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 / First Quarter 1997 / Issue 6(originally published by Booz & Company)


How to Stop Bad Things from Happening to Good Companies

Leaders who assert themselves and face the truth are found in every industry. For example, under Robert Wood's inspired leadership, Sears, Roebuck & Company moved from catalogues to counters in the late 1920's. It traveled from the cities to the suburbs in the late 1940's. Mr. Wood then directed Sears to the Far West while his traditional competitor, Montgomery Ward, dawdled near the Great Lakes. In 1959, Sears had 17 stores in the exploding Los Angeles market, and Ward had none.(5) The result? Sears gained a lead on the rest of the retailing world, which it has only recently thrown away.

Facing the truth is never painless. The success of Levi Strauss & Company as top gun in the jeans market made it a $4 billion operation employing 48,000 people by the early 1980's. Success and "affordability" enabled it to dabble in an array of diversifications, hiring thousands of people along the way. Meanwhile, significant changes in the company's customer base threatened its success.

When Robert D. Haas became president and C.E.O., in 1984, he faced "a company in crisis,'' he later recalled. "Our sales were dropping, our international business was heading for a loss, our domestic business had an eroding profit base, our diversification wasn't working and we had too much production capacity.'"(6)

Among other actions, Mr. Haas took the company private and reduced employment by 17,000, nearly a third of the work force. And the business was redefined.

Levi's success had depended on 18-to-25-year-old jeans buyers, the "baby boomers," who were growing older, more affluent and rounder. While Lee's, Levi's archrival, continued to define its market as the 18-to-25-year-old, thus placing itself into a declining segment, Levi's chose to stay with its customers. It created entire new product lines that met the evolving needs (and shape and size) of this group. While it remained competitive in the 18-to-25 jeans market, it became dominant in the over-25 group. The result? From 1987 to 1990, Levi's sales and profit grew by $1 billion and $300 million, respectively; Lee's revenues, meanwhile, declined by $300 million and its operating profit fell by $100 million.

Perhaps no story is more challenging than that of the Intel Corporation.

Intel was founded a mere quarter-century ago by Gordon Moore, now chairman, and the late Robert Noyce. Its founding strategy, according to Andrew Grove, Intel's third employee and today its president and C.E.O., was to be a "silicon-based [company with a] distinctive competence in memory products." It would supply replacement parts for mainframe computers.

For more than a decade, the strategy was successful. Inevitably, however, Intel's DRAM (Dynamic Random Access Memory) chips business became commoditized. While this was not surprising, given industry evolution, it was surprising that Intel spotted this development and redeployed its assets in time to gain a new competitive advantage in a different part of the industry.

How did that happen? First, middle management saw the changes coming. Second, the rule at the company was freedom of speech: "No one at Intel was ever told to shut up," Mr. Grove said. Third, not only were smart managers encouraged to speak their minds, but their teammates -- from the top through the ranks -- understood the necessity of listening, and of acting upon what they learned.

In 1984, Mr. Grove said, "I recall going to Gordon [Moore] and asking him what new management would do if we were replaced. The answer was clear! Get out of DRAM's. So I suggested to Gordon that we go through the revolving door, come back in and just do it ourselves."

Yet it was terribly difficult for many people to think of Intel as anything but "the memory company" -- in other words, to think "out of the box." Describing the possibility of abandoning the business, a manager said: "It was kind of like Ford deciding to get out of cars." Yet Mr. Grove persevered. The result? Intel's hard-driving competitiveness is the stuff of legend.(7)

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