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RESTRUCTURING
Review each case study provided. For each case study, discuss the categories in which they fit. 1. Turnarounds in what 4 areas. 2. Demand Shifts. 3. Strategic readjustment. 4. Technological Innovation, 5. Major Strategic Refocus.
The Scott Paper case is an example of a classic turnaround. It has been well documented by its chief architect [Dunlap, 1996]. When Al Dunlap was hired to run Scott Paper in early 1994, the company was in crisis. Scott had lost $277 million in 1993; Scott was on credit watch with over $2.5 billion in debt, its stock price had been declining. Dunlap presents four rules for a successful restructuring:
Poorly performing executives were fired, including 70 percent of upper management in the first year. New executives with strong track records were brought in. Dunlap hired fourteen experienced marketing directors from Kimberly-Clark, Procter & Gamble, Colgate-Palmolive, and Coca-Cola. He developed a small inner circle of trusted executives with diverse skills and personalities.
Payroll was reduced 35 percent by cutting 11,200 jobs. Procurement was consolidated on a worldwide basis. The items stocked in inventories were reduced from 11,000 to 2,000. Executive perks (jets, cars, beach houses) were eliminated. The opulent corporate headquarters were sold, alternative space was rented. Scott outsourced many functions. Dunlap followed the principle of doing in-house only what was perceived to give the company a competitive advantage.
Unrelated businesses, such as health care, food service, and a cogeneration power plant, were sold. Scott sold $2 billion in noncore assets within the first year. Dunlap focused on high growth products within the core business, selling off the coated paper activity for $1.6 billion.
The product line was pared-down. Dunlap eliminated 31 percent of the consumer product items offered. Testing the "Rule of 55" showed that 50 percent of the products produced only 5 percent of its revenues and earnings. So the number of products was reduced by more than 500 and domestic warehouses from seventy to ten. The remaining products achieved a sales growth of 24.5 percent and operating margins of 20.4 percent. Marketing efforts were refocused around a unified product line, with the slogan, "Scott the world over." This saved millions in advertising and promotional expense. Executive pay was tied to shareholder value. Dunlap himself invested his personal wealth plus substantial borrowings. Scott's top ten executives owned $10 million of company stock. Stock option awards were made to 10 percent of Scott employees. Stock awards were not granted unless performance targets were met.
The sale of Scott to Kimberly-Clark was announced on July 17, 1995. Scott's market value had increased $6.5 billion during Dunlap's tenure. At the time of the Scott acquisition, Kimberly-Clark's stock price was about $60. On August 29, 1997, it had risen to $110. The Spring 1997 edition of Moody's Handbook of Common Stocks noted that Kimberly-Clark "continues to benefit from its merger with Scott Paper, which has fueled improved earnings..."
The second case study involves a major shift in the nature of an industry.Â
This phenomenon has been called creative destruction [Schumpeter, 1942], major shocks [Gort, 1969], or major discontinuities [Drucker, 1989]. When this happened to Intel, its chairman, Andrew Grove [1996], called it the "Ten Times" factor or "strategic inflection points." Grove describes how the Japanese produced higher-quality memory chips priced "astonishingly low" (p. 87). By the mid-1980s, Intel's market share had plummeted. What to do? "After all, memories were us... our identity" (p.88).
Intel made the very difficult decision to exit the memory chip business to concentrate on micro-processors. This also involved changing the composition of its executive group to become at least 50 percent software experts.Â
A third case involves AT&T.Â
At 9:11 a.m. (New York time) on September 20, 1995, Chairman Robert E. Allen announced that, at a special meeting earlier in the morning, the board of AT&T had approved plans for a strategic restructuring that would separate AT&T into three publicly traded global companies. Under the plan, AT&T shareholders would receive shares in two other companies. A fourth business, AT&T Capital Corp., would be sold. This restructuring in the form of a split-up was accomplished by means of spin-offs to shareholders of two activities.
The AT&T name continued for the Communications Services group, with revenues of about $50 billion. This included the long-distance business, AT&T Wireless (formerly McCaw Cellular Communications), and Universal Card operations. About 15 percent of Bell Lab employees were also retained. It also included a newly established AT&T Solutions consulting and systems integration organization.
The second company was an equipment company called Communications Systems (later renamed Lucent Technologies). Its production encompassed public network switches, transmission systems, wire and cable, and wireless equipment whose total revenues in 1994 were somewhat over $10 billion. Communications products include business phone systems and services, consumer phones and phone rentals totaling about $6.5 billion. Microelectronics consisting of chips and circuit boards represented another $1.5 billion of revenues. The equipment company also included an AT&T Laboratories unit around the core (85 percent) of Bell Laboratories for research and development in communications services. The equipment company began with 20,000 of the Bell Lab employees; about 6,000 remained with the long-distance company.
Splitting off the equipment business from long distance was motivated by the need to separate AT&T's role as a supplier and a competitor. AT&T's biggest equipment customers continue to be the seven regional Bell companies. But the Bell companies and the long-distance carriers are competitors, each seeking to invade the others' telephone services markets.
The third company would be Global Information Solutions (GIS) (later renamed NCR). It was further announced that NCR would halt the manufacture of personal computers. It would continue to offer customers personal computers as a part of total solutions, but using outside suppliers. NCR would continue to support and service all of its current hardware and software installations and would market its capabilities to all industries, particularly the three key segments where it has a strong market position - financial, retail, and communications. NCR, with 43,000 people in more than 120 countries, announced major cost-cutting initiatives that would eliminate 8,500 jobs.
AT&T had held a vision of a presence in the computer business, because central station switching equipment units are large-scale specialized computers. But for many years it was prevented from doing so by a 1956 Consent Decree with the Department of Justice. A part of the divestiture decree of 1984 gave AT&T increased freedom to compete in other businesses, including computers. But AT&T had the disadvantage of starting far behind the established computer companies. The purchase of NCR in 1991 was an effort to catch up. However, the computer industry itself went through such major dynamic changes that even the former leader, IBM, was unable to keep up. The acquisition of NCR failed to enable AT&T to achieve its aspirations in the computer business.
The Fourth Case
The announcement on July 9, 1997, of Lockheed Martin's (LM) proposed acquisition of Northrop Grumman Corp. (NG) for $8.26 billion was seen as the last major deal in the aerospace/defense industry consolidation movement. Between 1992 and 1996, thirty-two U.S. defense businesses have been consolidated into nine companies, with LM and Boeing emerging as the largest.
This world industry is divided into two major sectors: commercial and defense. In the world commercial market, Airbus has a 40 percent share, and, with the acquisition of McDonnell Douglas (MD) (10 percent), Boeing's share is somewhat less than 60 percent. Other smaller producers include Bombardier of Canada, whose revenues in 1996 were $8.5 billion. Bombardier is a successful niche player in the commuter and business-jet aviation markets with 65 percent of the regional-jetliner sector.
In the world defense industry the top ten companies with their 1995 defense revenues in billion dollars are indicated in Table 1.
Table 1
1. Lockheed Martin (US) $19
2. Boeing (with MD) (US) $18
3. British Aerospace (UK) $6
4. Hughes Electronics (US) $6
5. Northrop Grumman (US) $6
6. Thompson (FR) $5
7. General Electric Co. (UK) $4
8. Raytheon (US) $4
9. United Technologies (US) $4
10. Lagardere Groupe (FR) $3
The ten largest U.S. merger transactions that have taken place since 1992 are shown in Table 2.
Table 2
Acquirer Acquired Date Price
(bils.)
Boeing McDonnell Douglas 12/15/96 $14.0
Lockheed Martin Loral 1/9/96 9.0
Raytheon Hughes Electronics
Defense Unit 1/16/97 9.0
Lockheed Martin Northrop Grumman 7/9/97 8.3
Lockheed Martin Marietta 8/8/94 5.0
Boeing Rockwell Defense Unit 12/5/96 3.2
Martin Marietta GE Aerospace Unit 11/23/92 3.1
Northrop Grumman Westinghouse
Defense Unit 1/4/96 3.0
Raytheon Texas Instruments
Defense Unit 1/6/97 3.0
Northrop Grumman 4/4/94 2.2
A two-way transfer of knowledge takes place between defense and commercial businesses. Diversification in the commercial business may increase a firm's ability to compete for defense business. For example, Lockheed Martin has developed an organizational systems business with substantial market potential. Before its acquisition of Northrop Grumman, the revenues from nondefense business were already one-half of total revenues. Even if the DOD budget continues to shrink, Lockheed Martin sees the nondefense capabilities as the core of the company, producing continuing growth and profitability. Competencies in such areas as organization systems have wide applicability, contributing strength to the military side of the business as well.
The foregoing represent some of the strong forces propelling the reorganization and consolidation of the aerospace/defense industry. The major risks are demonstrated by the structure of Airbus; a consortium of sovereign governments are combining their resources in the attempt to compete and to bear the risks of the turbulent aerospace industry.
The Fifth Case (The Tire Industry)(1)
A significant innovation in an industry's main product can lead to the need for the industry to restructure. The delayed introduction of the radial tire into the American market during the 1970s, compounded by sluggish and inadequate industry adjustments, necessitated subsequent restructuring.
All of the U.S. tire makers with the exception of Goodyear were acquired by foreign firms. By market value, 90 percent of the firms in the industry experienced a takeover bid or were forced to restructure, with 71 percent of the bids being hostile, one of the highest levels experienced by any industry during the 1980s. As shown in Table 3, by the end of 1993 only 17 percent of world tire production came from U.S. owned firms, which had produced 59 percent in 1971.
Table 3
Shares of World Tire Sales
Company Country 1971 1993
Goodyear US 24 17
Firestone US 17 Acquired by Bridgestone
Michelin France 11 19
Uniroyal US 8 Acquired by Michelin
Goodrich US 6 Acquired by Michelin
Pirelli Italy 6 5
Dunlop UK 4 Acquired by Sumitomo
General Tire US 4 Acquired by Continental
Bridgestone Japan 3 18
Continental Germany 2 7
Sumitomo Japan 6
Yokohama Japan 5
Toyo Japan 3
Total 85 80
The radial tire was first commercially produced by Michelin in 1948 and shortly dominated the European market. In 1970, 97 percent of tires manufactured in France were radials, while in the U.S. the figure was less than 2 percent, with the majority of the U.S. market served by American-produced bias-ply tires. Even though the radial tire had come to dominate the European market by the late 1960s and early 1970s, its introduction into the U.S. market was delayed. Some reasons were that the production of radial tires was more costly, significant costs were required to convert from bias-ply production to radial, the gas efficiency of the radial tire was less significant when gasoline was cheap, and U.S. auto manufacturers, the primary customers of the American tire industry, had resisted introducing cars using the radial tire because of substantial costs involved in redesigning suspension systems.
The combination of the oil crises and increased car imports from Japan and Europe forced the American car makers to respond with models using the radials. In a few years, the radial tire came to dominate the American market, with the U.S. tire makers struggling to adjust to new market conditions. The longer durability of the radial tire combined with reduced driving as a result of higher gasoline prices resulted in overcapacity in the industry. The European and Japanese tire makers had already sunk their investments in the radial tire production, making them the natural leaders in supplying the radial to the U.S. and world markets.
The U.S. tire makers responded to this crisis with varying results. Most firms attempted to deal with their decline in tires by attempting to diversify into other areas. However, rather than creating synergies, these largely wasteful forays attracted the attention of corporate raiders and were curbed. A natural solution to the overcapacity problem would have been consolidation between some of the firms in the industry, but the antitrust climate made this risky.
Goodyear was the only U.S. tire company to maintain its independence during the restructuring and takeover wave of the 1980s. Even though it was not the first out with radials, it neither attempted to skimp on the investment necessary to convert to radial production, nor did it compromise on the quality of radials produced. Equally important, Goodyear maintained its operations in Europe, enabling it to compete with internationally oriented firms like Michelin and Pirelli. Goodyear had also started to diversify out of tires in 1983 with forays into energy (Celeron) and oil (All American Pipeline). In 1986, Goldsmith disclosed purchases of Goodyear stock with the intention of taking over and selling off non tire investments. Goodyear paid greenmail and announced a self-tender. Saddled with debt, Goodyear abandoned its diversification policy, but improved in its tire operations. However, as Table 3 shows, Goodyear market share declined from 24 percent to 17 percent between 1971 and 1993.