Dear Bob, Sorry to burden you, out there in Maine, in retirement. But how many mentors do I have? I still remember how, during my first week as your COO, you got to the heart of the Horst issue when you told the board: “Ladies and Gentlemen, companies don’t sell drills, they sell holes.” I need some of that sensibility just now. Anybody would say things are fine at this company you put me in charge of. Profits are still growing comfortably and margins are good—not great, perhaps, but good. Our revenues climbed another notch last year, as they have every year since Steve was born (he’s just finished his freshman year at Tech this spring, thank you very much). Conventional wisdom says nothing is wrong with us. We rank first in the industry. Wall Street loves us. The analysts love us. The board loves me (and not entirely for your sake). You probably saw that puff piece on us in the Journal, which called us “one of the few remaining American institutions.” The only report of problems is coming from my gut. Bob, most of what looks good is actually coming from price increases and incremental growth in the population at large. Our market shares aren’t bad in the three core products, but these appeal to the most mature part of the population, which is going to decline but fast over the next 20 years. Our share in newer lines, directed toward younger people, is not acceptable. I’m uneasy about shifts in our customer base. Demographic trends are moving gradually against us. Who’ll be our customers 20 years from now? There are some fairly obvious things to do. My staff is already working on them—the “low risk” things. We could launch a program of “cognate” extensions, building on present brands and franchises with existing products or services. Birds Eye frozen vegetables launched Birds Eye frozen entrees, which launched Birds Eye frozen gourmet entrees. Look at Kodak getting into facsimile hardware, or Schlumberger with mineralization assessment in space. We could try to use our brand to get into new ventures more likely to impress younger people. But is this really low risk? Is it not a five-foot leap over an eight-foot pit? We’ve always made great products, but we’ve also sold identity, trust, a touch of prestige. If we start expanding the lines and lever aging off the brand, especially in ways calculated to appeal to young people, won’t we jeopardize our identity and customer loyalty? Have we not become hostages to our success with older core customers? I want to do for my young hires what you did for me. I want this place to last. And yet I have a disturbing sense that we have to make ourselves over. Competitors are moving in from entirely different industries, not only with variations on our existing products but, more and more, with entirely different kinds of solutions that threaten our markets. I often feel like the CEO of a department store facing mass merchandisers, or a courier company fighting a fax machine. I see digital electronics transforming everything—even clothes and ditch digging (new ways to make holes, right?). Besides, even if we do things very gradually, we will almost certainly upset the financial community and the trade press and our employees. Why shake people up with changes and not go all the way? I’ve asked some of our staff to think about this—“no holds barred.” I told them even to think about selling off everything, starting from scratch: we’d keep our name for now—sacred, “an institution,” better than gold. I told them to think of Coca-Cola announcing the elimination of its old formula. A kind of madness, wasn’t it, but Coke came out smelling like a rose. What would it be like, I pressed them, if Philip Morris had sold all of its companies and brands and was left only with a pot of cash and some smart people to make it grow? By analogy, could we not buy back into related industries, here and in the Far East, but for a much lower price and with much more upside potential—and with none of the demographics against us? What would be left of S.S. Kresge if it hadn’t transformed itself into K mart? The problem may seem small now, but I fear that when it begins to grow it could quickly become a crisis. Why not cast the net of possibilities wider? I’m not too worried about the board because at least it will listen. Would you listen to a more radical proposal yourself? It’s your life’s work too. Let’s talk when you’ve had a chance to digest this. My love to Kay. As ever, Philip Should Philip build on his strengths or reinvent the “Great American Institution”? Cathleen Black is publisher of USA Today and executive vice president for marketing of Gannett Company, Inc. Philip should look within the company for guidance—and create an entrepreneurial venture away from corporate headquarters. I see many of the same challenges that are confronting the newspaper industry highlighted in Philip’s company: changing demographic patterns, declining profits and margins, declining market share, price resistance, fierce competition, and, in an interesting way, a lack of entrepreneurial thinking. Philip’s letter struck me as nostalgic—kind of whiny, if you want the truth. While he should be applauded for thinking about these issues, it doesn’t sound as if his heart is in it. Now it certainly is nice to ask the ex-leader for advice, but Philip should be speaking with the best and the brightest at his company, asking them how the company should move forward. He has to look within his own company and create an atmosphere and an environment where the employees are excited about the future. Take Gannett, a $ 3.5 billion news and information corporation with 37,000 employees. Almost ten years ago, now retired Gannett chairman, Al Neuharth, had a vision for USA Today—a massive and risky venture within a successful, established media company that was as healthy, if not more, than the company Philip describes. To carry out the project, a lot of enabling factors (such as advances in satellite technology) had to be in place, but what was really needed was someone who at the core of his being wanted to change and innovate. If Philip’s company is so tradition bound, then he should think about starting a new venture away from the company’s heart. Fundamental change within any corporate culture is difficult; it’s especially hard at a conservative company like Philip’s. Let him create an entrepreneurial atmosphere that is not so close to the womb where everyone is second-guessing everyone. This allows the project leaders to forge new territory without all the overhead—literally and figuratively—of being next to corporate headquarters. IBM took this path by sending a team to Boca Raton—far from the management structure in New York—to work on the personal computer. Likewise, at Gannett, which has operations in 40 of 50 states, the first two years of research for USA Today were conducted by a small independent team in Florida. Neuharth did not want the group to operate under the thumb of corporate nit-pickers. His message was “You go down there and figure out how to do it. I will meet with you and discuss the problems and opportunities.” And he did this, on a regular basis. In time, what the employees of the company learned and experienced was that USA Today was good for all of Gannett. USA Today now serves as a laboratory for the entire company. And not just in news itself—but in marketing, advertising, systems, personnel, and circulation. It is a dynamic force from within for opportunity. We established a “loaner” program that rotates editors and reporters from throughout the company to USA Today for four months at a time. This opportunity has been invigorating. The “loaners” are exposed to a different type of journalism in scope and style. They go back to their former jobs, or they go to others within the company with a broader sense of what the newspaper business is all about. This vision could be useful for Philip. I believe that Philip needs to do two things: Line extensions are right if this is a conservative company. They don’t fundamentally change the corporate character, they produce incremental revenue, and they invigorate people. If there are natural line extensions, Philip ought to create multidimensional, cross-departmental task forces with the charge to create new products that fit both the image and the quality reputation of the company. Philip need not necessarily sell off everything and start over. That seems to me throwing out the baby with the bathwater. That would be the easy course. The harder task is fundamental change for the corporation. If Philip really believes there is a product that fits the company, then he should proceed with it—but free it from what seems to be an institutional organization that rewards inertia over innovation. Philip needs to start moving beyond the prevailing corporate culture and start thinking like an entrepreneur. He should stop reminiscing about the past and move forward with spirit, determination, and speed. David W. Johnson is president and chief executive officer of Campbell Soup Company. Prior to that, he was CEO of Gerber Products Company. Discipline yourself, Philip. Go back to the fundamentals. Plan your attack. And do it now. Dear Philip: Come on, Philip, you are better than “having a feeling in your gut.” Fear drives us to extremes, and although I do not doubt your sincerity, there is a clear need for you to grasp this situation and apply some hard-nosed discipline. Right now you are on top: number one in the marketplace, beloved by Wall Street and the board. You sit in the catbird seat. You have the money to bring in consultants or conduct research or take time off-site with your key executives or travel and immerse yourself in the marketplace with customers and competitors. What you need is a plan of attack to determine whether your instincts are valid or whether you are grabbing a handful of fog. Philip, go back to the fundamentals of your training when you were COO. Think about how you can find out whether our great brands might be expanded to appeal to new groups of customers. One thing you and I know is this: change is constant. It is better to lead change than to react to change. In that context, leveraging and extending proven, high-quality, repeat-purchase brand names is always preferred over launching a new name. Our brands make our asset bank. Consider using that source of power first. And the joy is that testing does not have to cost an arm and a leg. Take calculated risks. I think your attitude toward young hires is dead on. As the leader of a great company, your job is to pass on the baton of leadership to a new group of runners. They must in turn have the chance to win versus competition and extend the life of their company beyond any mortal one. In a sense, we must give to our successors the secrets of eternal company life! Watching the trends in other industries can be scary. But you should not feel like “a courier company fighting a fax machine.” Remember, you are the leader. Your company knows more about its industry than any other. Don’t sell yourself short. Rather, use the competitive adrenaline you feel to focus on how to throw existing and potential new competitors off guard. Lead with calculated innovation or insightful adaptation. Toward the end of your letter, Philip, you crossed into the area of idealism. Rarely if ever can we clean the slate and start over. Selling off the company to get a pool of cash depends on a plan to drive extraordinary earnings, returns, and cash from a new orientation. Get the plan first. Think about how to make it happen. The Far East may be an opportunity. But first protect the home bases that have been won over the generations. In conclusion, Philip, I would underline the following points: Your position demands that you take the initiative and lead a new plan for the future. If serious strategic planning had been a feature of the past two or three years, you would not have written me. That’s a subject for another day! Act now, Philip. Our life’s work must go forward, taking the shape and form as is necessary to reassert true leadership. Stephen H. Haeckel is IBM’s director of advance marketing development. Philip must plan his long-term strategy on markets rather than products. Philip enjoys 20/20 foresight. He sees a demographic time bomb that has apparently escaped the notice of his colleagues, his board, industry analysts, Wall Street, and his competition. This kind of insight, in someone able to act on it, ought to be translatable into significant opportunity. He must think through exactly what services are bundled into the products the company sells and then plan to grow the company by extending and building what it now provides so well. Philip’s most dramatic option, to sell and start anew with a “pot of cash and some smart people,” is essentially a “buy low—sell high” strategy. It has some obvious drawbacks: he doesn’t yet have a good idea about what to buy low after he sells high, and it sounds inconsistent with his desire to make “this place last.” He ought to keep this option alive only as a counterpoint to more prosaic alternatives. The company has an enviable roster of assets, including great products, decades of impressive financial performance, industry leadership, public admiration, a visionary CEO, and loyal customers. It also has time to deal with the decline of its traditional market in a noncrisis mode. Demographic forecasts are generally reliable, and a 20-year decline, even one as relatively steep as this, argues for a phase-out—phase-in, rather than a stop-start transformation. Philip should consider an incremental approach—which permits extended milking of the company’s cash cow to subsidize the discovery and development of new markets and inflicts minimum damage on the equities associated with being a “Great American Institution.” The reputation of quality, leadership, and success that abide is an extraordinary asset, a competitive advantage more difficult to earn, perhaps, than any other. That said, the problem of winning a leadership position in new market segments remains. As he sifts through his options, Philip should prioritize markets over products. Philip’s “obvious things to do” are product centered. They involve tinkering with existing products and services to make them acceptable in markets they were not designed to address. Philip should do nothing to compromise his company’s current leadership position, but he should begin, with some urgency, a systematic inventory of the assets that could be effectively leveraged in other than their traditional markets. Twenty years of growth and profitability imply not only that the company has been successful in differentiating itself but that it knows the source of that differentiation. That competitive advantage may come from a number of sources: the nature of the services wrapped around its products, the quality processes it employs, or the way it tailors specific combinations of products and services to individual customers. It may stem from infrastructure investments or from the quality of its channels. It could derive from superior information about its customers and competitors. Underlying these kinds of differentiating values are more fundamental and generalized assets: the know-how required to create and manage the values that have differentiated the company, be they development, manufacturing, marketing, service, or financing values. Such intangible assets are just as real as capital assets. In particular, the creation and delivery of marketing and service values are becoming decisively important in many industries today, including high-tech, capital-intensive arenas such as IBM’s. Solution, service, and market-driven strategies depend on such values. No decision is more strategic than the selection of markets to be served. After know-how and value inventories have been made, Philip should match them against as wide a set of potentially attractive market segments as imagination and market research can provide. The company must be rigorous in determining what values are required for leadership in those markets and how these stack up against the assets Philip has or can reasonably acquire. If good matches are not found, the Philip Morris alternative becomes compelling. If, however, good matches are found, Philip must begin shifting the center of gravity of the business from old markets to new, underwriting the process with profits thrown off by the traditional business. At this point, the issues of image and identity become crucial. Rather than trying to transfer brand equity, the company should focus on “logo equity”—make an “American Institution” contribute to the differentiation of new and newly branded products in customers’ minds. Carl Spielvogel is chairman and chief executive officer of Backer Spielvogel Bates Worldwide, Inc., an international advertising agency. Your brand names are your company. Don’t squander them. Philip understands that he already owns the major solution to his problem: the company’s strong brand equities. The way he must sustain and nurture his brand assets is to adapt his product lines to meet the changing needs of the marketplace—in this case, a growing number of younger people. Today it is very expensive to launch new brand names—an option Philip unwisely appears to have under serious consideration. Defending or reinvigorating consumer goods brands is much easier than building them. Of all new products, 90 % fail, while established brands, such as those Philip oversees, have long, profitable lives. Launching a new brand makes sense only if the new product is extremely desirable and very distinctive—an unusual combination in today’s markets. Accordingly, Philip should be focusing on improving or rejuvenating his established brands rather than launching new ones—even where innovations are involved. To sell off everything but retain the corporate brand name (or trademark) and attach it to totally new products would be an egregious mistake. Brand names have essential characteristics and associations in consumers’ minds. A company’s competence (and value) is often closely connected with its name—that is not easily transferable for consumers. Any changes Philip contemplates must be within the realm of his company’s perceived competence. Philip would be well-advised to research what products the younger consumer market is seeking and then determine if the company has an associated competency. If so, Philip should design, develop, and launch the newly identified products. But he must make certain that the marketing communications he chooses for the new products involve clear distinctions between the established brands and the new ones. It is highly unlikely that the markets that Philip’s company targets are so inseparable that only older people will buy the established items while only younger people will be attracted to the newer products. Very few consumer products are used by one category of customers exclusively. Over a period of time, the buying public will not be noticeably concerned if Philip launches specialized extensions of his valuable brands that appeal to younger people. The sense of an “American Institution” will be preserved, as it should be. It is unrealistic for a manufacturer of consumer items to worry about what will occur in the marketplace in 20 years. Philip should be concerned only about a time span equal to the outside lead time necessary to develop and launch a totally new product. Experience tells us this period should not be more than 5 to 7 years. Managing change by extending brand names may temporarily cause concern among employees, the financial community, and the trade press, but these concerns should not alter a sound decision about future corporate direction. If the decision is correct and properly explained, employees will embrace it; the lasting effect of the trade press is minimal and should not be considered material; the financial community will reassess its own expectations. No one should fear change. The task is to manage it in an orderly, profitable fashion. Today’s marketers must recognize what is occurring, analyze it, and make the necessary accommodations to get on with their business. These days, no one can stand still and be satisfied with the status quo. Sir Adrian Cadbury, now retired, is the former chairman of Cadbury Schweppes PLC. Think globally, Philip. Leverage this American brand name into a valuable international asset. Dear Philip: It was good to hear from you, and I would really enjoy having the chance to talk over the issues raised in your letter. In the meantime, here are my first thoughts. Go ahead with the “no holds barred” exercise. But don’t spend too much time on it. First, possible buyers will be as aware of the demographic trends as you are and will guess why you might want to sell. The prices they offer will, therefore, take those trends into account and will reflect what they think they can make of the company. Their opportunities are equally open to us—but we should have the edge in making the most of them, thanks to our knowledge of the business. More fundamentally, you could not buy back into related industries “for a much lower price and with much more upside potential.” Cheap, high-growth businesses are a pipe dream. I believe it is unrealistic to suppose that you can outsmart both the buyers of our company and the sellers of the businesses you want to buy. As for the Philip Morris example, if it sold all its companies and brands, it would be left with a pot of cash, which the shareholders would understandably want returned to them. It would also be left with no smart people—they would have all gone off with the brands. What concerns me about your Philip Morris example is that you may be thinking of the company—our company—as something separate from the brands that make it up and that have created its identity. This is to think like a banker—need I say more? The company, its brands, and its identity are one; they are assets that will continue to grow in value, provided we keep investing in them. All else apart, it is becoming increasingly difficult to establish new brands and new identities—especially in international markets. Don’t be afraid of leveraging our brands—look how Coca-Cola has used its brand to add value to goods outside the soft drinks market. Nor be afraid of replacing our existing products and services with new ones that solve our customers’ problems more effectively.
