Corporate Renewal: The Accordion Effect
by Jahna SR

As a company grows, it acquires a lot of baggage in the form of diversified business, hampering its ability to compete with new, nimbler players. A refocusing strategy, where the company gets back to its core businesses, comes to its aide in such situations.

Think of life in a jungle! When the forest has enough for everyone, all survives, but when the forest runs out of resources, only the fittest, survive. Likewise, in the business jungle, only the trimmest, fittest businesses survive in a slump. And, to be fit and agile, companies should shed the baggage that they have accumulated during the boom times. Thus, most companies, which divest their non-core businesses, trim costs and become focused (many at times reverting back to their old ways of doing business), in fact, try to get themselves in shape to face the testing times. Here is how they do it.

Identity and the Core

An individual's identity can be a result of gender, ethnicity or profession. Similarly, a company's identity might be a derivative of core business, knowledge base, country-of-origin, leadership or operating philosophy. Hamid Bouchikhi and John R Kimberly in their research paper "Escaping the Identity Trap" published in MIT Sloan Management Review (Spring2003, Vol. 44 Issue 3) say that organizational identity forms a cognitive framework that filters how members of the organization and its stakeholders view the world and perceive issues. For instance, if a company's identity is tied to manufacturing it would most definitely pay more attention to engineering, production capacity, productivity, product innovation or long-term investment. On the other hand, a company having an identity anchored to its brand, would view the world in terms of differentiation, brand awareness and consistency, customer loyalty or communication. And if the identity is very strong the organization has little room to diversify or even if it diversifies, it would be difficult to bring profits out of them.

In most cases, an organization's identity is based on its core business. But, more often than not, organizations get into non-core business based on the perceived lucrativeness of the opportunity. In the process, they burn their fingers and hamper their core businesses also. In most of the turnaround stories of the decade, a general trend has been observed in this regard. Many of these turnaround companies faltered because of unrelated diversification and had to refocus on either there core businesses or products (whichever was more strongly tied to their organizational identity to revert back to profits). Be it Sears, Roebuck & Co., Procter and Gamble, Interpublic Group, which resorted to their core business and core products in order to turn themselves around, companies have understood the perils of irrational diversifications. Then again in all these companies one of the leaders took the company away from the core whereas the other (the turnaround artist) got them back on core. What it means is that, leaders can make or break a company.

Refocusing Sears

For most part of the past century, Sears, Roebuck and Company was the darling of American households. It used to be the largest retailer in the US, with sales representing 1 to 2% of the US gross national product for almost 40 years after World War II. Then during the 1980s, Sears diversified into other businesses, hoping to provide middle-class consumers with banking, investment, and real estate services in addition to its traditional retail business. These diversifications carried Sears away from its roots in retailing, giving way to rivals to fill the top spots. Sears steadily lost ground, moving from the Number 1 position to Number 3 behind discounters Wal-Mart Stores, Inc. and Kmart Corporation.

At the same time, it gradually forgot about its customers and no longer understood who its competitors were. It shifted its focus inward, to the interests and needs of its huge bureaucracy, at the expense of the customers who found themselves in dismal stores. In short, Sears lost its way but only to find it again under an outsider CEO. Arthur Martinez, who was brought in from Saks Fifth Avenue, led the company through two transformations that saw the American retailing idol of yore return to its long forgotten roots. The first turnaround happened in 1994 and the second one in 2000. When Arthur Martinez took charge at Sears in 1992, he found a once-great company facing a loss of $4 bn, with an entrenched bureaucracy, having little idea of its target customer, and 300,000 dejected employees. Martinez started reorganizing, under Martinez, Sears started focusing on seven core types of merchandise- men's, women's and children's clothing, home furnishings, home improvement, automotive services and supplies, appliances, and consumer electronics. The company also began rearranging its merchandise displays to match those of more upscale department stores, paying more attention to women's apparel, which is considered a highly profitable segment of merchandising. The company even started offering special merchandise in each store aligned to its local customer base. More importantly, Sears realized that it could not compete with discounters such as Wal-Mart Corporation on price alone and focused on building a competitive edge through superior service. It even relieved managers and clerks of some reporting and administrative tasks so that they can have more time to actually sell. And, to ingrain the service philosophy, every employee's compensation included a measurement for customer service starting from 1996.

Most importantly, it sold off businesses unrelated to its core business of retailing. Then Sears started restructuring. This resulted in renaming the retail business the Sears Merchandise Group and the insurance business Allstate Insurance Group, which it acquired in 1931, in early 1981. Later that year, Sears, to tap the lucrative finance business, acquired the Dean Witter Reynolds Organization, Inc. and Coldwell Banker & Company, which formed the Dean Witter Financial Services Group and the Coldwell Banker Real Estate Group.

As a part of getting back to basics, in early 1993, Sears completed an Initial Public Offering (IPO) of 20% of its Dean Witter organization (then called Dean Witter). In the second largest stock dividend distribution in the US history, Sears spun off its remaining shares of Dean Witter to Sears's shareholders. Later in the year, Sears established another financial milestone through the IPO of 20% of Allstate's stock. At the time, it was the largest IPO in US history. The remaining Allstate shares were distributed to shareholders in 1995. As a result of these actions, shareholders of Sears then owned shares in three separate and non-affiliated companies: Sears, Roebuck and Co., Allstate and Dean Witter Discover & Co. (now Morgan Stanley Dean Witter & Co.). In addition, Sears sold the Coldwell Banker Residential Services, the Sears Mortgage Banking Group and the Homart Development Company. The proceeds from these transactions, about $4 bn, were used to reduce overall corporate debt. With its diversified companies divested, Sears, Roebuck and Co. had returned to its retailing roots. Today, Martinez's successor, Alan J Lacy is trying real hard to stick to the roots.

Re-sparking M&S

Another revered retailer Marks & Spencer (M&S) also faced diversification related problems, it expanded too much, too soon. For years, M&S ruled the retail roost, and reveled in profits quarter-after-quarter, until some bad decisions, complacency and boardroom battles took the company away from its glorious days. In January 2000, after continuous decline in share price and earnings Luc Vandevelde was taken in to revive M&S's flagging fortunes. And what the Belgian did to the Brit supermarket chain is no magic. Rather he followed the tried and tested approach to turnaround, but with a sense of urgency and heightened sensitivity toward competition, which was something new to M&S.

M&S is a classic case of a company with mid life crisis; it simply grew too contented with itself. Since it was founded in 1884, it had come to be trusted by the British, for its clothes, especially lingerie and food. For years, supported by these two pillars of growth (food and clothes), the retail chain grew comfortably within and outside Britain. It was hugely successful until chains like Tesco and Sainsbury inched into its territory. Even as competition intensified and new stores cropped up, M&S failed to appreciate the gravity of the situation. Because M&S have been highly successful (competition with Wal-Mart for the title of the most profitable chain store in the world) and competitive for so long there was no pressure to improve the business and now its competitors have overtaken and underlying problems have arisen. Marks & Spencer's troubles were more of its doing than its competitors'. Over the years its products became outdated, it was perceived as stodgy, and a fallout of all these was slumping profits.

In the 1990s, when consumer demand in Britain was uncertain and Asia was under slump the then Chairman and Chief Executive, Sir Richard Greenbury (son of the founder) announced a 2.2 bn ($3.7 bn) global expansion plan, updating technology and expanding floor-space worldwide. Pointless expansion meant that they needed more stuff to fill their stores with. It so happened that they didn't have enough and whatever they had was outdated or not novel, thereby wasting their sapping finances. Even when Brooks Brothers, acquired in America, was losing money rapidly, the chain expanded extensively and irrationally, opening 40 stores in France, Germany, Spain, and Belgium. At home, in an expansion spree, M&S increased the size of its average British store by more than a third. It had to offer more products just to fill the extra space. They also moved into areas such as mobile phones and jewelry, where they were just a "me-too" player.

Coupled with these strategic mistakes were some operational and suppliers related bungles. M&S had an early lead in selling up-market ready-made meals. But even as Britain's big supermarkets, Tesco and Sainsbury, were catching up, there was a snobbish disinclination to change at the company. While rivals imported cheap clothes, thereby selling at low prices, M&S's continued to buy all its clothes from the domestic suppliers, losing out on the cost advantage. As a result, it sold outmoded clothes at higher prices, further eroding its clothing sales.

But since taking up the dual responsibility, Vandevelde had tried hard to focus on core British market by selling off such ailing US businesses as the Brooks Brothers clothing chain and King's supermarkets. He pulled out of France amid labor unrest and closed the retailer's 38 stores in Europe, eliminating 4,000 jobs.

A major and much-needed change was that it started refocusing on its two pillars of strength: Lingerie and food. Lingerie is M&S's best-selling product in Britain that commands more than 30% of the market, and M&S is considering its export in the future through small boutiques. Food is another growth area: Sales of M&S's high-quality, ready-to-eat meals account for more than 40% of sales, despite competition from supermarket chains Tesco and J Sainsbury.

Back to Basics for P&G

Procter & Gamble's has a similar story, but here the refocusing happened on core products rather than on a core business as such. People identified the company with its best selling products and not its innovative capabilities. Thus when the ex-CEO tried to push the company towards greater and greater innovation, the core products were neglected and the customers as well as stakeholders confused the identity of the organization.

This Cincinnati-based Fortune 100 company, a diversified consumer products giant having operations in over 70 countries and employing more than 110,000 people ran into trouble in the late 1990s when it neglected popular core products such as Ivory soap, Pampers nappies, Crest toothpaste and Tide laundry detergent.

As the situation degenerated by early 2000, when the stock plummeted to around $55 from nearly $120 in a matter of months and the global consumer goods behemoth was gripped in profit warnings one after the other Procter & Gamble veteran AG Lafley was brought in abruptly to replace Durk Jager as Chief Executive in June that year. In just two years and three months Lafley refocused the company onto its core brands such as Tide, Crest, Vicks and Pampers, slowed down the pace of new product development, stabilized the organization culture and most importantly cut costs to bring the company back to profits. As a result, the once beleaguered company's stock is soaring; it has been delivering impressive earnings for eight straight quarters and is busy charting out future plans.

Way before its earnings warnings and stock slump, P&G had been struggling for years with the basic age-old problem associated with size- how to grow a $40 bn company? As Fortune says, "After all, it takes $400 mn in new sales just to move up 1%." As a result, between 1990 and 2000, the company failed to meet its goal of doubling its sales every decade (something which it had done in every previous decade since 1940).

On top of this inherent problem, Lafley's predecessor, Durk Jager, pushed the company onto his aggressive plan of launching a slew of products in the hope of finding the next billion-dollar blockbuster like Tide or Pampers (the hugely successful diaper brand), thereby deviating required resource and attention from the current hits (Tide, Pampers, Folgers, Crest, Pantene). The chase proved elusive as Olay Cosmetics and Fit, a fruit wash, flopped. What's more while the company continued to struggle with these failures, Jager's effort to globalize P&G's brands, by selling its products under the same name around the world, flopped. In Germany, for instance, P&G changed the name of its popular dishwashing liquid from Fairy to Dawn (as per the new strategy) only to see its sales for the brand plummet because nobody in Germany knew what Dawn was.

Jager, an aggressive change agent with a confrontational management style disliked by many in the company, shook P&G's culture and pushed P&G to escalate development of new products. He even jeopardized P&G's identity by proposing to buy two large pharmaceutical companies (the purchases never happened though). In his endeavor to radically change P&G from top to bottom he neglected the immediate goals of earnings growth. As the company's push to develop new products under Jager and a botched attempt at major pharmaceutical acquisitions deviated focus from the company's main business while worsening the company's prospects of revival, Jager's tenure was abruptly brought to an end after 17 volatile months. (In fact his is the shortest CEO tenure in P&G's history). And Lafley was brought in to rescue the consumer products giant.

Since he took over as CEO in June 2000, he has refocused the company on its core brands and its biggest markets, including the US and Western Europe. He recognized that the need of the hour was to get the company back on its firm pillars of growth rather than trying to build new pillars. He decided that P&G would concentrate on four of its biggest businesses - laundry, baby care, hair care and feminine care all of which had been losing market share. So, he deftly refocused the company on the big brands that drive earnings, including Pampers, Tide, and Crest. Like Jager, Lafley also resorted to acquisitions to grow, but unlike him he made sure that they are close to P&G's core strengths as evident from the purchases of Clairol and Spinbrushan electric toothbrushes against Jager's Iams pet food and PUR water-filter systems. Lafley is getting the company back to basics, which doesn't mean saying no to new products rather it is about striking a balance between old and new brands.

In order to find the balance between sales and profit growth something that evaded his predecessor, Lafley did away with slow-growth products such as Crisco shortening and Comet cleanser. Instead he sought out faster-growing, more profitable products in areas such as beauty and hair care while he brought a new focus and resources to core brands such as Tide. And, to boost up the bottom line, adeptly cut costs. Most importantly though, unlike Jager, Lafley had been setting achievable goals. For example Lafley scaled back P&G's long-term performance goals to 4 to 6% sales growth, from the unrealistic 6 to 8% of Jagers'. He also aimed for just "double-digit" earnings growth instead of Jager's very specific 13 to 15%.

Interpublic's Pruning

While the above-mentioned companies have already reaped the benefits of `back to core' strategy, there are others who are just trying it out.

On March 6, 2003, Interpublic reported a 70% drop in fourth-quarter profits, in May its credit rating fell to junk and in August, CFO Sean Orr left after the company restated earnings three times in the previous 12 months. Daniel Bell, the CEO feels that Interpublic's problems were a result of making too many acquisitions and straying away from advertising, its core business. So, to recover, it is shedding units like Brand Hatch Circuits motor racetracks. Interpublic owns five tracks in UK and has already closed or sold six go-cart tracks in UK and Hong Kong. The former CEO's zeal for growth cost the company too much and burdened it with $2.7 bn of debt. In an article titled, "Interpublic's Challenge", published in Bloomberg Markets (November 2003, Volume 12, Number 10, p92), it is said that in fact, between 1998 and 2002, the ex-CEOs Philip Geier and John Dooner spent $4.76 bn to add 273 firms to the more than 1000 units from Austria to Zimbabwe that Interpublic owned. Now, the company is trying to slim down by selling all unrelated units. Bell has already struck a deal to sell its market research unit, NFO worldwide to Taylor Nelson Sofres Plc as part of its plan to raise funds, reduce debt and most importantly, narrow Interpublic's focus.

All these companies show how leaders are challenged by the trade-off between core and opportunities. They have to constantly strike a winning balance between capitalizing on opportunities and remaining focused on the core. For them it is a vicious circle just like the accordion, which expands and contracts, businesses also alternate between diversifying and focusing to keep growing. Therefore, leaders have to balance these broad strategies from time to time. And, the balance can be optimally reached if the organizational identity is well understood and steers clear of any business which is far removed from the organizational identity to tide over the business cycle without having to resort to `back to the core' strategy.


Jahna SR heads JS Associates, a consultancy engaged in coaching executives based in Chennai, India. The firm also prepares fresh management graduates for undertaking corporate jobs. Jahna places heavy emphasis on people-orientation and believes that most organizational problems have their roots in people-problems, and these can be resolved by a free and fair talk with the concerned employees. She can be contacted at jahnasr@rediffmail.com.

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Copyright 2005 by Jahna SR. All rights reserved.

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