Gerald Albert, 68, and Frank A. Fariello, 59, were named chairman and president, respectively, of EDO Corp., a College Point, NY-based electronic and specialized equipment manufacturer. Albert, who continues as chief executive, succeeds William R. Ryan, 82, the company's chairman for 21 years. Fariello, who was previously executive vice president, was also named chief operating officer, a position vacant for some time.
Ed Anderson, 46, was named president and chief executive of Dallas-based CompuCom Systems, a national PC dealer. The former chief operating officer replaces Avery More, 39.
L.M. 'Bud" Baker Jr., 61, was named president and chief executive of Wachovia Corp. in Charlotte, N.C. The former chief operating officer replaces John G. Medlin Jr., 61, who remains chairman.
Roger C. Beach, 57, was named chief executive of Los Angeles-based Unocal. Currently president of the oil company, Beach succeeds Richard J. Stegemeier, 64, who remains chairman.
Doris D. Bencsik, 62, was named president of San Antonio, TX-based Datapoint Corp., filling a vacancy. She was executive vice president of the computer networking company and remains chief operating officer.
Robert G. Bohn, 40, was named president and chief operating officer of Oshkosh Truck Corp. in Wisconsin. The former vice president for operations replaces R. Eugene Goodson, 58, who remains chairman and CEO.
Robert Boni, 65, was named chairman of insurance broker Alexander & Alexander Services Inc. in New York. The former chairman of steelmaker Armco Inc. replaces T.H. Irvin, 60, who resigned.
Frederick A. Brunn, 49, was named president of International Totalizator Systems, a provider of lottery, wagering, and ticketing equipment and services, based in Carlsbad, CA. The former executive vice president succeeds James T. Walters, 61, who continues as chairman and CEO.
Thomas E. Clarke, 42, was named president and chief operating officer of Beaverton, OR-based Nike. He succeeds Richard K. Donahue, 67, who was named vice chairman of the board.
George David, 51, was named chief executive of United Technologies in Hartford, CT. Also the president and chief operating officer, he succeeds Robert F. Daniell, 60, who remains chairman.
Anthony F. Earley Jr., 44, was named president, chief operating officer, and a director of Detroit Edison Co. The former president of Long Island Lighting Co., Earley replaces John E. Lobbia, 52, who continues as chairman and CEO.
James A. Eskridge, 50, was named president of Mattel's Fisher-Price Inc. unit. Formerly a Mattel executive vice president and chief financial officer, Eskridge replaces Fisher-Price's Chairman, President, and CEO Ronald J. Jackson, 49.
Pier Carlo Falotti, 51, was named president and chief executive of American Telephone & Telegraph's operations in Europe, the Middle East, and Africa. He is the former president and CEO of ASK Group, a computer software company in Santa Clara, CA.
H. Allen Franklin, 49, was named president and chief executive of Atlanta-based Georgia Power Co. He replaces Bill Dahlberg, who is now president of The Southern Co.
William M. Freeman, 41, was named president and chief executive of Bell Atlantic-Washington. The former executive director of external affairs replaces Delano E. Lewis, 55, who became president and CEO of National Public Radio.
Richard F. Gaccione, 46, was named president and chief executive of La Crosse, WI-based G. Heileman Brewing Co. The former Bristol-Myers Squibb Co. senior vice president replaces Thomas J. Rattigan, 56. William J. Turner, 50, replaces Rattigan as chairman, a result of the Hicks, Muse & Co. takeover of the beer company.
Timothy R. Gallagher, 46, was named president and chief operating officer of Nations Financial Capital Corp., a diversified financial-services company based in Stamford, CT. He succeeds James H. Ozanne, 50, who was named chairman of the newly formed Nations Financial Holding Corp.
Richard Giordano, 59, has been named chairman of London-based British Gas PLC The non-executive deputy chairman of Grand Metropolitan PLC, and former CEO of BOC Group PLC, replaces Robert Evans, 65.
Danny Goldberg, 43, was named president of Time Warner's Atlantic Records division of The Atlantic Group. The former senior vice president at Atlantic replaces Doug Morris, who was promoted three years ago to co-chairman and co-chief executive of The Atlantic Group.
David M. Goldenberg, 55, was named chief executive of Morris Plains, NJ-based Immunomedics. The biopharmaceutical company's chairman and founder replaces David W. Ortlieb, 63, who resigned.
David P. Gruber, 52, president and chief operating officer of Wyman-Gordon Co. in North Grafton, MA, was named to the additional post of chief executive. He replaces John M. Nelson, 62, who remains chairman of the transportation and defense equipment maker.
J.M. Haggar III, 42, was named chairman of Haggar Corp. in Dallas. Currently the president and chief executive, he succeeds J.M. Haggar Jr., 69, who continues as a director. €.John Nils Hanson, 51, was named president, chief operating officer, and a director of Joy Technologies, a Pittsburgh-based mining-equipment manufacturer and servicer. He replaces Marc Wray, 61, who remains chairman and chief executive, as president.
Walter M. Higgins, 49, was named chairman and chief executive of utility holding company Sierra Pacific Resources in Reno, NV. Higgins, who is also president, succeeds Austin W. Stedham, 65, who retired.
Eric Hippeau, 42, was named chairman and chief executive of New York-based Ziff Communications Co. A Frenchman who served as chairman and CEO of Ziff's magazine division, Ziff-Davis Publishing Co., Hippeau replaces William B. Ziff Jr., who became chairman emeritus.
Katherine M. Hudson, 47, was named president and chief executive of Milwaukee-based W.H. Brady Co. The former vice president and general manager of Eastman Kodak's professional, printing, and publishing imaging division succeeds Paul G. Gengler, 62, who retired.
Robert A. Ingram, 51, was named chief executive of London-based Glaxo Holdings PLC's U.S. unit, Glaxo Inc. The former chief operating officer, who retains his other title of president, succeeds Charles A. Sanders, 62, who continues as the unit's chairman.
Darryl F. Jones, 40, was named president and chief executive of Vancouver, British Columbia-based International Absorbents. Formerly vice president of finance, CFO, and secretary, Jones succeeds Gordon L. Ellis, 46, who remains chairman.
Philip C. Kantz, 50, was named president and chief executive of Transcisco Industries in San Francisco. The former president and CEO of Itel Containers International succeeds Steven L. Pease, 50, who returns to Deucalion Venture Partners in Sonoma, CA.
Frederick A. Krehbiel II, 52, was named chairman of Lisle, IL-based Molex, a manufacturer of electronic and fiber-optic interconnection systems. Also the company's chief executive, Krehbiel succeeds his father, John H. Krehbiel Sr., who died in November.
D. Randy Laney, 38, was named chairman and chief executive of Rally's Hamburgers in Louisville, KY. The former Wal-Mart Stores treasurer replaces Burt Sugarman, 54, who stepped down but remains a director; he is also chairman and CEO of Giant Group Ltd. in Harleyville, SC.
John R. Leach, 51, was named chairman and chief executive of Western Auto Supply Co. in Kansas City, MO, a unit of Sears, Roebuck & Co. The former president and COO replaces John Lundegard.
Merle D. Lewis, 45, was named president and chief executive of Huron, SD-based Northwestern Public Service Co. Formerly the utility concern's executive vice president, Lewis succeeds Robert A. Wilkens, 64, who was named chairman, replacing Albert D. Schmidt, 67, who retired.
Howard C. Lincoln, 54, was named chairman of Nintendo of America in Redmond, WA. The former senior vice president now shares control with President Minoru Arakawa, 47.
H. Eugene Lockhart, 43, was named president and chief executive of MasterCard International in New York. The British banker-turned-consultant succeeds Alex Hart, 53, who resigned to join Advanta Corp.
George A. Lorch, 51, was named president and chief executive of Lancaster, PA-based Armstrong World Industries, an interior furnishings manufacturer. The former executive vice president succeeds William W. Adams, 59.
Terry J. Lundgren, 41, was named chairman and chief executive of Federated Department Stores' merchandising division in Cincinnati. Formerly president and CEO of Neiman Marcus Stores in Dallas, he succeeds Roger N. Farah, who left to become head merchant at R.H. Macy & Co.
Edward R. McCracken, 50, was named chairman of Mountain View, CA-based Silicon Graphics Inc. Currently also chief executive, McCracken succeeds James H. Clark, 49, the company's founder. Thomas Jermoluk, 37, was named president.
John T. McLennan, 48, was named president and chief executive of Bell Canada in Montreal. The former president of the company's Bell Ontario division replaces Robert Kearney, 58, who retired.
Lucio A. Noto, 55, was named chairman and chief executive of Fairfax, VA-based Mobil Corp. Already the president and chief operating officer, Noto replaces Allen E. Murray, 63.
William D. O'Hagen, 52, was named chief executive of copper-tube manufacturer Mueller Industries in Dallas. Formerly president of the company, O'Hagen replaces Harvey L. Karp, 66, who continues as chairman.
William A. Osborn, 46, was named president and chief operating officer of Northern Trust in Chicago. Previously senior vice president in charge of commercial banking and corporate management services, Osborn succeeds David W. Fox, 62, who remains chairman and CEO.
Barr B. Potter, 45, was named chairman and chief executive of JVC/Victor Co. of Japan's Largo Entertainment unit. The former executive vice president, president, and COO replaces producer Larry Gordon, 57, who resigned.
H.F. 'Jake" Powell, 61, was named chairman and chief executive of New York-based RJR Nabisco Holdings' Nabisco International unit in Hollywood. Powell was the president of the unit; James J. Postl, 47, was named president and chief operating officer.
Milan Puskar, 58, was named chairman and chief executive of Mylan Laboratories in Pittsburgh. He retains his title of president and replaces Roy McKnight, 72, who died. Puskar was a co-founder of the pharmaceuticals company in 1961, then worked at ICN Pharmaceutical in Costa Mesa, CA, and Ireland's Elan Corp. before rejoining the firm in 1976.
F.L. Putnam III, 48, was named president of Colonial Gas Co. in Lowell, MA. The former executive vice president and general manager succeeds Charles 0. Swanson, 62, who retired but continues as a director.
Safi Qureshey, 42, was named chairman of Irvine, CA-based AST Research, a maker of personal computers. He founded AST in 1981 as president and CEO and succeeds Carmelo J. Santoro, 52, who became the board's vice chairman.
Ronald G. Reherman, 58, was named chairman, president, and chief executive of Evansville-based Southern Indiana Gas & Electric Co. He succeeds Norman P. Wagner, 70, as chairman.
John W. Robb, 57, was named chairman and chief executive of London-based pharmaceutical company, Wellcome. He succeeds Sir Alistair Frame, 64.
John Robins, 54, was named chief executive of composite insurer Guardian Royal Exchange. The former group financial director of Willis Corroon replaces Sid Hopkins, 62, who will retire in August after 46 years with the group. Robins was succeeded by Richard Dalzell.
Harvey Rosenthal, 50, was named president and chief operating officer of Rye, NY-based Melville Corp., a retailing company. Previously the president and chief executive of Melville's CVS drugstore chain, Melville succeeds Stanley P. Goldstein, 59, who remains chairman and CEO.
J. Phillip Samper, 59, was named president of Sun Microsystems Inc.'s major operating unit, Sun Microsystems Computer Corp., based in Mountain View, CA. The former Eastman Kodak vice chairman succeeds Kevin Melia, 43, who stepped down from the acting president's post for family reasons.
John E. SlaterJr., 59, was named president and chief executive of Haverty Furniture Cos. in Atlanta. The former executive vice president and chief operating officer succeeds Frank S. McGaughey Jr., 70, who retired.
Robert E. Stauth, 49, was named chairman of Oklahoma City-based Fleming Cos. Also the president and chief executive, he replaces Dean Werries, 64, who retired.
Jan Stenberg, 54, was named chief executive of Stockholm's Scandinavian Airlines System. The former executive vice president at Telefon AB L.M. Ericsson replaces Jan Reinas, who acted as interim CEO and who left to take the helm of Norwegian paper and pulp concern Norske Skog AS.
Frank A. Sullivan, 65, was named president of Seven Oaks International, a Memphis, TN-based retail-coupon processor. The current chief operating officer succeeds Tommy Thompson, 42, who remains chairman and CEO.
Richard J. Swift, 49, was named chairman, president, and chief executive of Clinton, NJ-based Foster Wheeler Corp. Currently president and chief operating officer of the engineering, construction, and management company, Swift replaces Louis E. Azzato, 64.
Clyde T Turner, 57, was named chief executive of Circus Circus Enterprises in Las Vegas. The current president replaces William G. Bennett, 69, who remains chairman.
Joseph D. Vecchiolla, 38, was named chief executive of Dedham, MA-based Bird Corp., a building-materials and environmental-services company. The former company president replaces George F. Haufler, 62, who was dismissed after 12 years on the job.
Arthur F. Weinbach, 50, was named president and chief operating officer of Automatic Data Processing in Roseland, NJ. The former ADP executive vice president succeeds William J. Turner as president and Josh S. Weston, 65, who remains chairman and CEO, as chief operating officer.
David E. WilburJr., 51, was named president and chief operating officer of Carlisle Plastics based in Boston. Wilbur is the former president of Carlisle
Plastic's film-products group. William H. Binnie, 35, remains chairman and chief executive.
Carl J. Yankowski, 45, was named president and chief operating officer of Sony Electronics Inc. The former Polaroid group vice president succeeds Ronald Sommer, 45, who was president of Sony Corp. of America, and who was transferred to Europe to run Sony's troubled hardware operations there.
Laurence M. Zwain, 40, was named president of PepsiCo's KFC unit. He had been senior vice president of operations for KFC-International. He fills a job that had been vacant for the past year. The previous international president was Allan Huston, who left KFC to become president and CEO of Pizza Hut.
Your will is done. Chief Executive readers have nominated and a distinguished committed of peers-- all of them current or former CEOs-have confirmed Wayne Calloway of PepsiCo as 1991 Chief Executive I the Year. In this sixth year of the honor's existence the competition was the closest on record. As impressive as PepsiCo's 27.2 percent 10-year average annual return to shareholders, and its 14.6 percent compound annual growth rate in net income over 10 years are, financial performance was not the determining factor. (It never is.)
"Wayne demonstrates a capability to define a corporate strategy, to implement difficult restructuring, to pursue it aggressively, and finally to consistently generate significant returns," says Lockheed CEO and 1991 judge Dan Tellep.
"His single most outstanding achievement," according to another judge, Manufacturer Hanover's president Tom Johnson, "is his success against strong competition in the soft drink market." "In the food industry," adds former CS First Boston chief Bill Mayer, "you're always up against an extreme threat, but Calloway has improved PepsiCo's market share."
"PepsiCo and Calloway finish high on ay list of performance over the last several years," adds fellow selection committee member Jim Harvey, CEO of Transamerica. In this day of global competition, his peers regard him as a world class marketer who has actually done something many chief executives talk about but seldom do: wed the incentive of ownership-to everyone throughout the company - to strategy on a worldwide scale.
"l like the things he's done with the people in his organization, including implementing PepsiCo's unique sharepower plan," says committee member Bob Lear of Columbia Business School. "He's a real people person and very involved in his organization," says Dial Corp.'s John Teets.
Perhaps 1990 Chief Executive of the Year Heinz's Tony O'Reilly, summed it up best: "He's taken a very successful business, a market leader, and made it even more successful which is a very difficult thing to do. He's taken a business that was very clear beforehand and added value and personality to it. Coming after a major industry figure like Don Kendell, that's a real achievement."
Chief Executive salutes Wayne Calloway, 1991 Chief Executive of the Year
PepsiCo's Wayne Calloway inherited a strong, well-run global marketer of powerful brands. That was luck. He gave it sharper focus, greater attention to cost control, and most importantly pushed people forward with the power of ownership. That was ability. Beyond the placid country-boy manner lies a shrewd judge of character who leads by indirection.
Frito-Lay CEO Roger Enrico, formerly the Norman Schwarzkopf of the cola wars of the 1980s when he ran Pepsi-Cola, re€' members the nervousness he felt when he sat down to tell his boss that Michael Jackson wanted S10 million instead of $5 million to re-enlist as a Pepsi promoter. 'I told him it was an outrageous amount of money, but that it looked to me like a good idea and we ought to do it," recalls Enrico. "Wayne just looked at me and said, 'Well, it sounds like a big idea to me,' and that was the end of that. Wayne works through decisions by dealing with his people."
Pizza Hut marketing director John Lauck got stuck with $5 million in sunglasses when a sales promotion tied to the launch of Back to the Future, Part 2 misfired badly. The result? Lauck was later promoted. Pizza Hut CEO Steve Reinemund told Tom Peters in On Achieving Excellence, "People here don't get shot for taking risks."
People make the difference. Politicians say it. Military officers (when they are not stumbling over compound acronyms say it. And CEOs, nodding like so many backseat auto kewpie say it. With massive downsizing (oops, "rightsizing") of U.S. corporations due to restructurings and a recession, why believe PepsoCo's chief executive anymore than the others? "His example gets us to act on it, not just talk about it," Enrico shoots back. Thenotion of employee empowerment, ever the buzzword of today's management high priests, is difficult to dismiss lightly even at this $18-billion soft drinks, snack foods and restaurants company with 308,174 employees-not when a Florida employee in personnel on her own initiative convinces her local school board to consider a Pizza Hut concession in the school's lunch program, or when a Mississippi Pepsi truck driver comes up with a money-saving scheme by using back roads to shave 100 miles off his delivery route. Then there's the Texaco executive, who in going out to dinner one evening, met a PepsiCo accountant, with no sales responsibilities, who talked the oilman into selling pizzas in Texaco's new European convenience stations.
Isolated anecdotes? Maybe. Yet in 1989 the Purchase, NY-based company offered to all eligible employees something that is normally reserved for the corner office types with blue suits and snappy red ties: stock options. Sharepower is a Calloway brainchild that almost didn't happen. "The lawyers and many at corporate headquarters were dubious because no one had ever done anything like this before," says PepsiCo VP compensation and benefits, Charles W. Rogers. (The number of options is based on employee's earnings; 83,175 employees participate today with 19.5 million options granted of which only 0.2 percent have been exercised. Dilution is not significant.) Share-power is being closely watched by other companies. "The plan is the best expression of fairness and internal consistency in employee incentives today," says Douglas Reid, SVP, human resources, Colgate-Palmolive.
The effects are often spontaneous: Oklahoma City KFC restaurant manager Ken Hardin scours local manufacturers for a more durable hot water hose that annually saves his store, and ultimately 12 others to whom he's passed the idea on, $600 per restaurant. Frito-Lay employees in Plano, TX start the workday checking PepsiCo's stock price in the financial pages. A senior corporate VP is taken aback when a secretary filling out his expenses asks, -Couldn't you have stayed at a less expensive hotel?"
"We want to change the way this company is managed," says the 55-yearold Elkin, NC-born CEO with a soft Blue Ridge accent. How does one do this in a company already enjoying 15 percent annual growth? Michael Jordan, CEO of Pepsico Foods International who has worked in the company for 17 years says, "It's much calmer today compared to the days of Don Kendall. Don was dynamic, always pulsating. Since 1986 (When Calloway became CEO) we focus on consistency - margin improvement as well as growth. Cost reduction was always important, but we're more consistent at it."
PepsiCo more than anything is a global marketing engine with eight turbo brands each generating more than $1 billion yearly at retail. Brand Pepsi exceeded $14 billion worldwide retail in 1990. Coke still dominates with 40.9 percent of the overall market versus Pepsi's 33.2 percent, nearly a two point gain since 1985, according to Beverage Digest. Each of its three business lines-soft drinks (37 percent), snack foods (28 percent), and restaurants (35 percent)-have managed double-digit sales growth and record operating profits. Frito-Lay, with which Pepsi-Cola merged in 1965 and which Calloway ran from 1976 to 1983, commands almost half the $12 billion salty snack market in the U.S. Use of hand-held computers by Frito-Lay's representatives allows increased distribution control and quicker line extension introductions.
Although the U.S. market will continue to dominate, the future lies beyond. International operating profits were 7.6 of the total in 1987, but will be 20 percent by 1992. Coke has a 2.5-to-1 lead over Pepsi due mostly to its being in Europe directly after the war. Pepsi plans to grow by building the category and taking share from lesser players. Coke's formidable distribution system in Europe, now extended throughout Germany, will assure its supremacy there unless Coke does something really stupid. Yet Pepsi's early lead in the Soviet Union, pioneered by predecessor Don Kendall, and its presence in India, as well as recent acquisitions in Mexico, should keep the folks in Atlanta from being too smug.
Although he came up through finance (as he did earlier with ITT under Harold Geneen) Calloway sees PepsiCo's challenge in choosing "the right people." "He's a mentor and cheerleader to these guys," says John Nelson, analyst with Brown Brothers Harriman, "and generous enough to pass along plenty of the credit." Nelson sees the stock growing 16 percent versus the S&P 500's 7-8 percent over the next three to five years. However relentlessly upbeat, the company faces acute challenges in such areas as its fountain wars with Coca-Cola, where Coke argues to restaurant customers that buying Pepsi's syrup funds competing PepsiCo restaurants. Burger King's switch to Coke represented a loss of Pepsi's biggest fountain customer. Snack profit declined 4 percent overall and 12 percent internationally in the first quarter of 1991 due to price cutting, a troubling sign since snack food profit hasn't seen a decline since 1986.
CE caught up with 1991's Chief Executive of the Year in his Westchester NY, headquarters office overlooking PepsiCo's famous and beautiful landscaped sculpture garden.
Since PepsiCo doesn't participate in rapid growth industries with favorable demographic trends in its favor, how long do you think PepsiCo can continue to be such a terrific cash machine?
First of all, I have to disagree somewhat with the premise that we aren't in a growth industry. Last year, people said that restaurants had a bad year. Actually, the restaurant industry in the U.S. grew about six percent. Packaged goods companies, at least, would think that is terrific.
And if you look back at the history of the soft drink business and the snack food business, they've both averaged four or five percent growth as well. So, compared to most packaged goods businesses, we're in very good businesses for growth. We've doubled our business every five years for 25 years since PepsiCo was formed in 1965. So we expect to continue that for at least another 25 years. We don't see any reason we couldn't. The market will grow. Since we are market leaders in our business, we expect to get more of our share of that growth.
We also have to look at the international marketplace. Much of the world, as you know, is underdeveloped. The U.S. still represents the bulk of our business. Even in a developed country such as Canada, the consumption of soft drinks is considerably less than in the U.S. And the U.K. would be half the U.S. In India, someone will drink in a year what an American would drink in soft drinks on a weekend. So, we have an enormous growth potential all around the world, and that's true now with soft drinks as well as pizza or chicken or snacks.
BUILDING A BETTER BRAND
There are a lot of firms that are very good at marketing consumer products. What do you have that sets you apart from what other people do?
One is that we have outstanding people. I'm sure you hear that from a lot of CEOs, but I think it's clearly true in our case. We work hard at that. So we have an outstanding group of associates at PepsiCo around the world, and a culture that says, take this, he hold.
Our second strength, which is evident, is our strong brands. We have 25 brands that have sales over $100 million. We have enormous strength in that.
The third - and probably the most overlooked for PepsiCo's growth - is the fact that we are quite good at operating things. Generally, people think of us in terms of being a good marketing company. We do pretty well at that, but in addition, we know how to operate lots of businesses in a detailed manner.
For example, Pepsi-Cola has 10,000 sources. A normal packaged goods company-maybe a Kellogg or a General Mills-might have five or six hundred sources; we have 10,000. When you're operating 6,000 Pizza Hut restaurants in the U.S., a lot of little transactions add up to big numbers. That is a real strength that we have that most people don't realize.
That is a very sustainable competitive advantage, if you think, for instance, about out McDonald's. They're not the largest hamburger chain in the world because they're the world's greatest hamburger. But they have very wide distribution, a large number of restaurants, they operate them very well, and they're clean. That is a strength that competitors have not been able to overcome.
Those operating skills are really critical for us, because we don't sell boxcars of anything-we don't sell million dollar orders or billion dollar orders. We sell one pizza at a time, one pack of potato chips at a time.
You continually emphasize the "power of big brands," brand building, and brand equity. But surely your chief soft drink rival has a brand that is every bit as formidable, and some would argue is even more formidable, than any product made anywhere in the world. If your emphasis is becoming a brand company and you're up against the world's biggest, most powerful brand, is this going to be enough to win at the end of the game?
Coke clearly does have the world's strongest brand, and that's recognized by everybody. hat's why they have a great company. So, in our case, that shows we have a great brand-among the top four or five in the world-because that gives us the strength to play against a brand as strong as Coke.
The good news for all of us is that the soft drink business is so huge, and it's growing around the world at tremendous rates. There's plenty of room for both of us. The beverage business is not a zero sum game.
In fact, one of the reasons we've done very well is that there really is a cola war, so we both keep each other on our toes. Nobody's going to sleep in the beverage business, because it's so competitive. And so as a result of that, you're constantly seeing innovations and improvements in the business.
Speaking of the cola war, PepsiCo lost Burger King and Wendy's to Coke last year, but it won from Coke Marriott and Howard Johnson. Will we continue to see a titanic struggle for distribution control where points of sale are lost back and forth like so many pawns and knights?
Oh, certainly. As I said, the cola war is real. Every time we get one of their customers they're going to try to get back, and every time they get one of ours, we're going to try to get back. So, that will continue. It keeps everybody sharp.
Considering that Pepsi has 15 percent of the share of the international market versus Coke's 46 percent, how is Pepsi going to narrow that market share gap?
The international market is so huge and it's growing so fast that it is not a zero sum game. There's plenty of room for Coke to grow very well and for Pepsi to grow quite rapidly as well. It's not a question of, do we have to take share from them or they have to take share from us?
The underdevelopment in all of those markets is so astounding that as they are rapidly developing, they are rapidly picking up the habits of soft drink consumption that we have in the U.S. So we can certainly grow our business at an accelerated rate, and certainly, Coke will as well. I don't think that either one of us is going to worry much about market share. But Coke has said on many occasions that the name of the game is growing the market, really raising our market share, and that's exactly what we're both going to do.
DISTRIBUTION HITS THE SPOT
What sort of things do you pay special attention to in the international marketplace that might not receive the same consideration in the domestic operation?
In many of the international markets, the real issue is distribution and having the product available. One of the great things about this country is that almost anywhere you go, a Pepsi is available through a vending machine or fountain. That's the real drive in international marketing.
How will the role of snack foods and restaurants be advanced in the international markets?
We have enormous opportunity in the restaurant side of this business. We're in about 60 countries now with Pizza Hut and we have almost the same number of Kentucky Fried Chicken. That relates to 150 countries we're in with Pepsi. So we have a lot of opportunity with geographic distribution. And again, the development is far behind the U.S. We have 6000 Pizza Huts in the U.S., and we have two in Brazil. That's quite a big spread here that we can develop. The same is true in the snack business. Frito-Lay is in about 27 countries now, and we'll be in three or four times that number before it's all over.
We've more than quadrupled our investment in the international markets outside the U.S. over the last four years. We'll do that again, I suspect, in the next four or five years as well. We have enormous potential in restaurants and snack foods as well as beverages in the international scene. That's why we're very comfortable about continuing to grow.
In each of your three principal businesses, it appears that PepsiCo is modifying or reorganizing the distribution system. Are we approaching the day of perhaps even eliminating the middleman?
If you look at our business over the years, like everything else, it changes. If you went back 20 years ago, Coke and Pepsi would have had maybe 500 bottlers apiece in the U.S., built on a franchise system. As the world changed, as the supermarkets got more regional, as the cost pressures began to get much tougher over the years, that began to force a restructuring of the business. So certainly PepsiCo had to participate in the restructuring. The net result of that today is that Pepsi-Cola owns and operates about half of all the bottling themselves. It's likely to continue consolidating, but at a slower pace than it has been happening.
We won't live to see the day that we're going to control all of that distribution. We're going to always have partners ultimately getting to the consumer. Now, that doesn't mean that we don't have our eyes on the consumer. But we also better have in our mind that getting from the manufacturer to the consumer, there is a partnership in there in many of those cases that will be a retailer or wholesaler, restaurant operator or bowling alley operator, or whatever the case may be. Ultimately, the consumer is the customer. That's why brands are so important, because the ultimate customer is the one that consumes the product. If they have in their mind that this brand is better than that brand or no brand, then that is where you begin to have a viable business transaction. That will help you get through the distribution system in a partnership.
In the age of micro-marketing, allowing ever-greater customization of products, do you anticipate making soft drinks or potato chips or foods that are so customized that you can almost customize it to one brand per family?
That would be difficult. On the other hand, if that's ultimately what the customer wants, you can bet your boots that's what we'll be doing, because whether we like it or not, the customer is king. We aren't down yet exactly to the household, but if you pick any supermarket in the country, we have an idea of the demographics around that one supermarket, what the income is, whether there are 30,000 people or 40,000 people within three miles, what ethnic background that might be, and whether they would like a hot flavor or not so hot flavor or whatever their preferences might be. How far that kind of micro-marketing is going, we don't know, but we want to be out in front of it, not behind it.
You have extended a lot of your brands-made variations of them-as have other companies. Just how long can you keep extending a brand?
The elasticity of the brand is a subject that is very important, and it is something for which your information system has to be very well developed. You have to listen again to the consumer. When you see that you're not getting the incremental sales, that one extension is pulling from one extension, then you have to be sensitive enough to say, maybe it's time to pull back.
On the other hand, the drive to get to every individual consumer is still there. One consumer wants sour cream and onion, and somebody else wants barbecue, and somebody else wants banana, and somebody else wants whatever. You constantly have to keep testing that limit. But you'd better do it very carefully, because there will come some point
I was wrong on pizza," admits Mort Fleischer. He thought the local competition would be too strong for a national franchise chain such as Pizza Hut. Now we all know better and Fleischer himself, through his Franchise Financial Corporation of America (FFCA), bankrolls new Pizza Huts.
Despite his pizza misjudgment, the Scottsdale, Ariz.-based financier has generally been right about fast food franchises over the last decade. Founded in 1980, FFCA is now the major financing source in the industry, leasing over 1,200 fast food franchises with every major chain in America, except McDonald's. In 1989, FFCA distributed $116 million on the $900 million investment of 120,000 limited partners.
"Fast food," says Fleischer, "is the backbone of the firm's credit line. It's not something bankers or S&Ls understand." When he started FFCA in 1980, Fleischer perceived a "vacuum" in franchise financing and decided to fill it with a specialized operation that would back operations by picking locations with high real estate value. "My goal was to establish the necessary infrastructure."
Aligning good franchise locations with proven management has, Fleischer claims, resulted in steady growth with only a 2 percent average failure rate for FFCA. What the approved client gets is a fully equipped and leased fast food franchise. What the client pays FFCA is 12.5 percent of FFCA's investment or 8 percent of sales, whichever is bigger. The payments are deducted automatically from the franchise's bank account.
In 1980, when Fleischer started FFCA, 90 percent of the franchises he financed were new and 10 percent were existing. By 1990, these figures have been exactly reversed. Also changed is the typical franchisee: The era of the mom and pop single-unit enterprise has given way to multi-franchise operations using efficient management techniques. Fleischer believes 50- to 100-unit franchise owners will become the norm. In the meantime, FFCA is looking for new franchise ideas, and is already promoting an interstate truck stop called Flying J Travel Plazas -having luckily avoided Jiffy Lube. Fleischer, 53, tried clothing, sporting goods, insurance, M&A, real estate, and coal mining before he came up with FFCA. Today he dines at The Four Seasons, not Arby's.
You have spoken. Chief Executive readers have nominated, and a panel of peers has confirmed, Donald E. Petersen of Ford Motor Company as this year's Chief Executive of the Year. As Ford celebrates s its third consecutive year of record profits, a 26.5 percent return on stockholders' equity in 1988 (twice the average for Fortune 500 companies), and according to Salomon Brothers, a U.S. auto market share high of 24.2 percent, the selection committee unanimously selects Petersen as its choice.
Committee member Maurice Greenberg, CEO of American International Group, summed up the decision: "Under Don Petersen's leadership, Ford has been outstanding in the key measures of business success: financial performance, effective marketing, product innovation, and quality, and customer service."
For building on predecessor Philip Caldwell's recovery, improving on Ford's product quality and emphasizing employee involvement at all levels, Petersen has, in the judges' eyes, significantly advanced Ford as a world-class competitive company. "He's taken autocracy and turned it into teamwork," says last year's Chief Executive of the Year Bill Marriott, CEO of Marriott Corp. "He's made us realize that we can compete internationally, and has returned pride to U.S. business," says First Boston's Peter Buchanan. "He's faced what many thought was an insurmountable challenge and done a superior job," says Public Service of New Mexico's Jerry Geist. "There are few CEOs who could have done as good a job," adds Wharton's Dean Russell Palmer. "We are recognizing him for his sustained success," says Columbia Business School's Robert Lear. "In an age in which people continuously whine about competing with the Japanese," says fellow judge Charles Sanford, CEO of Bankers Trust, "Don Petersen does not."
Chief Executive magazine salutes Donald E. Petersen, 1989 Chief Executive of the Year
If conflict makes interesting history and peace a poor read, the cataclysm within the automobile industry during the last 10 years offers choice lessons for CEOs and economic historians alike. Not least among them is the role Ford Motor Company's CEO, Donald E. Petersen - this year's Chief Executive of the Year - played during what must be viewed as an unfinished drama. The company's back-to-basics rebirth and emphasis on product quality is well documented. In retrospect the recovery almost seems mundane, if not self-evident, were it not for the fact that Ford is fundamentally a different organization today that when it began its odyssey in 1979.
Much of what is written about corporate restructuring focuses on business strategy and technology. Both are important, but Ford's comeback illustrates that neither is decisive. Napoleon, a consummate strategist, said that in war, morale is everything. His adversary, the Duke of Wellington, conceded the point allowing that the Emperor's "hat (on the battlefield) was worth 40,000 men." Through he cuts more of a scholarly than material figure, Petersen realized early on that Ford would achieve nothing if the troops had no stake in the outcome and were not empowered to act.
Reynolds Metal's CEO William Bourke, a former career Ford executive and possibl ival for the top spot (he maintains that Henry Ford II promised him the job more than once), says Petersen "introduced to ford ideas it needed badly, such as democracy and more people involvement. He's very sensitive to people." Donald Frey, ex-CEO of Bell & Howell and former Ford product planning chief who was once Petersen's boss, says, "Don understands the product, that's his real strength." Unlike the bean counters, "he knows why they're in business," Frey adds. "Cooperation and team work are the cornerstone of his company," says James Stover, CEO of Eaton Corp., a major supplier and close observer of Ford.
Consider the contrast between Ford and GM in meeting the same competitive threat. G spent billions on technology focusing internally on the company; Ford spend billions on training and technology focusing externally on the customer.
Petersen says his leadership style is based on three guiding principles: having concern and respect for workers, focusing on customer desires and striving for continuous improvement. Those who know him describe him as quiet and extremely intelligent (he's a member of Mensa, the high-IQ organization). Nicknamed "Cobra" earlier in his career due to his habit them of waiting for others to hang themselves on a serious issue verbally before pouncing, Petersen today is said to be a sensitive but confident leader who is quick to credit others.
Leadership and the company's mission and values - summarized on laminated three-by-five cards that every Ford employee is expected to carry around - can go only so far in getting 360,000 people worldwide to change. Don't discount Ford's near-death experience. While the public's attention was riveted on Chrysler's EKG a decade ago, observers wondered if Congress was bailing out the wrong company. Ford's working capital dropped alarmingly from $2.3 billion in 1979 to $237 million in 1981 - a tenfold drop in two years. Its 1981 car market share slid to a historic low of 16.6 percent. It was the highest-cost producer with the lowest reputation for quality. To many hapless owners then, Ford meant "Fix or Repair Daily" or "Found on Roadside Dead". Like the British army after Dunkirk, Ford was demoralized, exhausted and ready to try something different.
The Taurus / Sable project, which made headlines, proved significant not for the car itself - as sexy as it was - but because it represented a "new" car-making process for Ford altogether. Nothing was put to paper before massive customer research had been conducted. The time-honored sequential method of new car development was replaced by a team approach. In working together from the start, designers, engineers, production planners and marketers are forced to abandon turf considerations in favor of product integrity. The basic notion of quality was also overhauled. Petersen invited W. Edwards Deming, whose statistical control techniques the Japanese long ago adapted, to help. Plastic Engineering Corp.'s president D. D. Bergmoser credits Petersen with "doing a lot more in the adoption of Deming's, Taguchi's and Juran's methods, including employee involvement, that any other U.S. CEO."
Independent surveys show that Detroit product quality has improved enormously. But foreign nameplates have also improved. J. D. Power & Assoc. reckons that a 20-to-30 percent quality gap persists between Detroit and Japan, but by the mid-1990s this will close. The cost gap is already closing. In the early 1, it averaged 1980s, it averaged $1,500 to $2,000 per car. In 1988, with 129 yen / dollar, a Japanese Tempo-sized import had a $300 advantage over a Ford Tempo. Ford assumes that by 1993 and 108 yen / dollar, a U.S. Tempo would have a $1,300 advantage over a Tempo-sized Japanese import. (Transplant factories, which assemble in the U.S., might make this difference moot.)
Last year, the company's worldwide earnings reached an all-time high of $5.8 billion - Ford's third consecutive year of record profits and the highest ever for an auto company. The 1990s could be very different for Ford. Overcapacity looms. GM may yet put itself in full combat readiness with its GM10 cars and possibly Saturn. Toyota, Honda and other foreign nameplates that Ford must beat in world markets, also strive for "continuous improvement".
Furman Selz's vice president Maryann Keller, who gives Ford high praise for "producing successful cars", says it "doesn't have world-class engines. Detroit is three to four years behind Japan in power trains and it remains to be seen whether Ford's current spending will overcome that." Merrill Lynch's Harvey Heinbach agrees. "Ford is going to multiple valve at a time when the Japanese are developing variable valve engines."
David Cole, director of automotive studies at the university of Michigan, sees four key areas of competitive differentiation in the 1990s:
- Lead time. The ability to bring product to market quickly. At the end of the next decade, it could be as short as one year.
- Total selling and service experience. When all makers make quality cars, customers will buy from dealers that satisfy other, subjective needs.
- Style. Like fashion, style isn't just how the car looks, but how it feels when "wearing" it.
- Technology. This may be difficult to quantify. Anti-lock brake systems offer definite competitive advantage. On the other hand, talking dashboards proved a dud. Understanding how customers value technology will be critical.
Petersen's actions over the next two-and-a-half years before he retires will determine if Ford can meet these challenges and become world champion. Competitors weren't surprised upon learning of his selection as Chief Executive of the Year. "He has led Ford to new levels of achievement because he is such an able competitor, he has helped to keep us at GM sharp," said GM chairman Roger Smith. "We wish Don continued - but limited - success." Chrysler chief Lee Iacocca says, "The fact that he took over a company in much the same shape as Chrysler in the early €˜80s and turned it around into a well-oiled machine is proof of his managerial abilities." And from Honda North America's president Tetsuo Chino: "A company's success or failure reflects the quality of leadership. The success of Ford in an increasingly competitive environment indicates good leadership." CE editor J. P. Donlon talked with Petersen in his Dearborn office recently about Ford's challenges.
Ford's emphasis on product quality, employee involvement, and getting rid of its former autocratic managerial style as contributing factors to its dramatic turnaround are well documented, but in retrospect, how did you ensure that these changes and other things that you had planned would actually take effect?
Perhaps the single most important thing I had to do was get out and around, join in discussion of groups that were trying to figure out what we had to do to pull ourselves back together. That includes discussions with management groups as well as spending quite a bit of time with non-management groups, both salaried and hourly, to get a sense of what people are thinking about. That led to the development of our values and guiding principles.
I came to the job of president, and later chairman, with the strong opinion that we did not do a good job at Ford of permitting much participation in the management process. I had seen evidence of how you stifle people when you lay down a lot of rules.
How much of Ford's recovery do you attribute to Ford's direct actions versus luck, such as the favorable yen-dollar relationship and the fact that GM stumbled more that anyone could have supposed at that time?
We benefited substantially once the yen-dollar relationship finally broke in 1985, but I think the extent to which we could have taken advantage of circumstances would have been severely limited if we had not successfully started to regain our reputation.
I don't think it makes too much difference how good he environment is it you don't have the customers who like what you are producing and see it as a real value. We did have severe problems as far as our reputation was concerned and that was reflected by how sharply our share of the market was dropping in the early €˜80s. Put it this way: We would have recovered, and reasonably well, but the fact that we have now been able to come back from 16 percent of the market to roughly 25 percent in a very short number of years is significant. We are trying to spread through our company the idea of being customer driven in everything we do and making quality the number one priority.
If we have something that is really sound and lasting, then the next actions that you see coming from Ford will continue to be successful. If you go through all the segments of Ford production, whether it's a car or a truck, you will find that we have a very broad base of customer acceptance.
We know we are serving customers well because they are responding. Keeping our minds focused on the customers should continue to serve us well. Maybe the rate of improvement will vary from time to time, depending on whether somebody else is stumbling, but the improvements should be there.
In terms of manufacturing efficiency and labor productivity, how does Ford rank in relation to other global competitors, and how do you measure this?
We tend to use the number of employee hours required to build a product, thereby getting rid of exchange rate problems and things of that nature. We believe that we're as efficient in the U.S. as we are in Europe, on the continent. We are not as efficient in Britain. We've made vast amounts of progress that we never dared to dream about in Britain, but it's still lagging. We are the most efficient producer of the domestic manufacturers.
Including the transplants?
Transplants are hard to measure because they are essentially assemblers. You have a mixed bag, a manufacturing base that's all around Asia, and then final assembly here. But if you take it in pieces, we are the most efficient full manufacturer in this country. We are as efficient as the best in Europe and we're equal to many of the Japanese, but we're not as good as the best. So we have a couple of rabbits we are chasing.
Which rabbit, specifically, are you chasing?
The one that I think the most important in this efficiency sense is Toyota. Because they are a full line producer - a complex line, high-volume producer. So they have a lot of the same ingredients as us, whereas Honda, a very different efficient company and one of the achievers in the world's auto industry, is narrow in scope and therefore more controllable.
How much of your improvement and efficiency do you attribute to high-tec new wave automation techniques?
Starting with the Taurus, technology is getting to be a more important factor. We feel ready now to bring more technology into out new programs. One of the worst things you can do is to try to go too fast with technology. In the Taurus case, in assembly, any Taurus plant has the capability of assembling 26 percent more volume than the preceding products they were manufacturing. We have put a lot of new technology in our plants, and it was directly a [part of getting that 26 percent improvement. So with the Taurus programs and the subsequent programs - the Continental, the Probe - technology is now coming there more and more.
And we see an increasing number of pilots in all sorts of places throughout our system. Once a pilot proves effective, then we embed it right into the next logical programs where we can.
Despite great strides in product quality, there continues to be a 20 to 30 percent gap between Detroit product quality and the best of foreign car manufacturers. When will Ford be able to close this gap and how will it do it?
It's hard to put a year on it. We are closing the gap. They typical automobile being make available to world customers is on a rapidly improving quality trends so that a 30 percent difference today, in terms of the customers' view of quality, is a much smaller factor that a 30 percent difference of, say, ten years ago.
There is also a conviction that the continuous improvement from this point will have to be more heavily process driven. Meaning, we've done as well as we know how to do with our existing approaches, and so we spending a lot of time breaking down the whole thought process of how we do things and identifying some of the vital things that we have to change and simplify if we are going to make meaningful continues progress in the future.
Can you share any insights on this?
You must do a much better job in the early work that you do, such as design and conceptual thinking. You can't be sloppy about what your customers are going to want. Generalities don't help the technical person a whole lot. So there is a whole concept called "quality functional deployment".
This is a highly disciplined way of identifying what you want to put into the design of a particular part of the product and determining if it is going to function and behave the way you want it to function for the customer once it is all put together.
How does that balance against speed-based competition - the need to get the new concepts and the manufactured products in less time?
You need up-front work to do the speed-based implementation. Much of the up-front work can be advanced work; it doesn't have to be identified with the end product. The Japanese have always done a much more complete job of research and advanced work than we have. I can remember when seeing their engine prototypes, they apologized, saying, "This is only a prototype."
Let's talk about the future. Presuming Ford closes the quality gap with foreign producers, what will be the primary areas of competitive differentiation among global carmakers? How is Ford gearing itself today to be on the top when that time comes?
The primary difference in my mind is the degree of customer appeal that you succeed in getting into your product and the perceived value that you are offering the customer in that product. It is critically important with consumer products to grab the emotions of the individual, to have the customer say, "I love that product, I love everything about it, the way it looks, the way it feels, the way it operates and drives, I've had it for a year and nothing has gone wrong, and it was just a remarkable value for what I paid." Now how do you get that? You've got to be customer driven. You must be the best there is at knowing what the customer wants. We think one of our competitive advantages is that we have fond ways of tuning into what customers want. We are discovering that our early judgments are proving to be accurate.
Are you satisfied that you are better in this one area than Honda or Toyota?
No. I think we are every bit as good in that respect. One of the most meaningful advantages we have in competing with the very best is that we are an American company. By that I mean that we have the opportunity to put to work the ingenuity, creativity and initiative that our free generates in each of us as Americans. That's part of the way we function and we take it for granted. We can build that into all the pluses that exist in the teamwork concept and have a far more dynamic, far more creative process to work with toward that end result.
Surely this "Americanness" can only be a competitive advantage if you also succeed in reducing lead times.
Yes, I agree.
Where are you now, and where do you think you ought to be in the mid- 1990s?
We have a substantial chunk of time we have to take out of our total process and we have been hard at work coming up with the best ways to do that now for several years. I have mentioned that the up-front work is a key element in that.
Another thing that we are working to improve substantially is the quality of each decision from the beginning all the way through the process. In the past, if there were a checkpoint, let's say, where a series of things was to have been accomplished, things in fact were often not completed so that as the process continued from that point forward people were still scrambling to do those things at the same time that they try to do what's on the plate now.
What are the other key points of competitive differentiation?
Quality is one and another is efficiency, which feeds into value, and feeds into working. Our goal is to build the best quality products in the world and have the world acknowledge that we do We are not there yet.
Why are the Japanese still ahead?
We think process improvement is the key to quality They have some processes that are ahead of us in terms of quality. And then quality and efficiency go together. It's hard to peel them apart.
Which overseas markets offer the most opportunity for Ford during the 1990s and how will Ford create a local competitive advantage in each?
Ford-Europe must continue to work hard to sustain its strong position in Britain That's a must. It's an anchor for Ford Motor Company of Europe. However, in terms of 1992, it is going to be increasingly important to have a broad base of strength. That means we need to strengthen our position in Southern Europe.
I would even include France.
What will Ford be doing to ensure that when 1992 rolls around, and presuming the Japanese are inside that market as they hope to be, it will still be top dog?
The fundamental actions that Ford-Europe must take are precisely the ones we have already discussed. We are introducing a new Fiesta, which is a B class size car, and the Escort is on the horizon Across all the markets of our products, including the smaller-sized products, we have taken a leading role. That gives us the opportunity to have strong products to work with to strengthen our position in Southern Europe.
There is an expected decline in car and truck sales in Europe in the next several years. Do you expect Europe to become a far more difficult market for Ford over the next few years?
Europe is a much less volatile market than America, perhaps because of the number of countries involved. There has been remarkable growth. In the last several years people predicted a falloff but it went up again. So our people don't see a substantla1 falloff in the near term.
How about Latin America and Asia Pacific?
Latin America depends on whether its major economies can get governments to function with some degree of efficiency. I think we're in the best possible position to take advantage of any improvement that occurs. Autolatina will undoubtedly make us the low-cost producer.
We haw proved to everyone's satisfaction that Ford and Volkswagen can indeed work compatibly. We have excellent opportunities for rationalizing the product lines and the manufacturing so we'll do better than anybody else does.
Now in Asia, there are the island countries, and then there is the mainland. By far the most rapidly growing Island country is Taiwan and fortunately, we are in the number one position there. We are doing just fine in Southeast Asia. That is almost a market all its own: it doesn't link particularly well with the rest of Asia.
The biggest question is, "When will meaningful markets begin to be there?" If you take a long-term view, the potential is extraordinary.
When do you think there will be a meaningful market there?
I think at this stage it's still a long way out there before it is going to be meaningful, but at the same time, I think it's desirable to find new ways to become active.
Environmental considerations will almost certainly prod the government to raise mandatory fuel economy and emissions standards. Wow is Ford going to deal with this rising concern?
We would love to put more emphasis on alternate fuels and what we call flexible fuel vehicles. We know how to build an automobile that will run on methanol or ethanol. We can run cars on natural gas too, but that is relatively inefficient.
The Japanese are already testing turbine car engines with ceramic matrix composite parts. Isuzu is projecting the production of one next year. Toyota plans an all-ceramic diesel by the early 1990s. What technological breakthroughs can we expect from Ford and when?
Ford is also developing a ceramic diesel engine, but in my view, electronics in many different forms is going to be the prime driver of change in the nature of the automobile. This will happen in manufacturing, of course. The consumer will see it only in terms of the inherent quality of the products you can build, the improvements in efficiency and cheaper prices.
People are going to find they are more delighted with the product and they won't even need to know why. Cars are going to be so quiet and smooth running. They will have wonderful acceleration, ride and handling, and the steering will be as if somehow the car knew what you wanted it to do.
What advice would you give CEOs of other U.S. firms which, like Ford, have had to face stiff global competition, but may not have had Ford's resources to overcome the challenge?
First, recognize that most of the improvement is up to you to achieve. You can be diverted in unfortunate ways if you permit yourself to blame government or other external factors. The motivation of the people involved is by far the single most important element of being successful and getting a job done.
Our company has been international in one way or another throughout its history. Over its first 80 years, Ford developed into one of the most successful multinationals in the business, forming discrete, often self-contained companies in various centers of economic activity. In its time, this arrangement worked well for us.
The new globalism, however, has brought Ford into competition at home and around the world with as many as 40 automotive manufacturers, turning out vehicles, parts and components in as many as 40 countires and territories. New manufacturers, seemingly with ever-lower cost bases, are sprouting up every day. It's a whole new ball game.
To serve all of our markets cornpetitively, we've had to adopt a more global way of doing business. That's not easy for a big, successful multinational. For one thing, we've had to stop thinking like a group of isolated units and start thinking like one company with a wealth of international capability.
Here's an illustration. In the past, it was our practice, generally, to develop products separately for different markets. Now, we apply the "centers of responsibility" concept. If we plan, say, a new Tempo-sized car for the U.S. market and a similar-sized car for the European market, we'll design and engineer it once. The U.S. car and the European car may ultimately look different and have different features.
"Bill is one of the best chief executives I've met in my business career," says Ryder System's Tony Burns, who earns top marks as a CEO himself. "He's built a tradition of quality and high integrity," says Anheuser Busch's August Busch. "Bill may be mild mannered, but he's thoughtful and pays great attention to details." "He's a tireless executive," observes Giant Food CEO Israel Cohen. "He spends 75 percent of his time on the business, 25 percent on his family and 25 percent on his church and community, which adds up to 125 percent, so I don't know how he does it." Such is the stature of J. Willard "Bill" Marriott Jr. among his peers. It's difficult to get those CEOs who know him or who are acquainted with Marriott Corporation to comment critically. Even his competitors greatly admire him. "He's an appropriate choice for Chief Executive of the Year," says Holiday Corp.'s Michael D. Rose. "While they seem to have a penchant for following our lead in segmenting their hotel business, their execution has been very aggressive." Hilton's Barron Hilton: "Bill Marriott runs a very professional and competitive organization. His considerable success speaks for itself." "I've been to a lot of his hotels and he's not flawless," sniffs Pillsbury's William Spoor, "but if you look at the record of earnings and growth, he's put it all together and that's what counts."
Essentially an open, informal man, Bill Marriott, 56, is self-effacing for an American chief executive. He travels over 200,000 miles a year to visit Marriott hotels and restaurants worldwide, periodically shaking hands with waiters and chambermaids.
Peter Drucker once observed that the reason many U.S. corporations lost their way during the 1970s and early €˜80s was due to professional managers who never had the gestalt of the business they were running. This is not the case with Bill Marriott. "I've been hanging around restaurants all my life," he says.
After serving in a number of capacities in his father's Hot Shoppes restaurant chain (which began as a nine-stool, five cent root beer stand in 1927) throughout his high school and college years, he joined the company full time in 1956. By then, he and his brother Richard, who is equally involved in the family business, had absorbed what management consultants are fond of calling €˜company culture'. Young Marriott didn't know this at the time. What he did know were the values of his hard working, devout Mormon parents, who neither drank nor smoked and who donated 10 percent of their income to the church. Marriott's wife, Donna, once said, "We belong to a church that believes in work. This is what Bill's dad grew up with - the principle of hard work."
Marriott - then and now - is essentially a family business. With over $6.5 billion in annual sales, and 4,000 units with operations and franchises in 24 countries developing $1 billion of real estate each year, the company is run somewhat like a chemical or oil refining operation. Services are treated like a process system. Every procedure, from folding linens, making up rooms - there are 66 prescribed steps - to food preparation is strictly controlled. Menus are tested and do not vary. Woe to the chef who introduces unapproved recipes.
Growing up in the restaurant business helps. "I can tell by walking through a dining room whether people (like the) food on their plates or are waiting to have their water glasses filled," says Marriott. "I check to see whether the food is being prepared properly and whether it's being picked up from the kitchen as fast as it should."
It's a principle that's worked. Company sales and earnings have doubled over the past four years. Net income has increased at a compound rate of 20 percent since 1968. Return on equity has remained above 20 percent since 1980. It's occupancy rate of 77 percent is higher than the industry average.
Turbulence in the airline industry, which has hurt in-flight catering and outdated franchise agreements, resulted in the underperformance in some restaurant chains, and has led to a minor reorganization of the company into two operating units. The lodging group, of which John H. Dasburg, 44, is president, includes 377 hotels with a total of 100,000 rooms. The service group, of which Francis "Butch" Cash, 46, is president, includes contract services, restaurants and the company's recently launched lifecare retirement communities. Despite airline industry problems, Marriott continues to lead in this market; Greyhound is number 2. Although resorts and hotels are the most visible signs of its presence, only a fourth of these are owned by Marriott. In fact, the success of its aggressive hotel expansion is due to its creative use of financial techniques where the properties are sold to partnerships and insurance companies, while retaining management contracts. This arrangement provides an investment or (previously) a tax shelter to the limited partner and to Marriott, a source of cash with which the company can develop other hotels. Marriott is very much a deal-oriented company.
Realizing the hotel business was rapidly becoming overbuilt, Marriott began to look for other segments of the business to venture into. Like Procter and Gamble, it uses extensive market research in its strategic planning. While its time consuming approach tends to signal intentions to competitors, Marriott's execution tends to be superior. In 1987, the acquisitions of Residence Inn, designed for the extended-stay customer, broadened its mid-price offering. Further down-market is Fairfield Inn, which debuted two units last year in Atlanta. Future growth is also pinned on lifecare communities, which incorporate retirement living with limited nursing care.
Not all efforts to diversify have worked. Marriott burned its tongue with gourmet foods, went nowhere with cruise ships and fizzled with theme parks, for reasons he explains in the interview that follows. Some also worry about its increasing leverage. "Essentially, it's a well managed company," says Noel Sloan, an analyst with London-based Kleinwort Grieveson, "but the balance sheet is not that pretty." Bill Marriott maintains that debt levels may be high, but prudent.
While having presided over impressive growth since he became chief executive in 1972, the boyish-looking Marriott nonetheless worries about maintaining the "extended family" character. However romantic, family enterprises tend to be fragile creatures, as the experiences of the Binghams of the Louisville Courier, the Revsons of Revlon and the Johnson brothers or Johnson & Johnson testify. What may overcome the tribulations that tear other family-dominated firms apart is the shared ethos - inherited from J. Willard Marriott Sr., summed up in the often repeated dictum: "Are we doing a good job for the customer?" With the company serving some five million customers a day, one sees the logic of the precept. In addition to generous profit sharing, the company offers job security and a training program that turns largely unskilled people into skilled workers. As CEO of Marriott Corp.'s chief rival Hyatt hotels (and one of the Chief Executive of the Year judges), Pat Foley is a knowledgeable critic of the company. "Bill has built an incredible degree of loyalty and purpose among his people," observes Foley. "It's getting to the point where we no longer bother trying to hire his general managers away because they won't leave!" Mathias J. DeVito, CEO of The Rouse Company agrees: "Bill has provided extraordinary leadership while expanding its operations without reducing its quality." Affable, if laconic, Marriott proved to be modest about his achievements during his conversation with CE.
Although Marriott's 10 years of solid earnings growth is noteworthy, you were nominated and ultimately chosen, in part because of your team building efforts. What do you do that makes your transference of skills, your team building, so different?
We've developed a climate of listening. The more I listen, the more effective I am; and the more my people will contribute to solving company problems. They know that I need their help, and that their ideas will be used. We are relatively open to all levels, but especially in the senior ranks of the company. I want to get everybody's input about operations and find out what's going on. To do this you must develop trust.
How do you listen in ways other chief executives may not?
Well, I try not to talk very much. Having attended gatherings where other CEOs are called upon to give reports, I've noticed that many speak in the first person. It can be interesting to hear them say, "I did this," "I did that." We tend to trip over our own egos a lot, because, I suppose, most of us fight so hard to get to the top.
How did you acquire or develop this listening ability?
I've always been reasonably sensitive. When somebody tells me that I'm not doing something right, I really want to hear why. Up until 10 years ago, I read every single letter that came into the office. Now we get 7,000 letters a year, and I answer 10.
Any person at any level within Marriott who feels he's not being treated fairly after seeing his supervisor and supervisor's boss can supposedly go directly to you. Does that really work?
I don't get very many of them, but I've had some. Somebody will come up to me and say, "You know, I didn't get a raise last month," and I'll review it. One woman approached me and said she was a cocktail waitress at the Marriott Marquis in New York. She complained that the shoes they were required to wear were too high. She said, "We can't walk in these shoes eight hours and not have our backs and legs in pain." I told the people there, "Get them some lower pumps, guys." If they're not comfortable, and if their backs ache, they're going to growl at our customers. If my people feel that I'm being fair with them, they attempt to do their best. If there's a rotten apple in the barrel, I hear about it. I have enough contacts around to know what's going on. If a general manager of a hotel or a vice-president of a company is very tough on his people, I hear about it.
But you are only one person and Marriott employs some 210,000. You can't be everywhere. Is there a formal system by which this works?
There is no formal system. It's values, it's beliefs. It's how you talk. It's how you feel and how you conduct yourself. A lot of people in this business and other businesses have not spent time with "the little people". I'll go through a company cafeteria and shake everyone's hand.
You are unusual in the lodging business in terms of the breadth of markets and the price range that you cover. How can you be certain the brand image isn't blurred in customer perception?
We conduct a lot of formal research and extensive focus group studies on Courtyard and Residence customers. People stay at the Residence for totally different reasons than at Courtyard. This particular strategic direction is more a result of necessity than invention. When we realized that we just couldn't add any more rooms to our traditional lodging capacity - we have seven or eight hotels each in Atlanta, Chicago and in Southern California - we ran out of markets. In asking ourselves, "What can we do to grow?" we had to look at other markets, specifically those at moderate prices. Our research showed that people wanted to pay $55 - $60 a night, but wanted a good, clean room. When the old properties servicing this market were built in the 1960s and early 1970s, many were made inexpensively. Most are noisy, drafty and aren't very clean. Many had been built with financial constraints. It owners couldn't afford to maintain the rooms and public areas, maybe they would put up a new rug in the lobby and get through the year.
Many were franchised. Some were run by doctors, lawyers, Indian chiefs - the whole works. In many cases there was no franchise control. Where our competition in this market had put money into restaurants and public rooms, we put it all into guest rooms.
Do you plan to change your strategy of syndicating hotel properties and securing management contracts to service them?
No, because it's working very well for us. We just sold out a Residence in syndication a couple of weeks ago. It sold in a few hours though Merrill Lynch! There is a market for real estate because people get a reasonable return on their investment in our hotel syndications. Many feel it's an appreciating asset.
Doesn't this limit your upper-profit potential? Shouldn't you know the true profit potential in lodging by this time?
It limits us on the upper-end, but it also limits us on the downside. We're really in the business of manufacturing hotels for sale. One result of our efforts to get good management contracts is the shedding of non-performing assets on the books. Public companies can't afford to own real estate. It's just not recognized as anything but a big dent on EPS, even if you have great cash flow. The market still does not value it despite your ROE.
Speaking of ROE, Marriott's 1987 annual report, unlike the previous nine, didn't reaffirm your goal of maintaining at least 20 percent annual returns. Can one infer that you no longer believe this is attainable?
It may be mathematically difficult. We've been at 20 percent or better for about 10 years. After a while, you become too big. It's also harder to do without inflation. Inflation back in 1979 was up around 10 percent. Now it's 4 percent, it's a different ballgame.
Yet Wal-Mart has phenomenal growth each year and it's larger than Marriott.
Sure, but they're not going to double their sales at this point. It's got to stop. A reasonable target for us lies in the high teens - probably 18 percent.
If one discounts asset sales and tax benefits, actual earnings would only be 10 percent instead of the usual 20 percent. Is the quality of Marriott's earnings declining?
No, the sale of assets is not a big percentage of earnings. It is a factor though, because when you manufacture hotels for sale, you should get two parts of the profit: one part should be what you receive as a syndicator, a developer or whatever, and the other part comes from the ongoing management contract. When you sell, you get a little bit from development which we pull in as part of our earnings. We'll own a hotel because we think there's going to be some great asset appreciation. We did that with the Santa Barbara Biltmore for which we paid $5.5 million - we put another $10 million into it. We had approximately $20 million invested by the time we sold it for $58 million - taking a $38 million capital gain on that one property. That hotel had 220 units, and if Izzy Sharp, (CEO) of the Four Seasons, wants to pay us $280,000 in earnings, he's welcome to buy the Santa Barbara Biltmore.
What about the benefits of the lower tax rate which puts a short-lived glow on earnings?
Our operating earnings are not going to be as high this year as they were in the last 10 years. But, remember, our tax rate is pretty high - around 46-48 percent. In fact, we got hurt in 1987 and the last quarter of €˜86 when Congress took away the investment tax credit at the end of the year. We ran without ITC all the way through 1987, and we got hit big in '86, when the ruling compelled us to go back and reinstate earnings. We can cost-cut our way to the bottom line, but that's not the way to get there or stay there.
Considering the premium you paid, what value do you bring to food service catering through Marriott's acquisition of Saga?
When we first approached them, Saga Corp.'s stock was selling for $124 a share; we ended up paying $130. When we got it, we sold about half the company - all the restaurants - and knocked our acquisition price in half. We got what we wanted - which was its school, college, hospital and healthcare business. We merged that with ours, as well as the small businesses we bought just prior to becoming the biggest payer in the industry. It gave us market coverage on both coasts, in fact, throughout all of the U.S.
You couldn't have done that on your own?
It just takes too long to get there. Saga was doing a very good job and, in my opinion, it was the Cadillac of the food service management business.
If they were the Cadillac, why did the Smithsonian trade it for another model?
I can say exactly why they withdrew. We had a lease with them, where we paid rent and made a good profit. They wanted to contract it out and pay someone $200,000 to run the place and get more money.
Owing to the high premiums normally charged people who are dubious about the prospects of lifecare, what will Marriott offer that's different?
It's a market and price-point problem. It's limited only if you build expensive lifecare for a very narrow market. We're building one for retired army officers and considering another for retired air-force officers. We'll probably build one in a major area such as Washington D.C. We've got a lot of loyal shareholders and others in the Washington area who know our company and would like to buy in. Long-term lifecare can cost less. It could be marketed either as a rental, a privately owned unit, such as a condominium or it could be tied in with what we call assisted living. This is for single people, who are not well enough to live alone and not sick enough to go to a nursing home.
How much will you be investing before it makes money?
That depends whether or not we go with a rental or an endowment arrangement. If we go with endowment, the investment will not be great. If we go with rental, we will figure out a way to syndicate it. We will keep the initial investment low. Lifecare resulted from six or seven years of strategic planning where we looked into a variety of different markets, such as housekeeping, healthcare and intensive care units in hospitals. We even looked at psychiatric hospitals and drug abuse centers. Demographics pointed us towards extended living.
What are you doing to improve your in-flight catering, which is your problem business?
International expansion. We're getting ready to move into Seoul, South Korea and we are working with the airport authorities in Osaka, Japan. Until the turmoil in domestic airlines settles down, we're going to have problems.
Where else is Marriott becoming more international?
Our move into Mexico is our answer to the guy who makes shoes in Taiwan with leather that's been produced in the U.S., and then has the shoes shipped back. In Mexico, the average wage is a dollar a day, versus five a day in the U.S. You can get a great room in Acapulco in the peak season for less that $100. That same room in Hawaii will cost you $300. We intend to service the foreign traveler that goes to Mexico.
What did you learn from your unsuccessful acquisitions, such as gourmet food, theme parks and others that didn't work out?
Our experience with theme parks taught us to stick with our knitting. To be in the business of theme parks, you've got to come up with an attraction every year. It's like being in the movie business. Every year you've got to make X amount of movies. To come up with new rides every year will cost us about $1.5 million. The third year it cost us four, five, even six million dollars. The money went back into that park every year. We were able to maintain attendance; not drive it, just own it. Furthermore, we couldn't build attendance because we were in Chicago, a northern climate, which only had three months of good weather a year.
Disney's building a $2.5 billion theme park in Paris; it'll probably end up costing $3 billion or more. You have to ask yourself, "Will that work in that kind of climate?" They've never done that before. They enjoy sunshine everywhere, except in Japan.
With the benefit of hindsight, is there one decision that you would most like to take back?
We had an opportunity to buy what later turned out to be the Hyatt Regency in Atlanta. We were about a $100 million company at the time, and had just opened a 500-room hotel in downtime Atlanta costing us $12 million. The hotel that became Hyatt Regency was available for $16 million. Our people went down there to look at it, and were convinced it wouldn't work; the atrium was too high, the elevators were exposed and the restaurants and kitchens were in the "wrong" places.
Did you ever tell (Hyatt CEO) Pat Foley this?
Oh yes. I even told John Portman, the architect who built it, and who later designed our Marquis hotels in Atlanta and New York. We should have bought it. My dad was afraid of the hotel business. His attitude was formed by what he saw during the 1930s when hotels failed in great numbers. He saw owning hotels as a high-debt, high-risk business, and hadn't figured on selling them off while retaining management contracts. While he wasn't opposed, he wasn't enthusiastic either.
Speaking of debt, Marriott's debt to equity has gone from 1.9 to 1, to 3.4 to 1. Why?
Although it may seem like a paradox, the fundamental reason that our debt-to-equity ratio has increased recently is because Marriott is so profitable. Let me explain.
First of all, our high profitability gives us ample and reliable cash flows, which, in turn, gives us the capacity to service higher levels of debt. We use a lot of debt in our capital structure because, up to a certain point, it is cheaper than equity. Second, high profitability translates into a stock price well above the book value. This is good news, but consider what happens to our balance sheet when we repurchase our stock, as we have been doing since he stock market crashed in October. When we repurchase a share for, say $30, our equity account drops by $30. That share was on our books for $6.82. You can see that any significant share repurchases quickly, drive our equity account below what it might otherwise have been. Because of these fundamentals, our debt / equity does not overly concern us. We look to our cash flows, not our balance sheet, as the source of our capacity to carry debt. Since those cash flows are solid, we are very comfortable with our debt position.
People describe you as being highly moral, a man of high values. How difficult is it serving both God and Mammon?
I'm active in the Mormon Church as president of our stake, which is like a diocese. Our stake has 3,500 members. I spend between 15 and 20 hours a week on church affairs. It may seem to be a conflict to others, but not to me. This business, my family and the church are my entire life. I love all three. It's a good thing my family works in the business, that way I get to see them. Seriously, I find time to attend my son's lacrosse games as well as attending to my church and CEO duties. It's my life.
"He's something of a superstar executive," says McDonnell-Douglas's CEO Sanford McDonnell. "He's personable, good looking and has a lot of drive and perseverance." "He's the classic example of the intense, hard-driving executive who demands performance and grinds it out," says Don Brandin, CEO of Boatman's Bancshares. "He's got an astounding ability to get things done," echoes Interco's Harvey Saligman. "Dynamic guy," quips Union Electric boss William Cornelius. "He exercises a high degree of personal control and gets good results because he wills it," observes Sara Lee Corporation's John Bryan.
Who is the object of this admiration? Lee Iacocca? Jack Welch? Walter Wriston during his heyday at Citicorp? No, it's Charles F. Knight, 51, chairman and chief executive of Emerson Electric, a $5 billion St. Louis-based manufacturer of electrical and electronic products. Twice nominated by Chief Executive readers as a finalist, "Chuck" Knight emerged the unanimous choice of this year's panel of judges to be the 1987 Chief Executive of the Year. The reason, as summed up by GM's Roger Smith, a panel member and last year's award recipient, "in this era Knight's performance is amazing." Without much fanfare Emerson has racked up 29 consecutive years of increased earnings per share (from 1956 to 1986 the growth rate averaged 12.1 percent), and 30 consecutive years of increased dividends per share - and this with an average return of stockholder's equity (17.1 to 20 percent over the last 10 years) well above Standard and Poor's 400.
But profits alone didn't assure Knight his laurels. "Consider the kinds of tough, unglamorous businesses he's operating," observes Robert W. Lear, a veteran judge. "Even good managers would have had to endure downswings due to the economy of foreign competition." "I've never met the guy," says another veteran judge, Patrick J. Foley, chairman and CEO of Hyatt Hotels, "but I couldn't help being impressed by such a sustained record of performance." In other words, the judges turned not to a household name, but to a professionals' professional.
Knight himself ascribes his success at Emerson to the "management process," a system of continuous, some might say relentless, planning, communication and control. Tall, with Frank Merriwell good looks, the former Cornell University football tight end is intense even when he's personable and socially charming.
Upon their first meeting, Interco's Harvey Saligman remembers, "He seemed to look right through me." August Busch, CEO of Anheauser-Busch and a longtime friend of Knight, responded when asked to sum up Knight in a few words, "Homework, hard work and involvement."
This drivenness has been a hallmark of Knight's business career. Two years after he earned his MBA at Cornell - in 1961 - he joined his father's engineering consulting firm, Lester B. Knight & Associates in Chicago. His father trained him hard and hoped ultimately that his son would take over the firm. Several years later, Knight and a number of key executives did just that. With 80 percent control, young Knight was on his way to expanding the practice. One of its clients was Emerson Electric (no relation to Emerson Radio), an old-line manufacturer of motors, components and a defense contractor. Emerson was led at the time by Wallace R. "Buck" Persons, who liked Knight's organizational insights. By 1968, Knight was sitting on several Emerson company boards - including the motor division - and participating in its first international planning conference. Person's interest and confidence in Knight had a great effect on the young executive. "It's been one of the great relationships in my life." Knight recalls. By 1972, at age 36, he joined Emerson, leaving the presidency of Lester B. Knight and a disappointed father who had hopes of his son's running the firm. Within a year Knight became vice chairman and chief executive, making him the youngest CEO of any billion-dollar corporation.
Over the following 10 years, Knight devoted himself to building the organizational process without which, he says, "this place would be just an average company." The core of his approach is a planning and implementation system that stresses above-average growth, return on equity of 18 to 20 percent and an emphasis on developing new products based on the cutting edge of technology. During two-day planning sessions, each of Emerson's 50 division presidents and their staff are grilled by Knight. Some view it as a contest of sheer stamina. But it has paid results. In 1976, 70 percent of the company's product line ranked number one or two in share of market. In 1986, 83 percent had that distinction. During this period, net margin improved from 7.7 to 8.3 percent and its commitment to R&D spending increased from under 2 percent of sales to over 3 percent.
Like everything else it does, Emerson's acquisitions have been conducted without fanfare. Preferring private and closely held businesses that hold leading positions in their markets, the company avoids messy public auctions where the premium to book is higher. During Knight's first 10 years Emerson spent $1.2 billion acquiring some 46 different companies. In the last year and a half it spent over $1 billion acquiring Copeland Corp., the largest maker of compressors; Hazeltine Corp., a New York-based leader in defense electronics; and Liebert Corp., a designer and manufacturer of computer support systems. In an era of the headline-grabbing write-downs, even Emerson restructures without hoopla. More than $150 million has been spent over the last 5 years eliminating products and redesigning others for world markets. As a result, the product mix has changed markedly. Ten years ago, industrial motors and drives were 19 percent of sales. Today they are 11 percent. Electronics were 2 percent of sales. Now they are 11 percent. Process controls have climbed from 8 to 17 percent of sales. The company has redesigned major product lines such as saws around world market requirements. Over the past decade, sales (representing 23 percent of total 1986 business), outside the U.S. have outpaced domestic sales. All this has been accomplished with hardly a blemish on the balance sheet. Total debt to capital is a pristine 17.7 percent. The company's triple-A credit rating is enjoyed by few industrial firms today.
Emerson's bid for consistent high performance has not come without cost or criticism. Factory workers have objected strongly to demands for wage cuts, and even salaried executives have had to face slimmer paychecks.
In addition to its emphasis on cost reduction and quality to become the "best cost" producer, Emerson is determined to become the key supplier to its OEM customers. To do this, it is working more closely with both suppliers and customers to share cost reductions and integrate design engineering. Steel-process finishing, that may have cost Inland Steel $22 per hour in labor costs, is now being done by Emerson, which can do the job at closer to $8 per hour in labor. The consolidation of sourcing among U.S. manufacturers is leading Emerson to offer component systems as opposed to selling individual components.
Broadening the product scope does raise the question of whether the company might one day compete with its customers. For example, at the behest of Whirlpool, Emerson manufactures dishwashers which Whirlpool sells under the KitchenAid label. Emerson has also commenced selling dishwashers under the In-Sink-Erator label. "Emerson says it does not wish to get into direct competition with its customers," says Martin Sankey, vice president, First Boston, "but the practical effect may be the same. The company will have to step very carefully in this area."
Knight is the first to agree that he's a demanding boss. When goals are set, he demands that they be met. Subordinates have reportedly been called for meetings at his home on Sunday following a meeting on Saturday. "His drive and perseverance are highly admirable," says Sanford McDonnell, "but he works harder than he should. He doesn't play enough for his own good." In contrasting his management style with Knight's, who sits on his board, Southwestern Bell's Zane Barnes says, "I like to hire the very best people and then delegate up to the point where I'm about to lose control." Some observers note that while his hands-on management style has produced stellar results it could, in time, suffocate promising subordinates. "What about succession?" says Sara Lee's John Bryan. "That could be his Achilles' heel." The recent elevation of executive vice presidents Al Suter and Jim Hardymon to the newly created posts of vice chairman is evidence that Knight himself is at least aware of this concern. August Busch, who has recently joined the Emerson board, agrees that his friend is something of a taskmaster, but "more than that he's a true leader. It's a corny word today, but it describes him best. People wouldn't do what they do for a guy who wasn't as involved as Chuck." However, demanding he may be as a chief executive, Knight clearly commands loyalty - average tenure of his executives is almost 15 years. Few companies can make such a claim.
To glimpse his style of leadership, CE editor J.P. Donlon recently talked with this year's Chief Executive of the Year at Emerson's corporate headquarters in St. Louis. Highlights follow:
Twenty-nine years of consecutive earnings per share growth and 30 years of increased dividends per share are nothing to sneeze at these days. How do you continue to make it happen?
The first thing any manager should do is understand what his job is, preferably expressed in one sentence. You would be surprised at how few people can do this. Some CEOs may talk about such things are civic duties - that's fine, but that's not my job. It's something you spend maybe 10 percent of your time with. My job is to define and pursue the investment opportunities that will support our objectives, which are growing faster than GNP, maintaining high levels of return on equity (Target: 18 to 20 percent), and consistency of earnings. That's my job. How do I do my job? In centers on one thing: management process. I hate to bore you but that's the secret. Management process consists of six things. First, keep everything simple. This is the most difficult thing to do, in my experience. Managers get caught up in ideas and concepts that come out of business schools or consulting and look great on paper but just don't work in practice.
Matrix management. And what's the latest one, this teamwork concept where people jointly make decisions? My point is that management is basically business-101. You develop plans and programs to achieve goals, follow up and pay for results. If you do that you're doing damned well. But some people like to complicate matters.
Second, commitment to planning is essential. Sixty percent of my time is spent in planning. I'll spend anywhere from one to two full days just in planning for each of our divisions. Why? How else can I do my job of identifying investment opportunities except by head-to-head battle with the individual companies on where they want to put their dough?
Third in our management process is how we follow up. The board meeting, the president's council, division planning council, the corporate planning conference, the functional meeting, and the organizational meeting are all part of this. Most companies fail not in planning but in implementation. Why? My theory is that in order to keep young people, most companies feel they must keep promoting them, pay high salaries, and have lots of people reporting to them. Both are counterproductive in implementing company plans successfully because those who don't stick with a project because they want to get promoted aren't involved. The highest-paid staff person at Emerson doesn't have anyone reporting to him. It's important to get people to stick to a job and see it through. I'll pay them and even reward them with stature, but they must be involved.
Fourth in the process is an action-oriented organization. This isn't just theory. It's human nature, for example, for executives to group all the numbers together and see how big their pie is. The more dollars they are reporting, the higher the compensation. We don't let anyone aggregate the numbers. We decide on the level where we plan and control profits and where decisions are made. This is one of my tests of institutionalization. How much staff do you have? Our staff is under 290 today (versus 296 in 1986) and we're a big company. Staff creates work. The second test is, how do your people communicate? We don't have a corporate organization chart at Emerson. Really. There's no such piece of paper. The reason is I want people communicating around plans, projects and problems, not along an organization chart.
Cant believe that a $5 billion company with 50 divisions doesn't communicate along an organizational chain of command whether or not you've got a piece of paper with boxes and lines on it.
Oh, there are chains of command, but you don't need organization charts to have that. All organizational charts do is determine size of offices, who sits next to whom, and all kinds of nonsense. It takes away flexibility. We can take a group executive and let him run a small operating unit. Very few companies can do that. You see how little turnover we have.
Fifth in importance in our management process is our best cost-producer strategy. The best cost is the lowest cost consistent with the highest attainable quality and performance.
The sixth element is leadership. Can't teach it. It must evolve from an organizational environment where people can make a difference. That's the process. It's a discipline. When people understand the process and are a part of it you can do anything.
Other companies and other CEOs have a disciplined management process and several are larger than yours, so why don't they have 30 years of uninterrupted dividend growth?
There are managements who don't believe that consistency is in the interest of the long-range value of their company stock. When you make that decision, and it's legitimate, you'll manage differently and take the ups and downs.
Why do you place great value on consistency?
Our peer review analysis demonstrates that the market tends to pay a premium for a consistent, high-performing company as compared to companies that are less consistent but are also high performers. At least the market has paid a premium over the last 12 to 15 years. Some argue that such a period of time is too short to build a case.
When Harold Geneen ran ITT he was similarly concerned, some would say obsessed, with consistency. He still boasts of the 58 uninterrupted quarters of earnings growth. Geneen's ITT was more diverse and had five time as many divisions as Emerson, but like him, don't you have to postpone investment opportunities and make big trade-offs to achieve consistency?
I don't know what Geneen's process was, and to me that makes a big difference. There's no question that trade-offs exist. Certain investments, if not made, will hurt the company. But trade-offs go both ways. For example, in 1982, a tough year for Emerson and the economy, we put $15 million in a sensor laboratory. It was critical. We knew we couldn't delay it two years because Honeywell, Yokogawa and Foxboro were all moving in that direction and we had to maintain leadership in sensor technology. Conversely, in our integral motor business we could put off redesigning for cost reduction or coming out with a new series of motors. Should we get out of the large, over 500-hp motor business? Easy decision to make. We delayed designing a new line for two years. The market wasn't about to disappear. The management process here forces us to objectively separate the investments that are critical to survival versus those that represent incremental opportunities.
You still appear to be sacrificing long-term shareholders wealth in order to keep smooth earnings.
You assume that all investments would work under the same context. Sometimes by putting off an investment, assuming the technology and market do not change, we can make it in a different way at a later date and create more wealth for shareholders. I don't say we don't make mistakes. You can't avoid it. For example, if I had waited another year I wouldn't have made the investment in smoke detectors and saved shareholders $5 million or $6 million. In order to protect consistency, I'm sure we may have made decisions that have cost us a little in the long run, but there hasn't been anything that materially injured a company or made it less competitive.
Your acquisitions tend to be private or closely held companies where you don't get involved in messy bidding wars. If your policy is to acquire sound companies with good management on a friendly basis, where is the added value for becoming part of Emerson?
We try to bring a number of advantages, not the least of which is out management process and our product-cost discipline to get better and faster returns than would otherwise be possible. If we can do these two things and achieve a higher growth rate than our core businesses we can boost profitability and drive up value to above-average levels from Emerson shareholders. I never ruled out underachievers among the good companies we acquire and there are some good ones there that can do better with our help.
If you have faith in your "management process" whey aren't you buying turnaround situations?
We've tried a couple. Our experience has shown that they take a lot longer than you initially think. Companies are often in such situations for reasons you don't understand until you get into them, no matter how much preliminary work you do. Further, the dilution of management's time and energy from the positive side of your business is often so great that you risk trouble. There are guys at Emerson who feel just as your question suggests, that we could create value by doing LBOs. We've got the money; let's leverage the hell out of a few of these companies. We've reached a deliberate decision not to do this because it would call for a change in the management process that has worked so well for us.
Let's take Copeland, for which Emerson paid a half billion dollars last year. Where's the value added?
Copeland fits Emerson like no other acquisition ever fitted us. It has a real opportunity to increase profit margins. Their foreign operations, a $250 million business, were break-even last year, but could be as profitable as its domestic business. Second, it has a new technology for compressors called a scroll, which when integrated with what we have in motors, connectors, controls and valves, puts us in the position to work closely with all the big customers in the air-conditioning market. We think we can achieve systems efficiencies with Copeland that are considerably greater than the component efficiencies. All of the components are run as separate businesses, but when a Carrier or a Whirlpool buys multiple components, it's to their advantage to deal with the best cost producer in each case. Our customers are in a very competitive market. If they win, we win. How do we do that? If it means selling five different components in a special deal, fine. If it means selling only one, that's fine too.
That may be a good approach strategically, but what do u do about the immediate problem where a Taiwanese compressor maker or a Brazilian motor maker knocks on Whirlpool's door offering components at 20 percent below yours?
There's nobody doing that today. No more. Three years ago that was the case. We've responded to that by designing quality in the process of making the component to get costs down. People used to say that being the low-cost producer implies that we've cheapened our products. That isn't the case here. We're getting to the point where defects are counted in parts per million, and I'm not just talking about electronic products. We've reached a point where we just don't ship a bad motor.
A chief executive who knows you well says you're particularly masterful in dealing with the globalization of markets. Where have you put this best-cost strategy to work internationally?
The simplest example and most familiar would be our consumer saw, manufactured by Skil. For years the only competition had been Black & Decker. Suddenly, Makita, Hitachi, Bosch, among others, and all good companies, were coming into the U.S. market with good products. It forced us to rethink the entire tool line and to identify those products in which we had market share and scale to become world class competitive. As a result we came up with a circular saw manufactured in a highly automated facility in Hebrew Springs, Arkansas; it's the lowest-cost saw in the world as well as the highest performer. It's used by carpenters and professionals as well as home owners. We're now the largest manufacturer of circular saws in the world. One thing we've learned in competing in global markets, and this relates to my earlier comments about our management process, is that there's no point in making investment decisions based on cost comparisons to oneself. There is much talk about knowing your competitors' costs. How much time do you think it took us to really understand the cost of a saw made in Germany or in Japan? It was enormous. Our process involves forcing people to spend the time and energy to get these facts. Mistakes are made when you don't have all the facts.
What is the biggest challenge facing the company over the next 10 years?
Well, we're going to be living in an environment of excess capacities everywhere, with a few exceptions, which means growth will be tougher to get. When you face growth problems and no margin with world volume, you've got trouble. It's a bad combination. That's why we've been spending these recent years to get our own house in order. That's why we place much emphasis on protecting the company's profitability. With the exception of our major acquisition purchase which is purely the accounting and fixed costs that go with them, we've got margins right up at all-time high levels. In March of last year we took 5 percent out of SG & A - $65 million. We cut our salaries even though there was no recession. Everybody understands that cutting salaries is something we don't like to do.
This implies an aggressive attempt to take market share away from your competitors. What's the plan?
The plan is to have the best product at the best cost and be in a financial position to help our customers win. There's a consolidation of sourcing going on in this country, where all of us, Emerson included, are being forced to look at suppliers and align ourselves with them so when you need to do something vital, you can go back to them and get their commitment to support you. Also, when our customers need to do something, they know they can come to us and say, we need your help. This is a major change, particularly at Emerson, but in terms of future financial performance it's necessary. We're even integrating our computer systems with customers and suppliers.
Emerson isn't unique in that. Everyone is doing that these days.
Well, not everyone. The important change is the change in thinking. It's not every day you can find suppliers willingly, once the situation is explained, to give up something for both sides to protect market share as well as future growth.
Your predecessor, Wallace "Buck" Persons, who had built a high degree of earnings consistency into Emerson before you took over, was your mentor. In what way did he influence you as chief executive today?
It sounds corny but part of what drives me is the fact that he placed so much confidence in me and I just didn't want to let him down. He permitted me to come to Emerson and rethink and change things while he was chairman. I'll always admire his ability to deal with that because he built this company and I was the new guy. He put me on a couple of boards five or six years before I got here. So I became exposed early to the business and worked with him on organizational changes. I don't think he was training me, just using resources at his disposal.
Was Persons taking a big risk in recommending you, an extreme youth at the time, and a consultant, no less, to be his successor? An old-line manufacturing company might be inclined to prefer an operations guy from within.
Have you ever had to meet a payroll? It was the first thing my old man taught me when I bought his consulting business. We had a good company, but once you have to meet a payroll it changes every decision you ever make in your life. My father did a lot of things for me, and one of them was to train the hell out of me. I did things at an age that most young men don't have to do. I'm lucky to have survived the process because you are never sure how you are going to come out. I don't think my being a consultant had much to do with my selection. It came down to the fundamentals of what it takes to run the business and whether or not you have the capacity to work with people to get the job done. Fortunately, I knew the people at Emerson well and had spent 18 months working with them.
Did you ever have doubts?
I had doubts. You're not human if you don't. But there was no doubt in my mind that I was going to give it my best shot.
Do you see yourself as a tough manager?
My definition of tough is probably different from yours. To me tough means that people want to be measured, have their performance talked about, and want to be compared to tough targets. Some people think tough is someone who is mean, cruel and unfair. That's not it at all. I set tough targets and am demanding, so yes, in that sense I am tough; but I am fair.
Name one challenge you would personally like to meet as Emerson's CEO over the next 10 years.
I would like Emerson to have the same relative performance over the next 10 year as we have had over the last 10. This doesn't mean the same performance, because we're going to be dealing with a different environment. But if we can duplicate what we've been able to do so far it will be very satisfying to me.