Management Mistakes and Successes Robert F Hartley

Kmart: From Mediocrity to Leadership to Jeopardy ...................................................................................... 2 Scott Paper: Turnaround Trauma ...................................................................................... 2 IBM: A Giant Falters But Then Arises ...................................................................................... 3 Harley Davidson: Finally a Comeback ...................................................................................... 4 The Saving and Loan Disaster: Greed Running Amuck ...................................................................................... 5 Coca Colas Classic Planning Blunder ...................................................................................... 7 Euro Disney: Bungling a Successful Format ...................................................................................... 7 Contrast Southwest Airlines: Finding A Strategic Window of Opportunity ...................................................................................... 9 Herman Miller: A role model disappoints ...................................................................................... 10 Reebok vs Nike: Sneaker Wars ...................................................................................... 11

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Kmart: From Mediocrity to Leadership to Jeopardy Replace those in the company who are incapable of accepting change Be aggressive, voluble and full of ideas Move aggressively and quickly in making changes Use technology to give yourself more control over your business If you dont experiment, you will never know Plans may be good but are not always implemented properly. The fault may lie within the organization, resource allocation or within top management itself Do not fail to delegate and develop key executives Although maintaining a centralised management structure of non-delegation has its faults (hinders creativity), an autocratic approach makes it easier to get things done Heavy overhead can kill business Front-runners must stay sharp (the only way to go is backwards) Neglect your core business at your peril Attention to the core business does not rule out diversification can the resources be allocated to the diversification or will that allocation of resources hurt the core business? Scott Paper: Turnaround Trauma Al Dunlap was brought in to turn a 115 year old company around (he was nicknamed Rambo in Pinstripes) The same day as Al Dunlap took over as CEO of Scott Paper, he invested $2 million of his own money in the business to show his confidence that the company can be turned around On his first day Al Dunlap offered three of his former associates top jobs in the company On the second day he disbanded the powerful management committee On the third day he fired none of the eleven highest ranking executives On the fourth day he destroyed four bookshelves crammed with strategic plans of previous administrations Some executives believe in instituting major challenges as quickly as possible because the organization is expecting it and it will be better prepared to make the adjustments needed than it ever will be again Other executives prefer to move more slowly after all the pros and cons can be weighed sometimes such delays can lull an organization into a sense of false calm and make for even more trauma when the changes eventually come After only two months at the job, Al Dunlap announced four major goals for the coming year: o Divest the company of non-strategic assets o Develop a core team of accomplished senior managers o Undertake a one-time-only global restructure to trim up the company (11,000 out of 25,900 positions were eliminated) o Develop new strategies for marketing

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Bloated bureaucratic organizations are the epitome of inefficiency and waste but remedies can be overdone: dont cut off too much bone and muscle. The results of Dunlaps cost-cutting frenzy resulted in a rise in earnings by 71% in the second quarter. In the third quarter, earnings increased by 73%. Fourth quarter earning were 159% higher than in 1993 (Dunlap took over in 94) However, Scott Paper lost market share of 1% in the bath-tissue market and 5.2% in paper towels. But Dunlap still said, I am still the best bargain in corporate America Slash and Burn techniques tend to bring great short-term results, but leave the company with longer term problems Cut the deadwood but not the bone and muscle A well-structured organization would appear to be best in many circumstances, but it tends to be too rigid, relying on rules and procedures and as a result is slow to adapt and change Some of the worst decisions in business concern buying and selling. Charisma, new blood and decisive leadership can turn around a company Strategic plans often delay change implementation it is often a vehicle for procrastination and blame-dilution

IBM: A Giant Falters But Then Arises In 1993 IBM reported a $5.6bn loss for the fourth quarter of 1992 a yearly deficit of $4.97bn the biggest annual loss in American corporate history 42,900 jobs went in 1992 and another 25,000 were slated for termination in 1993 IBM got fat and complacent over the years Akers, the chairman of IBM, recognised that the company was in trouble in 1991 and attempted to decentralise the business structure. He saw a crucial need to cut fat from the organization Akers more radical proposal was to break up IBM and divide it into 13 divisions and give each division more autonomy IBM was lagging behind Compaq, Sun and HP in producing affordable highquality fast PCs. AT&T could sell a machine for $12.5 million that outperformed IBMs $20 million mainframe Louis Gerstner was appointed as CEO to replace Akers who lost the support of the Board. Gerstner was an outsider, an unusual step for IBM as they had a policy of promoting from within. It isnt always good to promote from within because by doing so you are happy with the status quo but always promoting from outside the company can play havoc with trainees who will lose faith in their career path within the company Resistance to change can be combated by good communication with participants about the forthcoming changes and by involving employees in the change process. Change in a gradual fashion is much easier on staff, but abrupt changes can also be more effective in certain circumstances (see the section on Scott Paper and Al Dunlap)

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IBM was guilty of complacency, conservatism and conceit which leave no incentive to undertake aggressive and innovative acitons, causing growing disinterest in such important facets of the business as customer relations, service, and even quality control. They also inhibit interest in developing innovative new products that may cannibalise existing products and disrupt entrenched interests IBM had a diminishing payoff on massive R&D expenditure and bloated costs IBM gave away the game they left microprocessors to Intel and software to Microsoft, preferring to concentrate on other issues In 1994, Gestner turned the company around its first profitable year since 1990. Annual expenses were reduced by $3.5bn and its stock nearly tripled in price. Critics thought that Gerstners approach was not aggressive enough as he discarded the idea of breaking up the company and opted for deepcleaning and redecorating. People thought that he was moving too slowly, they were after an Al Dunlap style approach In an industry that moves at the speed of light, there is very little time for that (slow restructuring). IBM concentrated on R&D 1,298 patents in 1994 the most ever issued to one company in one year IBM was transformed into a lean and mean organization (in 1994, 185,000 employees less than in the mid 1980s and $1.2bn of infrastructure sold off) Acting Small Adversity need not be forever firms can turnaround and come back over time, despite strong competition

Harley Davidson: Finally a Comeback Harley Davidson motor cycles date back to 1903, but by 1960 it had destroyed all US competitors and had a 70% of the motorcycle market Despite their dominance, growth was minimal compared to the growth of the motor car market In 1964 Honda shook up the whole market by offering lightweight cycles and advertised towards the new customer. In only a few years Harley Davidsons market share dropped to only 5% AMF (recreational equipment and bowling) bought a controlling stake in Harley Davidson in 1965 Honda was making high quality motorcycles, Harleys quality control was very poor quality was going down just as fast as production was going up. 50-60% of motorcycles failed quality control tests at Harley, only 5% at Honda Vaughan Beals bought out AMFs share in Harley and his massive lobbying for tariff protection by the government paid off and Harley began to build market share Beale took a front line approach to marketing Harley he drove his Harley to rallies; he helped to establish and grow the Harley Davidson Owners Group (HOGs) and spoke to them about their concerns etc In 1986 Harley Davidson requested that the tariffs be taken off imports one year earlier than planned their confidence was back Japanese operating costs were 30% lower than Harley Davidsons because of professional management and attention to detail Table of Contents Page 4

Beal divided each plant into profit centres, with managers assigned total responsibility within their particular area They formed quality Circles to increase employee involved in the quality control process. Quality circles are worker-managed-committees that meet regularly to talk about production problems, plan ways to improve productivity and quality and resolve job-related gripes The introduction of quality circles had a marked improvement on the productivity of Harley Davidson defects were down 70%! Harleys strong point was an unflappable base of loyal customers 92% of customers remained with Harley even during the bad years Harley also began to crack down on its copyright issues others were using its name on inferior merchandise. This helped to keep the Harley name associated with quality Harley increased its product range with 20 models by 1991 ranging from $4,500 to $15,000 Harley honed in on a new market: Rich Urban Bikers (managers, professionals etc) who brought the company back from the brink By 1993, Harley Davidson had a new problem: supply could not meet demand Visionary Leadership: o Challenge the process: be a pioneer and encourage innovation and people with ideas o Be enthusiastic: Inspire others through personal example to share in a common vision o Help others to act: be a team player and support the efforts and talents of others o Set the example: Provide a consistent model of how others should act o Celebrate achievements: Bring emotion into the workplace and rally hearts as well as minds You dont solve problems by throwing problems at them Harley took on the strategy of going slowly with its production, being careful with quality and refraining from heavy debt commitments. This raised the risk of permitting competitors to gain market share in the US and especially in Europe You must weigh up the risks of conservative planning versus aggressive planning Certainly a product has to be unique, but though most firms strive for this differentiation, few achieve a mystique

The Saving and Loan Disaster: Greed Running Amuck Sunbelt Savings Association McBirney formed an investment group that began buying small Savings and Loans companies and called it Sunbelt Savings Association which controlled $3.2bn Sunbelt was nicknamed Gunbelt because of the risks it took (loaning $125m to an inexperienced investor in his 20s who ended up losing $80m) Sunbelt spent millions on parties, aircraft and entertainment in the early 1980s When the regulatory authority began auditing all of the savings and loan companies after a large company collapsed (due to high risk investments that

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didnt pay off), the bulk of the savings and loan companies in the Sunbelt empire were declared insolvent. Many of the collateral properties were declared over-valued. Then real-estate prices plummeted. The government files a lawsuit against McBirney and other insider shareholders nearly $13 million in common and preferred dividends had been taken out in 1985 and 1986 at a time when Sunbelts capital was rapidly evaporating General Discussion By 1988, 503 of the USAs 3178 thrift institutions were insolvent. Another 629 had less capital on their books than required by law. In 1987 630 of these companies had lost an estimated $7.5bn. More than half of these companies were based in Texas The motivation for taking wild risks with deposits was that individual accounts were insured up to $100,000 b the Federal Savings and Loan Insurance Corporation but even they could not cope without Congress contributing billions of dollars Taxpayers eventually footed the bill Savings and Loans Companies had to Re-Evaluate Their Mission Determining your mission involves: o Assessing the environment and how it is changing or is expected to change o Appraising competitive factors and how these may be changing o Weighing the particular strengths and weaknesses of the company Dont make mission statements too broad, but narrow definitions restrict perspectives and the grasping of different opportunities Leadership Issues Related to the Savings and Loan Debacle Leadership is vulnerable to abuses: o Overreaching o Not carefully assessing risk vs rewards in proposals o Operating beyond reasonable means o Not keeping a tight rein on costs o Failing to guide the organization with the best interests of the stakeholders in mind Such abuses are tempting in times of wild optimism Discipline is: o Controlled behaviour o Careful evaluation of actions o Quest for disciplined growth o Not being too conservative you risk missing opportunities and give competitors an advantage Adversity can create opportunities Any business firm faces a dynamic environment; nothing can be expected to remain constant. This requires some degree of adaptability

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Coca Colas Classic Planning Blunder By the mid 1970s the Coca Cola Company was a lumbering giant, and this was reflected in its performance Pepsi was gaining a lot of headway the Pepsi Challenge proved time and again that taste testers preferred Pepsi In 1980 Robert Goizueta took over as chairman of Coca Cola and stated that Nothing is sacred to coke anymore in other words, changes were in the air he announced ambitious plans to diversify beyond the soft drink industry Marketing research still proved that taste testers preferred Pepsi so the only logical thing to do was to change the flavour of Coke. By September 1984 they produced a sweeter and less fizzy version of coke with a soft, sticky taste the taste out-performed Pepsi in every taste test. Coke predicted $200 million boost in sales from New Coke 150 million people tried New Coke. Most comments were favourable. But protests mushroomed. In the first four hours, the company received about 650 calls. By mid-May calls were coming in at a rate of 5,000 per day, in addition to a barrage of angry letters. People were speaking of Coke as an American symbol and a long-time friend. Company executives were worried about a consumer boycott and they decided to re-introduce Coca Cola under the name Coca-Cola Classic and keep the new recipe on the shelves as New Coke Old Cokes comeback drove the share price up to the highest level in 12 years But Coke spent $4 million and 2 years to market research 200,000 consumers were contacted during this time The market research was flawed: o Participants in taste tests were not told that by picking one cola they would lose the other o Only 30,000-40,000 of the taste tests conducted involved the specific formula for the new Coke o Preferences for sweeter products diminish with use and this was not taken into account o The symbolic value of coke was not taken into account either Beware of tampering with the original image Tampering with a major product still in high demand may be risky Major changes are often better introduced without immediately discarding the present Sheer advertising expenditure does not guarantee effectiveness Euro Disney: Bungling a Successful Format Three amusement parks failed one year before Euro Disney opened just outside Paris in 92. Those failures did not concern Disney We are spending 22bn Francs before we open the door, they only spent 700m Euro Disney cost a total of $4.4bn. The French Government invested $160m and other investors contributed $1.2bn Disneyland was already successful in Tokyo (opened 1983) By 1990, 16 million people passed through the gates each year. Profits were at $150m per year (revenues at $988m)

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At the end of 1992, it became clear that the numbers were not being met there was a recession and people were bringing their own food and not staying in the hotels for many nights. Park admission prices were also very high ($42.25US for adults) Skimming Pricing: setting prices assuming that demand will not be determined by price and therefore the price can be high with large profit margins Penetration Pricing: Setting prices assuming that demand will increase with lower prices and decrease with higher prices and therefore there are limitations on your profit margin Patronage was up, but spending by each visitor was down There were a few cultural blunders made: o A no alcohol policy (wine is customary for lunch and dinner in France) and this discouraged visitors o It made mistakes with predicting the peak periods and had to lay off a number of staff when there were fewer visitors, but France has very strict labour laws so they found this to be very difficult o Tour bus drivers were not catered for properly, so tour companies did not recommend visiting Euro Disney as much as they would have otherwise Euro Disney lost $921m in the first fiscal year - $2.5m per day: nonoperating costs were extraordinarily high. Efficiency and economy became the watchwords it took 20 months to start ironing out the operational issues The English Channel Tunnel brought many Britons to France and Euro Disney Disney management failed to research the culture thoroughly enough By September 1995, Euro Disney became profitable. o The European banks loaned Euro Disney $500m and forgave 18 months worth of interest charges and deferred all principle payments for 3 years o The Walt Disney Company spent $750m in further investment in Euro Disney o The Saudi royal family invested up to $500m for a 24% stake in Euro Disney in 1994 The turnaround ($35m in profit by 1995) was attributed to a new marketing strategy: o Entry prices and prices within the park were slashed o A new high-tech attraction that mimicked a trip to the moon Critics saw the turnaround coming only from deals struck with creditors to suspend debt not a sustainable situation especially when the payments resume in three years time Beware of cultural differences when marketing overseas Great successes often dont have staying power Financing through debt is highly risky and vulnerable

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Contrast Southwest Airlines: Finding A Strategic Window of Opportunity Herb Kelleher, flamboyant CEO of Southwest Airlines, exploited a market niche to grow a 4-plane airline into a 141 planes and took on the big airlines at the same time. Kellehers local short-distance no-frills flights attracted many passengers because: o They were cheap (average of $58 US) o They took passengers to smaller airfields, rather than the congested larger fields o Flights were frequent o Good service o Fun (in-flight trivia contests, instructions delivered in rap and prizes for the passenger with the largest hole in their socks!) They were so successful that many larger airlines simply could not compete and stopped servicing many of the short routes In many instances, Southwest was competing with car and bus travel The traffic is already there. We take it off the highway and put it on the airplanes When Southwest entered into the Californian market, it really hurt its competitors they were unable to maintain certain routes which were main feeders to the rest of their national travel network Secrets to Southwests success are: o Cost containment - all aircraft are 737s so maintenance costs are reduced, 70% of Southwest aircraft have a 15 minute turnaround time between flights which include cleaning, servicing, unloading and loading passengers, no assigned seats, baggage was not transferred to other planes (that was the passengers responsibility), re-usable plastic cards for boarding passes, peanuts and drinks offered but no meals. o Employee commitment negotiated flexible work rules with the unions, high productivity meant a leaner crew (no layoffs necessary when times were tougher), sense of fun in the workplace (Fun is a stimulant to people. They enjoy their work more and work more productively) o Conservative growth expansion was only undertaken when enough resources could be committed to go into a city with 10-12 flights a day, rather than just one or two concentrating on a few areas, rather than dissipating strength by trying to compete everywhere. The most powerful advantage a company can have against a competitor is lower prices, better service and superior quality Competitive advantage can also be gained by unlocking a niche market: 1. Identifiability: can those people who constitute the niche market be easily identified? 2. Size: Is the niche market big enough to be viable? 3. Accessibility: can you promote your product or service without too much waste? 4. Growth Potential: Does the niche market show promise for long-term growth?

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5. Absence of vulnerability to competition: Is the niche market already being tapped? If so, are you competitive enough to break into the market and capture significant market share? No competitive advantage is more powerful than a dedicated workforce Herman Miller: A role model disappoints Herman Miller is an office-furniture maker in Michigan and has long been celebrated as a model of superb employee relations and it stood at the forefront with modern environmentally friendly policies such as: o The company organised silver parachutes for employees who lost their jobs in an economic downturn so that they received big cheques o Herman Miller limited top execs salaries to 20 times that of the line worker (it was not uncommon to find top execs earning 100 times that of a line worker) o Employees were organised into work teams and every six months both workers and employees would evaluate each other o They ensured career development prospects for employees by scrapping nepotism in the company the owners family was not even allowed to work in the company in any capacity. Management kept a paternalistic relationship with employees they practiced a participative management style by involving them in management processes. Dictatorial Least Authoritative Participative Democratic Most Degree of subordinate involvement in planning and decision making

The advantages of a participative management structure are: o People tend to be more cooperative and enthusiastic when they have some involvement in the planning o Better decisions are usually more common when different experiences and points of view are raised o Employee development is maximised The disadvantages are: o Consultation takes time and many decisions are too minor to warrant that sort of time commitment or a decision has to be made quickly and there is no time for commitment o No benefit is likely for new or untrained employees The best managers use participative techniques whenever they can, especially when the decision affects the employees but they choose their opportunities carefully In 1995 Herman Miller was a $1billion company, but sale were only $800million in 1989 so the growth was very slow profits slid from $40m in the 80s to $4.5m in 1995. In 1992 it recorded a net loss of $3.5m its first loss ever. In 1992J Kermit Campbell was named chairman and moved quickly to cut costs by:

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o firing several top execs, including an employee who had been with the company for 20 years (this type of employee treatment was unheard of at Herman Miller) o Closing plants in Texas and New Jersey as well as several showrooms Herman Miller was rapidly losing its reputation as the best company to work for by Campbell said, Survival is more important than maintaining a pristine relationship with workers Campbell announced his retirement only two months after taking the job. He was replaced by Michael Volkema Herman Miller started losing profits and market share because: o They made high quality, high cost furniture. In the past there was a large market for such office furniture. Now consumers were turning towards mid-quality low cost furniture o They changed the type of wood used for their best selling office chair on environmental grounds (the wood was at risk of becoming endangered) and they lost a lot of sales o They spent $11m on waste-to-energy heating and cooling which was environmentally friendly and could save money in the long run, but the savings would not be as much as if they would have invested that $11m o They miscalculated the rise of the home office and their receptiveness to high priced office furniture o They didnt adapt to competitive forces Dont grow the company too fast that a high percentage would have to leave in times of difficulty (be lean and mean) Shareholder discontent is unhealthy for executives: stakeholders have the right to agitate for drastic shake-ups when the company fortunes as reflected in the stock price show little promise of improving. Reebok vs Nike: Sneaker Wars Reebok Reebok goes back to the 1890s when Joseph William Foster made the first known running shoes with spikes. In 1958 the Reebok company was formed by Fosters grandsons and in 1979, at the height of the running shoe boom, three models were introduced into the US market. Although they were the most expensive shoes on the market, demand soon outgrew supply By 1981 sales were $1.5 million Reebok anticipated three major trends that would transform athletic footware: the aerobic exercise movement, the embracing of sports by women and the trasference of athletic footware for street and casual wear. Growth exploded (especially with the introduction of the first-ever athletic shoe designed for women) and sales soared from $13 million in 1983 to $307 million in 1985 sales tripled in one year, reaching $919 million in 1986. $1.4 billion was reached by 1987 and $2.7 billion was reached by 1991 In 1993, a company publication stated that their objective, is to become the best, most innovative and exciting sporting goods company in the world.

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In 1987 Nike had sales of only $900m while Reeboks was soaring at $1.4b. But Reeboks sales slowed and by 1990, Nike overtook it with $2.24b in sales compared to Reeboks $2.16b in sales. Reebok began to steadily lose ground. Part of the shift could be attributed to Bikes savvy advertising and to its two well-paid endorsers: Michael Jordan and Pete Sampras. But as the mid 90s approached, Reeboks internal flaws became more and more obvious. As sales increased so rapidly in the mid 80s, Fireman, who was Chairman and CEO gave up his position to a management team more experienced in handling such a large company. While Fireman (who owned 20% of the stock) was busy building golf courses on Cape Cod, the new management team proved to be inept. The company went through three different top managers in five years. In August 1992, Fireman took charge and wasted little time in bringing in a new team and planned an aggressive thrust back into the market. Reebok attacked Nike on the basketball market. Jordan was retiring from basketball and Reebok signed up Shaquille ONeal (the next enduring superstar) to promote its products for $3m in 1992 Reebok advertised its new instapump shoe (using a pump instead of laces) very aggressively and expected $100m in sales The Just do it slogan of Nike was devastatingly effective Reebok also signed up 400 football, baseball and soccer stars for its advertising and promotion But these efforts did not pay off:. The Shaq Attaq shoes, aimed at teens, bombed the colours were wrong and the price was $130US basketball shoes fell 20% By 1995 operating costs soared to 32.7% of sales, exceeding the industry average of 27% Reebok signed up 3,000 athletes to wear Reeboks at the 1996 Olympics in Atlanta; NFL teams; and Rebecca Lobo (a basketball star) which blew out the budget Other endorsements failed: Michael Chang was on a $15m contract, but he never made it against Sampras and Aggassi who were both Nike endorsers and Shaquille ONeal became unhappy with his $3m contract and started to look elsewhere for bigger and better money The Reebok company also hit distribution snags and opened a new facility in Memphis, which also cost big dollars There were problems at the top the turnover of top management was high, How do you attract first rate talent when theres been a history of turnover at the top? There were also price-fixing charges laid by the Federal Trade Commission and in May 1995, Reebok paid out $9.5m to settle Reebok also lost ground in the Foot Locker market. Footlocker (a Woolworths company) was the biggest retailer of sports shoes. Footlocker saw its biggest weapon as its exclusive lines but Reebok denied exclusivity to Foot Locker regarding their aerobic shoes. In contrast, Nike had been working with Foot Locker and by 1995 had a dozen items sold only by the Footlocker chain. Reebok also failed to get its samples in to Footlocker on time and that virtually guaranteed that they would not be sold in Footlocker stores.

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 Nike

Senior management, even Presidents of firms need to become involved in the development of relationships with major customers, such as Foot Locker Nike, founded by Bowerman and Night, began as the Blue Ribbon Shoe Company in 1964 and sold $8,000 mostly to high school athletic teams in its first year. In 1972 they changed the name to Nike (the Greek goddess of victory) and during the Olympic marathon trials Nike wearers placed 4th through 7th, compared to Adidas wearers who finished 1st, 2nd and 3rd. On a Sunday morning in 1975, Bowerman, a co-founder of the company, was playing around with a waffle iron and some urethane rubber. He fashioned a new type of sole with tiny studs that made it more springy. 1976 sales soared to $14m, up from $8.3m the year before and from only $2m in 1972 Careful research and development of new models ensured its continuing success they employed nearly 100 people in the R&D side of the business who produced more than 140 high-tech models Nike led the market with more than a 50% share In 1980 Nike went public and Night became a multimillionaire worth $300m, Bowerman sold most of his stock earlier and was worth only $9.5 million Nike missed the opportunity to gain a foothold in the aerobic dancing market which boomed in the 1980s and lost a lot of ground to Reebok who was there first with a shoe designed specifically for women In 1993, Nike did not look like a winner as share prices tumbled sales were up only 15% and earnings just 11% - not enough for a once hot-stock Nike embraced the motto, Play by the rules, but be ferocious. But they were not ferocious to their customers they pampered them Nike cultivated customers while Reebok was surprisingly nonchalant Nike was also very lucky they chose athletes to endorse their products who became the dominant figures in their sport. The Just do it slogan really appealed to youth and really caught on Success does not guarantee continued success, as is evident from Reeboks rise and fall The most competent executives have vision, support of their organization and reasonable judgement

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