rooted in Herman Miller's history. During the Depression, the company was on the brink of bankruptcy. DePree, who had bought the business, made a radical decision. He would move Herman Miller away from its core business—period reproductions—and make "modern" furniture, an idea that horrified traditionalists. DePree also decided to use external designers to come up with new products. "It was a huge change in direction, for a sleepy furniture company to be design driven," Walker says.
Another huge change came in the 1960s, when DePree and his son, Hugh, decided the furniture business needed to find new sources of revenue and hired Robert Propst to look for them. His insight: With more and more workers moving from factories into offices, companies would need ways to house them all. Voilà! The Action Office—the original cubicle—was born. Walker hopes to keep that disruptive spirit alive. "If today you see Herman Miller as a large innovative furniture company, five years from now, I hope you see us as an innovative company with a large furniture business," he says.
Linda Tischler (email@example.com) is a Fast Company senior writer.