Reviving John Deere

(Fortune Magazine) -- When a company has been around as long as John Deere - 170 years, to be exact - it enjoys a rich history and, in the case of the Moline, Ill., firm, loyal customers who "bleed green." But a company that old can also get set in its ways - and bad habits can seep in.

When CEO Bob Lane took the wheel of the farm equipment giant in August 2000, he quickly identified Deere's biggest problem: spending too much money to make money. Factories tended to overproduce, churning out a steady level of product no matter what the season or the demand. Its results were inconsistent: In 1998 the company earned $1 billion; the next year it made only $239 million. Lane sensed the potential for more from Deere. Seven years later its stock has risen nearly fourfold, and since 2003 net income has doubled to more than $1.6 billion. Here's how he shook things up.

Lane is teaching his workforce to use financial goals.

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"We had a bunch of employees who were doing a fine job but didn't know what it was to be a great business," says Lane. So he set ambitious financial targets and spread the word, starting with the workers in the factories and Deere's board. Then he made his case to Wall Street analysts and suppliers. Lane also invited the head of the UAW, whose members work in Deere's factories, to his office to explain his plan.

For decades Deere's fortunes rose and fell with the price of commodities. This meant that in boom years, employees could count on big bonuses. But when the tides turned, they disappeared. To keep people motivated throughout the cycle, Lane created short-term incentives, so that employees could receive a bonus even during down years if their division was performing relatively well. And if the industry was booming, employees would have to perform even better to earn more.

Lane introduced a financial benchmark called "shareholder value added": the difference between operating profit and the pretax cost of capital (including things like inventory and equipment). Division managers are charged 1% each month of the cost of the assets they use; at the end of the year their financial results must exceed those charges. Thus, managers are motivated to cut costs, and SVA, as it's called, is understood across the company. "If there is one thing that's noteworthy in our company," says Lane, "it's that the concept of economic profit and how it's applied is understood by thousands of managers, not by a few financial people at the top."