Their Hearts Belong to Iscar

Employees of the global cutting-tool giant are exceptionally satisfied and fiercely loyal. And the managers, known for their modesty and cohesiveness, are passionately committed to their company’s impressive performance.

Here are three examples to show why no employee ever quits at Iscar.

1. The year is 1973. Jacob Harpaz, a young temporary worker at Iscar, is wounded in the Yom Kippur War. One day Stef Wertheimer, the company’s founder and then-CEO, comes to see how he is doing. Harpaz is so impressed by the company’s support during his convalescence that he returns to his job after his recovery. He is currently Iscar’s CEO, a position he has held for the last 20 years, and is responsible for many of the company’s achievements.

2. It is 2009. Like other companies around the globe, Iscar is struggling amid the economic crisis. It is now part of Warren Buffett’s Berkshire Hathaway Group, which purchased 80% of Iscar in 2006, and its sales have dropped by 40%. Management convenes and takes a strategic decision: No employee will be laid off. Harpaz, who personally experienced the founders’ care for employees, goes in person to explain this to Buffett. As one employee puts it, “while thousands lost their jobs elsewhere, we took salary cuts and got rid of bonuses, and no one was fired. We’re loyal to the company, because it’s loyal to us.”

3. In 2011, Israeli soldier Gilad Shalit returns home after more than five years in Hamas captivity in Gaza. His mother, Aviva, and his father, Noam, who has been employed in Iscar’s marketing division since 1994, will no longer need the Jerusalem apartment placed at their disposal by the Wertheimer family (not subsidized by company funds). They will surely remain grateful to the Wertheimers and to Iscar for all the support they received during their son’s long captivity. After his son’s release, Noam Shalit decides to enter politics, with the blessing of his employers.

But these exceptional human relations, which undoubtedly played a major part in transforming Iscar from a small workshop in the Galilee into a global leader in hard-metal cutting tools worth $10 billion, cannot fully account for its success. Neither can its success all be attributed to the novel vision, the responsiveness to demands or many years of excellent leadership. Like other companies, Iscar is multifaceted. In order to understand how all these components combine to create one of the biggest success stories in Israeli industry, one must examine the unorthodox way they interact. Yet even this will not guarantee a repeat of the company’s success.

Born in Germany, Stef Wertheimer was a poor student and never completed 12 years of schooling. In 1937, when he was 11, he and his family came to Mandatory Palestine. His first professional experience was as a technician with the British Army during World War II, and then in weapons development for the pre-state Jewish militia Haganah and its elite strike force, Palmach. After the establishment of the state in 1948, he worked for Rafael Advanced Defense Systems. He was fired in 1952 because he lacked a formal degree in engineering.

He then set up a small metalworking workshop in a shack next to his Nahariya home. At first, he supplied the local defense industry, which was enough work to provide for his family. However, he realized local demand was limited. As opposed to other entrepreneurs, he was not intimidated by foreign markets, realizing that the main business arena is abroad. He therefore established relationships with foreign clients, mainly in Europe. Over the years his small workshop became a major, multi-national enterprise that manufactures mainly hard-metal cutting tools for lathes and milling machines. His clients include some of the largest global aircraft and car makers.

Even after its expansion, Iscar was never just another factory in northern Israel. Wertheimer had a far-sighted vision for developing the Galilee by establishing industrial parks that would serve as anchors for new initiatives. He managed to persuade the government to support his vision. The next Iscar factory was built in the early 1980s in the Tefen industrial park, which Wertheimer established. At the same time, he obtained 7,000 dunams (700 hectares) from the Israel Lands Administration to build the community of Kfar Vradim, designed to entice workers seeking a better quality of life to move north. No other developer managed to obtain land from the authorities like this.

The Iscar venture made the Wertheimers into Israel’s richest family, with their worth recently estimated at $6.8 billion to $7.6 billion. This has not diminished their image as modest, hardworking people, and they never became the targets of public criticism like so many other tycoons. Stef Wertheimer’s many initiatives for developing the Galilee and advancing vocational education, his record of public service and avoidance of media exposure, and his image as a hardworking man who built his empire with his own hands have established him as a man of values, devoted to developing the country and its industry, rather than someone interested only in his empire’s financial success.

The Location: A position that forces self-reliance

Wertheimer’s determination to keep Iscar in northern Israel gave him an unexpected advantage. “When you are far from the Tel Aviv hub and its way of doing things, you develop your own unique organizational culture,” says someone close to the company management. “Iscar did not follow trends and its managers nurtured independent thinking. One remains much more focused on one’s goals when there are no distractions.”

Being removed from the center had another far-reaching advantage. With no easy access to service providers, Iscar had to be independent from the outset, providing its own services and inputs.

This remains so even today. Other companies view outsourcing as a way of increasing efficiency. Iscar holds the opposite view, and does everything, including all its bookkeeping and public relations, in-house. The company even has its own system for data analysis, the core of any large business. Iscar seeks out external service providers only when it has no alternative. Thus, for example, it hired the Eitan-Mehulal Law Group to manage the company’s sale to Berkshire.

The strategy: Real profits, No financial Gimmicks

Many companies seek to go public on the stock exchange. Iscar has never done so. Its guiding principle over the years has been to focus on manufacturing, rather than on financial gimmickry. Wertheimer’s basic idea is that a successful economy relies on real, not virtual, products.

Iscar never branched out laterally into areas not directly connected to its core activities. Since it was not publicly held, its trade secrets remained hidden from inquisitive eyes. During the 1970s, Iscar tried partnering with Discount Investment. However, the Wertheimers were not happy with this connection to the financial markets and the reporting requirements it entailed. The partnership ended when they bought out Discount Investment and became the company’s sole owners.

Wertheimer still routinely expresses his disgust with virtual finances. He recently rebuked industrialists who were complaining about the credit crunch, urging them to work harder and meet their needs on their own. “Make more money so that you don’t depend on credit, and bid farewell to the banks,” said Wertheimer at a conference held by the accounting firm BDO Ziv Haft. His words once again echoed the founding principles on which Iscar was built: self-reliance, hard work and operating in traditional industries.

Continuity: The father, the son and the managing director
Transferring authority from father to son can work well for a family business, but it is also fraught with risks and sometimes leads to the company’s early demise. This transition happened at Iscar out of necessity when Stef Wertheimer suffered a severe concussion in a 1984 car accident. For many months it was unclear whether he would ever return to work. His son Eitan, who had joined the company a year earlier, became CEO. The move was initially temporary, but it later became permanent at Stef’s request.

Even though Eitan Wertheimer’s ascendancy was sudden and unexpected, the transition was seamless due to the strong, supportive managing team. Eitan Wertheimer stresses the importance of teamwork, which was critical during the transition. His father’s absence helped avert potential intergenerational conflict and ego issues that often characterize such transitions.

Iscar veterans relate that although the company’s guiding vision was Stef Wertheimer’s, Eitan and his right-hand man Jacob Harpaz, who was in charge of marketing, brought novel ideas. The two men are responsible for turning Iscar into an international firm worth billions. Stef Wertheimer, who is now Iscar’s honorary chairman, never returned to an operative role in the company. He still shows up in his office in Tefen every day, focusing on advancing his agenda of developing the Galilee and its local industry.

A further potentially explosive transition occurred eight years later, when Eitan Wertheimer relinquished his position to become the company’s chairman. Again, the transition went smoothly; Harpaz, who had been groomed for the job for years, assumed the daily management of affairs.
Buffett’s acquisition of Iscar in 2006 also went smoothly. As a precondition to the deal, the Wertheimers had stipulated that nothing would change except the ownership.

The obsession: First at any cost

While Iscar is often compared to Teva, another Israeli flagship business, there is a big difference between the two companies. In contrast to Teva, Iscar did not grow through mergers and acquisitions (with the exception of the purchase of the Japanese tool-cutting manufacturer Tungaloy in 2008, for $1 billion). Its growth was organic, resulting from a steady increase of market share.

In its field of hard-metal cutting tools, there are two other dominant global companies, the Sweden-based Sandvik and the United States’ Kennametal. Iscar has overtaken Kennametal, becoming the second-largest company in the industry.

This is not enough for Iscar’s management. “They lose sleep figuring out how to increase their market share,” says a source close to the team. “Their obsession is not to become rich or famous, or to advance themselves or please shareholders, but to become the world’s No. 1. All their activity is geared toward this goal.”

This message trickles down from management and motivates the entire workforce, giving all a sense of purpose.

The management: Modesty in action

Visiting the factory’s dining hall, you’d have a hard time pointing out the table management sits at. It looks like all the other tables. These managers, responsible for billions of dollars at one of the world’s most successful companies, look and behave like all other workers.

Iscar’s management is a tight-knit group that has been working together for decades. Different people have different roles, but they share several core qualities. They are all modest, hardworking professionals. They all share a well-developed sense of humor as well as a sense of urgency. They are here to work, not to waste time.

If you were to spend time with them while they worked, they’d remind you of President Shimon Peres: boundless energy, a long attention span and the desire to set a personal example. This group was formed through a long process of natural selection. Anyone who couldn’t keep up simply dropped off, leaving a team of managers with similar abilities and goals. Vacations are sparing; responsibility is abundant. They lack the tokens of honor and status symbols that are common in companies of this size. There are no hordes of secretaries or personal assistants fluttering around these managers. When the CEO prepares his own PowerPoint presentations, it is clear that personal responsibility is the guiding principle.

This does not imply an egalitarian system. Iscar has a clear managerial pyramid, but it does not have managers with inflated egos, richly paneled offices and doting secretaries. Apparently one can be professional and efficient without these trappings.

Focus: Do one thing, but do it well

In a rare interview in 2006, Jacob Harpaz explained to Globes the principle that has guided him since he started working at Iscar. Iscar’s strategy is “not to sell a supermarket’s worth of goods, but to get clients hooked on exceptional, high-quality products, and to focus only on those. You have to be the best in the market with at least one of your products, on which you build your reputation. Anyone who buys your best product will realize its advantages and won’t go to other manufacturers. But it’s essential to keep improving the initial product,” he said.

This requires a big investment in research and development, on par with developing the product in the first place a process to which Iscar is committed. Older products are taken off the market once newer ones are introduced. “I’m competing with myself. Each version works better than the previous one. An improved version brings in more customers,” Harpaz added.

It is not only the pursuit of innovation that drives the Iscar team. Anyone who has dealt with them knows they can be very tough businessmen. “None of them are suckers,” says a former employee. “Even during Stef’s tenure it was evident that these are people who know how to do business. Negotiating with them is not easy. They come prepared and well-versed in all the details and they don’t yield when they think they’re right. Nothing is emotional. Nowadays they benefit from being such a large company, but they always knew how to do business.”

Expertise: Decades of experience

The emphasis on internal growth and the aversion to hiring managers from the outside has meant that all of Iscar’s executives have first-hand knowledge of the company’s products and technology. This cumulative experience is one of the company’s strongest assets.

“My workers can’t pull one over on me with partial answers, and I can’t do so with any of my managers, all of whom know the product as well as I do,” says a mid-level manager at Iscar.

This is the reason the company attaches great importance to fostering workers and makes every effort to retain them. “One reason we didn’t fire anyone in 2009 was the long-term vision,” explains an employee. “Where else could they find experts like us? People with 15 years of experience are considered newcomers here. At least 250 of the 2,500 employees have been here for more than 20 years. The principle is to develop expertise by accumulating experience.”

Mind you, in northern Israel in general it is more difficult for people to change jobs, simply because there are fewer employment opportunities. This has probably also helped Iscar retain workers. But this is not the main reason most employees say they intend to stay with Iscar for many more years.

“I’ve been here for 30 years and have never been bored,” says one employee. “A place with constant innovation maintains professional interest and you don’t feel the need to try something else.”

Another characteristic of Iscar is its thoughtful approach to workers from widely diverse cultures. Iscar now has subsidiaries in 52 countries, from Latin America to the Far East. The workers and most managers there are locals, and Iscar does its homework when it comes to the local ways of doing business. No one at Iscar arrives unprepared for a meeting with a Chinese or Korean representative. The typical Israeli arrogance and know-it-all attitude are not in evidence. Fifty years of focusing on exports, rather than on local markets, have created modesty when dealing with workers, suppliers and colleagues abroad.

Ethos: Like family, really

Salaries at Iscar are not among Israel’s highest, although workers describe them as fair. Bonuses are given with a well-defined link to achievements. Iscar is a traditional industrial company, without the perks that characterize high-tech such as stock options. Despite this, Iscar workers are deeply attached to their workplace in a way not usually seen elsewhere. They attribute this to the company’s personal approach to each employee, his problems and his needs.

“When an employee runs into health or financial problems, the company helps out,” says a junior worker. “This is company policy, not the whim of individual managers. You don’t need a big bonus to know the company cares for you. It’s enough to have a decent salary, an interesting job and stability. These are things Iscar excels at.”

The Media: Who needs it?

Over the years, the Wertheimer family and company managers have kept their distance from the media. Stef Wertheimer appears occasionally to talk about technological education and strengthening the Arab sector. Eitan Wertheimer had to face the media during the Buffett acquisition, but has since receded from the limelight.

The managerial team also avoids exposure. Jacob Harpaz is the CEO least known to the Israeli public. However, he is well-known in professional circles, attracting attention at professional gatherings. He has no interest in the general public reading about him in the press, or in professional socializing. He prefers his work. Anything that advances the company is done professionally, and the rest is of no interest.

The public image: American company, Israeli pride

The last component in Iscar’s success is its public image. The public views Iscar as a source of pride, even after 80% of the company was sold to an American tycoon. The public respects Stef and Eitan Wertheimer even after they became the richest citizens of Israel.

This is partly due to the fact that Iscar is an exporter, far from public scrutiny. Its products are traditional industrial ones, unfamiliar to most Israelis. Iscar does not produce high-tech household gadgets, so it is not susceptible to daily consumer testing.

Israelis love Iscar partly because they don’t know it that well. Another important reason is that, as opposed to other local success stories, Iscar is not a greedy monopoly. It does not rob the public kitty, with executives paying themselves huge dividends. Its executives made their money honestly, they don’t want hospital wings named after them, and they don’t hobnob with models and soccer players. The public respects this.