“Remember, Jack,” said Hal Hestnes, “swords into plowshares.” “And guns to butter,” said Jack Marlowe, managing a weak smile for the old man’s benefit as he started down the hall back to his office. The “swords into plowshares” routine had begun as an inside joke between the two men—an allusion to a tough but fairly accurate profile of their company, Sargon Corporation, that had appeared several years earlier in a national monthly magazine. The writer had used the two phrases to describe chairman and CEO Hestnes’s strategy. Without losing any of its humor, the routine had become something of a mantra for Hestnes and for Marlowe, the 49-year-old president of Sargon. Their plan was to forge a new identity for Sargon—once a small defense contractor and now primarily an appliance company—as a diversified manufacturer poised to take advantage of the new and growing economies in the global marketplace. For the moment, however, all humor was lost on Marlowe as he wrestled with one of the most intractable problems he had dealt with since joining Sargon as a young, freshly minted business-school graduate. What to do about Arcell Corporation, Sargon’s household-appliances unit? And, for that matter, what to do about Charlie Crescent, Arcell’s president? Marlowe replayed the conversation he had just had with Hestnes over lunch. “We’ve been talking this to death for weeks, Jack,” Hestnes had said. “Do we let Crescent go? Do we keep him but rein in his plans for Arcell? Move him to another unit? Or, if the answer is D—none of the above—what in blazes do we do?” Marlowe checked his watch as he banked left past the neat rows of desks that led to his office. It was just past 1 p.m. —less than five hours until he and Hestnes were scheduled to leave for a white-tie charity fund-raiser. “I’ll want to hear more of your thoughts about this on the way into town,” Hestnes had said. Marlowe suspected that meant he had better show up with a solution. Marlowe motioned Steff Ferris, his assistant, into his office and asked her to cancel his afternoon appointments and hold all his calls. “Does that include Chris Freed’s 4 o’clock?” Ferris asked, referring to Sargon’s chief of R&D. “She really needs to go over her budget proposal with you.” “If she can keep it to under ten minutes, fine,” Marlowe said. “Otherwise, it’s going to have to wait until tomorrow.” “I’ll tell her,” Ferris said. Marlowe sat down at his desk and turned his attention to the yellow legal pad that he had pulled from his drawer. His thinking pad, Ferris called it. He had already covered about half a page with sprawling notes when she drifted quietly out of his office. All right, Marlowe told himself as he began to outline the issues. The first thing to do is to drain the emotion from the situation. That meant ignoring any resentment he harbored toward the old man for framing the problem so starkly. Old man. Hestnes was only 11 years his senior, but the time he had spent at the helm of Sargon had taken its toll, reminding Marlowe of those before-and-after pictures of U.S. presidents. Hestnes was right, of course. They had been chewing the issue to death for weeks. Look at it from Hestnes’s point of view, thought Marlowe. Sargon’s nondefense businesses included everything from household appliances (which Hestnes’s predecessor had gotten them into in the early 1970s) to brake systems for the automotive industry (which had always been a sideline at Sargon) to components for telecommunications equipment (a business that Hestnes had launched in 1983) to voice recognition systems for the security industry (a 1989 acquisition). By the end of the year, those businesses were expected to account for half of Sargon’s profits. That was a far cry from 1977, when Hestnes had taken over and the company’s defense business was delivering practically all of Sargon’s earnings. So much for the good news. The bad news was that Wall Street seemed to be taking a dim view of Hestnes’s strategy. That despite a vigorous cash flow, little debt, and the company’s current program to buy back shares. The pros just didn’t seem to be accepting Sargon’s new identity. The company’s recent acquisition of Cyberam, a maker of routers and hubs for corporate networks, had met with virtually no applause outside Sargon headquarters. Cyberam had a good deal of potential but negligible market share. It was also a bit of a stretch for Sargon—just beyond the company’s current manufacturing capabilities—and the press and Wall Street had expressed doubts about Hestnes’s ability to make the move succeed. But that’s where Arcell was supposed to come in. Sargon’s shrinking defense business was still providing some cash for the parent company’s investment in its future, but Sargon was now counting on Arcell to provide the lion’s share of the money. From day one, that’s how Hestnes had seen Arcell’s role in the company. And when Charlie Crescent had taken over the appliances unit two years earlier, the first thing he had done—with Hestnes’s full blessing—was to launch a major consolidation and cost-cutting effort. In those two years, he had lifted Arcell’s operating margin from 2 % to 7 % . The trouble was, Crescent didn’t always seem to get the big picture at Sargon. His insistence on quality was laudable, and he was taking an active part in the company’s best-practices and conversion-technology programs. In fact, he was working closely with Chris Freed on a project to adapt the heat-resistant material used on Sargon’s missiles to the tops of Arcell’s stoves. At the same time, though, Crescent was making endless requests to plow his profits back into his group for new, state-of-the-art machinery, for an updated computer system for his purchasing department, for establishing a sales force in China—for this, that, and the other thing. Marlowe thought he had made it clear to Crescent from the start that Sargon was counting on Arcell to run lean and mean. And Crescent had said that he understood. But his actions just didn’t show it. What was worse, every time Marlowe turned down his requests, Crescent seemed to grow increasingly alienated. His resentment sometimes bordered on hostility and outright insubordination. He had made no effort, for instance, to disguise what he thought of Sargon’s acquisition of Cyberam. Marlowe remembered the conversation clearly. Crescent had been on the phone to Marlowe within minutes of receiving the internal announcement. “You guys back East are having so much fun running with the bulls,” Crescent had cracked, “it’s no wonder you think of us here in the heartland as Elsie, the cash cow. But I’ll tell you, I don’t think this is a good move. You can’t continue to count on us as your safety net unless you give us what we need to grow. You’re forcing us to stagnate, Jack. I can’t keep my people motivated if you won’t let us live up to our potential.” “I can’t keep my people motivated if you won’t let us live up to our potential.” Marlowe had calmed him down, temporarily, by saying that he thought Crescent’s proposals for increased R&D funding and for a greater investment in building a dealer network had merit, and by assuring him that he was considering them seriously. But he also had the feeling that his reassurances had fallen flat. Marlowe himself was only lukewarm about Crescent’s ideas, and he knew that Hestnes wouldn’t approve. Crescent probably suspected as much. His political survival skills had kicked in during the phone call—he hadn’t exploded—but he had probably started swearing as soon as he hung up. Marlowe smiled in spite of himself. Crescent had always been outspoken. It was one of the traits that Marlowe admired in him. The two men went back a long way. Years ago, Marlowe had been dispatched on a troubleshooting assignment to Arcell’s Indiana headquarters. Crescent was then the company’s youngest plant superintendent, and the two men had struck up a fast friendship. Crescent seemed to know every nook, every job, and every person at Arcell. He should, he joked; half of the employees were his relatives. But Marlowe knew better. Crescent was a natural leader. “The more you lead,” Crescent would say with a wink, “the less you have to manage.” Marlowe needed to take a walk. As he left his office, his eyes were fixed in a 1,000-yard stare, which he had come by honestly in Vietnam and had cultivated since then to discourage small talk in passersby. In the men’s room, he splashed cold water on his face. On his way back into his office, he noticed Ferris on the line. Cupping the receiver, she mouthed Chris Freed’s name. “Patch her through to me,” Marlowe said. Back inside his office, Marlowe picked up his phone. “Chris, sorry for standing you up this afternoon,” he said. “No problem,” said Freed. “Steff said you were up against it. She penciled me in for tomorrow morning.” Marlowe appreciated Freed’s patience. He also respected her judgment. He decided to solicit her opinion, albeit obliquely, on Crescent. “How’s the Arcell project going?” Marlowe asked. “Fine,” said Freed, not taking the bait. “We can discuss it tomorrow.” “No, really,” Marlowe said. “I want to hear about it now. Give me the broad brush strokes.” Freed told him about the coating process her lab had come up with to spray the missile material on Arcell’s stove tops. “It’s only about 5 % cheaper than our current process,” she said apologetically, “and we haven’t seen as much of an improvement in durability as we had hoped. But frankly, I think it’s the best we can do.” “Hmm,” said Marlowe. “What’s Charlie say?” Freed hesitated. Marlowe repeated the question. “Charlie’s balking,” Freed finally said. “He wants us to spend more time on research. Originally, we thought we could reduce costs by 10 % .” Freed spoke the next few sentences slowly. “Charlie also seems to believe that customers will think we’ve lowered our standards. The focus groups haven’t reacted well to the look of the new surface, and Charlie thinks that if we go ahead with it, consumers will interpret it as a cost-cutting move without any benefit. He really thought he would be sitting on a revolutionized stove top. And maybe we could be. But this was intended as a cost-cutting project and as a way to take our expertise from one part of the company and use it throughout. The problem is, we’re out of time and money at this end. We can’t keep playing at this forever. We’re behind the curve already on our project for the telecommunications unit.” “Why didn’t you tell me this sooner?” Marlowe said, barely concealing his annoyance. “You’ve been under the gun yourself lately,” said Freed, “so I figured it would keep until our budget session. But to be perfectly honest, Jack, if Charlie doesn’t decide to roll out the new stove top now, I’d just as soon scrap the whole project and save the bucks.” Marlowe finished up the conversation, promising more time to discuss the issue in the morning, and then returned to the questions at hand: what to do about Crescent and Arcell. Marlowe knew that Hestnes already had a replacement in mind—Pat Jameson, second-in-command in telecommunications. Jameson had championed the Cyberam acquisition and had done most of the leg-work required to bring the company into the Sargon family with as little upheaval as possible. She was capable, but Marlowe wasn’t certain that she had the temperament and the patience to run a mature business like major appliances. Besides, Crescent was still widely respected by his people, even though he had led the company’s painful downsizing. Replacing him could put Jameson in a tough spot. And who was to say that Jameson wouldn’t act the same as Crescent, given Arcell’s position? Crescent had an ego—that was certain. But still, it had to be hard for him to sit during Sargon strategy meetings and listen for two hours to plans for growing Cyberam and plans for growing the voice-recognition-systems division and plans for growing the telecommunications business. Crescent usually got the floor for about ten minutes at those meetings—just enough time for Hestnes to hear that Arcell was performing as expected. Crescent always left looking disgruntled. Wouldn’t Jameson become just as frustrated? How was Sargon supposed to motivate the leader—any leader—of a company that wasn’t expected to grow? And where to put Crescent if they did replace him? He was too valuable to let go. Maybe the thing to do was to try to pacify Hestnes—and sit tight for a few months. “Less is more, Hal,” Marlowe said out loud. After all, Arcell was nicely positioned to grab its share of the market—and more—when China and Eastern Europe opened up, he thought. Crescent has a plan to expand, and he has an organization that he must manage—people he needs to motivate. It wasn’t at all like the shrinking defense business, in which the division head had been close to retirement and not at all interested in pushing the company to go on. Employees had moved into Sargon’s new businesses—or out of the company—fairly smoothly. But would China and Eastern Europe ever open up the way Crescent envisioned? And could Sargon afford to back Crescent’s plans and give adequate support to the organization’s critical growth businesses as well? Cyberam needed hand-holding. The voice-recognition-systems division was still sharing space and administrative personnel with one of the telecommunications units, and it needed steady investment to grow and to secure its niche. And Hal Hestnes was not the kind of guy you advised to stand pat and do nothing. Ferris knocked at his door and poked her head in. “It’s 5:45—you’d better get ready,” she said. “If you don’t need me anymore, I’d like to take off.” “Thanks for minding the gate,” Marlowe said. When she had closed the door behind her, Marlowe slipped into his tux, grabbed his overcoat and briefcase, and headed for the front door of the building. The car had already pulled up, and Hestnes was waiting in the back-seat. Marlowe got in and pulled the door shut behind him. “Take your time,” Hestnes told the driver as he raised the inside window for privacy. “Mr. Marlowe here has something to tell me.” What Advice Should Marlowe Give the CEO? Michael Goold is a director of the Ashridge Strategic Management Centre, a research, teaching, and consulting organization based in London. His research focuses on corporate strategy and the management of multibusiness companies. Goold is the author of Corporate-Level Strategy: Creating Value in the Multibusiness Company (John Wiley & Sons, 1994) and Strategies and Styles (Basil Blackwell, 1987). As Sargon’s president, Jack Marlowe is responsible for implementing the company’s corporate-level strategy. Under this strategy, the role of Arcell Corporation, the mature household-appliances business, is to provide cash so that Sargon can reinvest in newer, more rapidly growing businesses such as Cyberam. But Marlowe is also aware that by squeezing as much cash as possible out of Arcell, he may well be holding back the division’s development and frustrating the competent and successful management team headed by Charlie Crescent. Corporate parents that treat their mature businesses as cash cows to be milked in order to pay for more glamorous investments elsewhere in the portfolio inevitably create such conflicts and resentments. Corporate parents that treat their mature businesses as cash cows inevitably create conflicts and resentments. Resolving Marlowe’s dilemma is not difficult. He needs to stop playing the balanced-portfolio game. That is, he should stop expecting all of Sargon’s mature businesses to act simply as cash generators and all of its new businesses to grow quickly and soak up the cash thrown off by the mature businesses. Instead, he should think about the intrinsic merits of the company’s different businesses and try to figure out how Sargon, as a corporate parent, can add the most value to each of them. Resolving Marlowe’s dilemma is not difficult. He needs to stop playing the balanced-portfolio game. Let’s start with Arcell. The business’s recent performance is impressive. It’s no surprise that Crescent is getting more ambitious and asking for investments in new products, new facilities, and new markets. The critical judgment call for Marlowe and CEO Hal Hestnes is to decide whether they think those investment proposals are sound. If they do, they should give Crescent as much encouragement and support as possible. If they don’t, they should rein in his ambitions and scale back his plans. The decision should turn on the merits of the Arcell proposals, not on the needs of Cyberam or any of the other businesses. Otherwise, the corporate parent may well end up destroying value rather than adding it. Now consider Sargon’s growth businesses. The parent company has diversified extensively in order to move away from the defense sector. Granted, it has stayed within the very broad realm of manufacturing. But I doubt whether Sargon has the competencies it needs to manage its newer businesses successfully. Slogans like Swords into Plowshares sound fine, but they often disguise a lack of rigorous thinking about what sorts of businesses a company can manage well and add value to. I suspect that Hestnes and Marlowe have pushed Sargon’s diversification program too far away from their mature “heartland” businesses. They are unlikely to have a good feel for what it takes to succeed in businesses as different as defense, household appliances, telecommunications components, and voice recognition systems. If so, further investments in those diversifications are unlikely to pay off. Wall Street has probably spotted the problem already; that may be why it is taking a “dim view” of Hestnes’s strategy. Sargon may have pushed its diversification program too far away from its mature businesses. What should Marlowe do? First, without worrying too much about the other businesses in Sargon’s portfolio, he should figure out how he can help Arcell improve its performance. For mature businesses, the role of the corporate parent is often to ensure that a suitably lean and mean approach is taken and to weed out overambitious plans for growth or diversification. If Marlowe decides that Crescent is being overly optimistic about what can be achieved, he should explain clearly to the Arcell management team why they will not be getting the funding they want. And if, at the extreme, he concludes that Crescent is completely out of touch with the realities of his business, he may decide that another, tougher manager is needed to run Arcell. On the other hand, if Marlowe concludes that Crescent has identified some genuinely worthwhile opportunities, he should do whatever he can to help the company succeed. That may mean providing additional investment, technical help, or other kinds of support. In such a situation, the corporate parent can add the most value by making skills and resources available—either from other parts of the corporation or from outside—to help the mature business accomplish its goals. In any case, Marlowe should make clear that, in principle, he is fully willing to support investments in Arcell that he believes will earn a good return for Sargon’s shareholders. Right now, Marlowe is probably unsure about the quality of Arcell’s investment proposals. If so, he needs to spend more time with the business in order to form an opinion. He should make plans to sit down with Crescent and the other Arcell managers and go through their ideas carefully enough to form his own independent judgment of their worth. Good corporate parents of mature businesses are distinguished by their understanding of the real opportunities and pitfalls that face the businesses, not by their willingness to make snap judgments in accordance with some theoretical notion of a balanced portfolio. This leads me to Marlowe’s second challenge. He must persuade Hestnes to reconsider Sargon’s corporate-level strategy. What sorts of businesses does it really make sense for Sargon to own? What skills and resources does the corporate team have, and in what businesses can they be used most effectively? How can Sargon get the most out of its mature businesses? Is it really in the shareholders’—or any other stakeholders’—interests to diversify so widely? What kinds of growth and financing goals are realistic and achievable? It will take more than a car journey to reach agreement on those issues. And Hestnes may not be too happy when he hears that Marlowe doesn’t have a quick-fix solution to the current dilemma. But until the larger strategic issues are resolved, Sargon will continue to have problems with businesses like Arcell and managers like Crescent. And despite everyone’s hard work, the organization will continue to falter. Orit Gadiesh is chairman of the board of Bain & Company, an international strategy consulting firm based in Boston, Massachusetts. Jack Marlowe should hope that it’s a long ride. He and Hestnes have at least five critical strategic questions they must begin addressing together. What they do about Charlie Crescent will depend on the answers, which they probably should have agreed on long ago. Let me phrase the questions as Marlowe might put them to Sargon’s CEO: As the parent company, what’s our mission? Is Sargon to be a pure portfolio company, whose primary purpose is generating cash by buying and selling businesses? In that case, Hestnes and Marlowe necessarily will act as financial managers, keeping themselves removed, for the most part, from managerial issues at the divisions. Or do they want Sargon to be what I call a value-added parent, making the whole greater than the sum of its parts by managing the organization’s core competencies and creating synergies among its various divisions? Wall Street’s lukewarm response to the company may reflect the fact that the analysts have picked up on its leaders’ confusion. Unfortunately, Hestnes and Marlowe’s stated mission—“to forge a new identity for Sargon as a diversified manufacturer poised to take advantage of the new and growing economies in the global marketplace”—doesn’t make clear what kind of company they want Sargon to be. Nor do their actions. On the one hand, they want to buy new businesses and grow them. On the other, they’ve been trying to share people and expertise across divisions. The reality, however, is that they won’t be able to do either effectively unless they are clear about their strategic intent. The Cyberam acquisition shows where a lack of clarity can lead. Cyberam doesn’t seem to be a global company, and it has no appreciable market share, so it appears an unlikely candidate for building up and selling off under a portfolio strategy. But neither does it seem to draw on or extend Sargon’s core competencies. How can it add value to the company’s other divisions? What’s more, one would think that if Hestnes and Marlowe wanted to share expertise across the company, they would include senior managers from the different divisions in their decisions about acquisitions. They certainly didn’t ask Crescent for his opinion before acquiring Cyberam. What are our specific goals for Sargon? Have Hestnes and Marlowe thought through where they want the company to be in a year? Five years? Ten? Is it possible that the CEO is concentrating on growth but not paying enough attention to ensuring that that growth ends up being profitable? Too many companies grow very fast but never achieve profitability. Bain recently looked at 1,500 companies with more than $ 1 billion in revenues and found that less than 10 % were able to grow at an annual rate of 8 % and still earn their cost of capital over time. If Hestnes and Marlowe are to avoid this trap, they need to understand the dynamics of their business. They must think through the underlying economics of each industry they are in and envision how they intend to make Sargon a player—the number one or two company—in each. If they focus on profitable growth, they can better understand the trade-offs involved and the short-and long-term implications of each move they make. So how do we achieve profitable growth? Does Hestnes foresee Sargon continuing to grow solely by acquisition? Or does he want it also to grow organically—that is, by expanding the businesses or the expertise it already owns? In my experience, the most successful growth companies are those that build organically on their base of core customers or core competencies. As a rule, companies that grow organically have these qualities: Their senior managers genuinely seek change. Hestnes and Marlowe seem unsure of where they stand on this front. All the members of the top management team share a common, consistent view of the future. Marlowe and Hestnes clearly are not on the same wavelength. Crescent is butting heads with both of them. There’s no consistency here. Their managers are willing to take considered risks to get to where they want to go. In the process of investing, they develop a carefully thought through rationale for each investment decision. If the rationales are consistent over time, others in the organization will understand how to think through decisions on possible investment for themselves. Here Hestnes and Marlowe don’t seem to have a rationale for explaining to Crescent why his ideas for investment don’t make sense (if indeed they believe that they don’t). They are always watching the competition and have a strong focus on the customer. They know the value of market share and market leadership. Hestnes and Marlowe keep getting their company into businesses with different sets of customers and different competitors, which doesn’t make focusing on either any easier. At the same time, they are ignoring the fact that those new businesses are not market leaders. To his credit, Crescent seems to understand his customers’ likes and dislikes, which leads me to think that he probably also has a good sense of Arcell’s potential in the industry. He also seems to have a fast, flexible organization ready to roll out a revised strategy the minute he gets the nod from Hestnes. But Crescent may be alone in his class. Which brings me to the next question. How exactly should we at Sargon, the parent, be managing our different businesses to achieve our overall corporate goals? In this context, Hestnes and Marlowe should think hard about the definition and proper use of a cash cow. Do they want to drain Arcell quickly or invest in it and milk it over time? They seem to be doing the former, but if they decide to treat the division as a cash cow, I would hold that the latter is the better strategic option. Sargon’s new businesses are likely to require cash for a long time. On the other hand, even if management does decide that Arcell is a mature business, why can’t a mature business still be an engine, or a platform, for growth? Hestnes and Marlowe might consider letting Crescent continue to build Arcell’s business by extending what it offers to its core customers. USAA is a good example of a company that pursues such a strategy; it has consistently broadened the range of services it provides to its existing customers. Or they might want to steer Arcell to gain market share by focusing on a core competence. For example, it could strengthen its position as a low-cost producer, perhaps by making related acquisitions around the world, much as Emerson Electric has done. The point is that Hestnes and Marlowe must understand the distinctive factors that drive each of Sargon’s businesses. How can each division achieve maximum performance? How can corporate help those efforts along? But again, as a prerequisite to everything else, Hestnes and Marlowe must figure out what kind of company they want theirs to be—a portfolio company or an integrated whole. Then they can determine how each division’s needs fit with the overall corporate strategy. They should communicate their understanding to the division heads—indeed, to all of Sargon’s managers. With a better understanding of the parent organization’s objectives, this larger group will have a better sense of how to manage, what to manage, and how much to manage. The company’s board of directors might be interested as well. What kind of people do we need to enable Sargon to succeed in its mission? Are Hestnes and Marlowe being sufficiently thoughtful in making executive staffing decisions? I doubt it. They seem to be entertaining a lot of options on the fly and not trying that hard to match people to the task at hand. It takes a completely different kind of person to manage a company for growth than to manage it for cash. What makes them think Pat Jameson will be able to lead Arcell? And why are they so frustrated with Crescent? Here they have someone who has done everything they want him to do. He led his unit through a painful downsizing and cost-cutting process, and his employees still love him. He needs only ten minutes to present his reports at senior management meetings because he always hits his numbers. He understands his customers, he is eager to leverage expertise from other units, and he is champing at the bit to produce even more than he currently is. He is not afraid to give feedback to his bosses, which may be a bit threatening to Hestnes and Marlowe but is, in fact, an extremely valuable quality. To me, he looks like a terrific manager; I wouldn’t even consider letting him go. If they want to drain Arcell as quickly as possible, then he probably isn’t the right person to head the division. But if they have growth opportunities in another division, he looks like a good guy to put at the helm. In sum, Crescent is a manager who seems to be asking for logical, smart things. Hestnes said early on that he wasn’t going to focus on Arcell—but that was before it started doing so well. Reevaluate it, guys. Crescent is a manager who seems to be asking for logical, smart things. I wouldn’t even consider letting him go. Of course, it would help to know Sargon’s financials, its market shares, and the size of its investments. But even without those numbers, we can see that the company’s CEO and president really should step back, answer some fundamental strategic questions, and consider the situation at hand from the broad, balanced perspective that having the answers to the questions will provide. If they don’t, Crescent will quit, Arcell will flounder, and Hestnes and Marlowe may find themselves sitting in the middle of a corporate ruin instead of presiding over a whole that at least has promise. David J. Collis is an associate professor at the Harvard Business School in Boston, Massachusetts. He is coauthor, with Cynthia Montgomery, of Corporate Strategy: Resources and the Scope of the Firm, to be published by Richard D. Irwin in September 1996. If Jack Marlowe is truly focusing his attention on Charlie Crescent, he is missing the point—and possibly putting Sargon in jeopardy. Nothing can be decided about Crescent until Sargon’s overall corporate strategy has been reevaluated. Sargon’s senior managers appear to be making two fundamental mistakes with regard to corporate strategy. First, they are holding on to the misguided belief that value can be created in a corporate portfolio by transferring capital from one business to another. The traditional approach of portfolio planning, which was widely practiced in the 1970s, was to take funds from cash-cow businesses and invest them in high-growth, emerging businesses that would then become the stars of the corporation. If there is any lesson for diversified companies to take away from the 1980s, however, it is that the capital markets are the most efficient allocators of capital. Although it is true that raising capital (particularly new equity) may be more expensive than retaining earnings, any business strategy that is viable should enable a company to raise the capital it requires. Sargon should not be using Arcell as a cash cow to fund its new businesses; each business should have a sufficiently credible strategy that the corporation can raise the necessary finances on its behalf. Sargon should not be using Arcell as a cash cow to fund its new businesses. The second corporate-strategy mistake Sargon’s managers appear to be making has to do with the company’s diversification plans. The Cyberam acquisition, whose announcement received such a cool reception on Wall Street, seems to be only the most extreme example of the weakness in the strategy. What do household appliances, brake systems, telecommunications components, voice recognition systems, and routers have in common? Other than that they are nondefense and high technology, and have great growth potential, they seem to share nothing—no technology, no manufacturing processes, no customers. The diversification strategy appears to be a mad dash to get into any nondefense business that might even remotely be claimed to have a synergy with the company’s defense activities. The problem that Arcell is having finding a worthwhile use for the missile coating is typical of the difficulty many companies have creating economic value by competing in both defense and nondefense businesses. The diversification strategy seems to be a mad dash to get into any nondefense business. Marlowe, therefore, has a lot of work to do before he can resolve the alleged problem with Crescent. First, he needs to reassess the corporation’s strategy. If he does not believe in the strategy, he should confront Hestnes. If, for some strange reason, the diversification plans do make sense to Marlowe, he still should use his analysis of the strategy to convince Hestnes that funding acquisitions with Arcell’s cash is inappropriate. In either case, once Marlowe has established that the strategy for Arcell must be separated from the diversification move, he should begin to think about what, in fact, is best for Arcell—independent of the arbitrary corporate mandate to generate cash. It is unclear whether Arcell should or should not be investing in itself. Is there a real future in China? Will investment in a dealer network pay off? Such questions must be answered before Marlowe can know whether or not Crescent is the right manager. Only if it turns out that Arcell really should be managed as a no-growth, low-cost operation does Marlowe have a potential problem with Crescent. If Crescent then refuses to recognize that this is the best strategy for the unit—and he must be given every opportunity to argue that growth is the correct option—replacing him becomes a possibility. I hope Marlowe comes to realize that the real problem at Sargon is the inappropriate corporate strategy being pursued by Hestnes. (If he doesn’t, he will soon find the organization under siege from Wall Street.) Crescent’s objection to his role in the company is merely one manifestation of the problem. To replace Crescent would be to sacrifice to a misguided corporate strategy someone who might be a great manager. Jane Warner is president of Randall Textron, a diversified manufacturing company based in Troy, Michigan. Before joining Textron, she held executive positions at General Motors in the manufacturing, engineering, and quality areas. This scenario either represents the failure of Sargon’s management to develop, communicate, and obtain support for a solid corporate strategy or is an example of a key division head’s unwillingness or inability to change the focus of his business to achieve the company’s overall objectives. Either way, Hestnes and Marlowe are not approaching the problem in a productive way. I suspect that Hestnes’s judgment is clouded by his preference for high-tech products and by the fact that Arcell was established before his appointment as chairman of Sargon. I don’t know what is causing Marlowe’s confused thinking. But it’s clear that if he doesn’t bring Hestnes and Crescent together to share a common vision, he may be forced to move Crescent aside. And that would be a shame because Crescent is clearly a competent and respected leader. Right now, Hestnes and Marlowe seem to be focusing on Crescent as the problem rather than considering how Sargon functions vis-à-vis its business sectors’ roles and goals. Their orientation leads me to believe that Sargon, as a corporate parent, has not developed robust top-level financial goals or a strong, supporting strategic plan. If that is the case, Crescent isn’t the problem; he is merely a symptom. He is following the natural instinct of an executive to protect and grow his business, because he hasn’t seen what Hestnes and Marlowe want Sargon to look like once the big investments in new businesses are completed. Hestnes and his management team—which should include Crescent, by the way—need to determine how Sargon plans to compete, how success will be measured, what roles various sectors will play, and how Sargon’s transition will occur. The very process of developing a comprehensive strategy for Sargon would clarify the company’s expectations of Crescent and of Arcell. For example, the process of developing financial goals might confirm the need for Arcell to be a cash cow indefinitely. Or the management team might find that Arcell needs to be supported for a specified time while Sargon makes the transition to a predetermined business mix. In both cases, Arcell might need a certain amount of investment to sustain its performance. And in both cases, Crescent would be able to motivate his team and offer incentive compensation if he understood and accepted the rationale behind the plan. In the extreme, Sargon’s management team might decide that Arcell should be divested. That decision wouldn’t necessarily result in a disaster. It has been my experience that if you are honest with people and show a sincere interest in their personal and professional needs, they will work with you through any circumstance. While open communication is always a key to success, a divestiture demands focused and frequent communication, with the parent company offering as much help as necessary with outplacement and severance. On the other hand, the group might validate Crescent’s interest in international expansion, Arcell might be recast as a potential global player, and that move in turn might open doors for growth in other sectors. There might be joint projects that could utilize the resources and expertise of two or more Sargon divisions and prove rewarding for everyone. Or there might be customers that Arcell could cultivate for other Sargon businesses. Textron’s Avdel Division, a global supplier of engineered fasteners—designed for automotive and electronic uses, among others—has helped create a business relationship between Toyota and Textron’s Randall Division. Avdel managers spotted potential connections, introduced the players, and, by virtue of their company’s reputation, provided a good foundation on which to build the new partnerships. Of course, it may prove difficult for the current management team to conceive a strategy on their own. Hestnes, Marlowe, and Crescent (along with other members of Sargon’s top echelon, no doubt) have been together for a long time. It is hard to know whether questions being raised by Hestnes regarding Arcell and Crescent are a function of old patterns of interaction or whether the tensions exist because the company is in transition. It is clear that different skills and perspectives are required today than were needed in 1977, when Hestnes took the helm. For those reasons, and to depersonalize the issues further, Sargon would probably do well to consider hiring an outside resource to help with its competitive analysis, strategic planning, and executive staffing decisions. However chartered, a written plan that includes such specifics as a five-year financial forecast, and goals and plans for specific sectors, is essential. Are there synergies among the businesses? What needs to be done with each sector to make it the top one or two in its field? All the senior managers—Crescent, the other Sargon division heads, and top-level staff officers—must be included in the process and be clear on their divisions’ objectives in order for the plan to work. If Sargon does have clear financial strategies and a supporting strategic plan that, at a minimum, was created with input from Crescent and the other division heads and has been well communicated throughout the organization, then Crescent may in fact be a problem. In that case, Marlowe needs to have a one-on-one with him—and soon. After Crescent’s concerns are considered and, if appropriate, accommodated, his behavior needs to change. If he simply cannot be a team player in the context of the larger Sargon organization, Hestnes and Marlowe will need to move him out. If Crescent cannot be a team player in the context of the larger Sargon organization, Hestnes and Marlowe will need to move him out. As for the car ride, Marlowe should discourage any specific mention of Crescent and instead focus the discussion on whether Sargon is following a well-defined and clearly communicated business plan. If Sargon has a strategy, is it the right one or does it need refinement? Have the company’s goals been communicated? If the plan needs more development, Marlowe should take the lead in its planning and execution. If Hestnes and Marlowe believe that the best possible plan is in place and that it is well understood throughout the organization, the writing is on the wall for Crescent. But if they have any doubts about their strategy, they really are at the beginning of a long, rough road.
