Executive Times
Volume 2, Issue 11	November, 2000
ã 2000 Hopkins and Company, LLC Note re: links---certain hyperlinks assume that you are registered as a subscriber to the site. If you are not a subscriber to certain sites, the links will fail. If you register, the links should work. Also, certain hyperlinks expire and may not be available when you try to go to the site. Time to unplan For many executives and their organizations, this is the time of year to finalize annual plans and set budgets. Not long ago, plans remained static: to be implemented, but not radically changed. Today, the main purpose of annual planning is to support budgetary resource allocation and to prepare an organization to notice and exploit opportunities that might arise in the future. The best executives act when the time is right, not when the plan anticipated action. Organizations don’t wait for changes in the calendar to change executives or plans; action is taken when decision makers determine the action is in the best interest of stakeholders. In recent weeks, we’ve read more about the unplanned actions by executives and companies than we’ve read about the results of slow and steady implementation of corporate plans. Read about what selected executives have done when faced with unplanned events, and consider how you might have acted in the same situations. Take Me Out to the Ballgame General Electric CEO Jack Welch planned to retire in April 2001, and had been leading an orderly management transition, until recently when plans changed dramatically. Late on Thursday, October 19, Welch learned of United Technologies bid to acquire Honeywell. Not wanting a competitor to become stronger, Welch directed a team to devise a GE bid for Honeywell. By Friday morning, a bid 10% higher than the one from United Technologies was prepared, and Welch and Honeywell CEO Michael Bonsignore began earnest talks. By the end of the day Friday, UT withdrew their bid, not wanting to go toe to toe with GE. Late Friday, Welch agreed to stay on as GE CEO through year end 2001 to help with the merger integration. The Wall Street Journal (October 23, 2000) said “The swift, stunning moves by Mr. Welch quickly changed the game plan for GE, a company that prides itself on stability and predictability. On the brink of his retirement, Mr. Welch has pulled off the biggest deal of his 20 years atop GE and one of the largest industrial mergers ever, doubling the size of GE's already large aircraft engines and servicing business and adding to its plastics, chemicals and industrial controls units.” Our favorite part of these 48 hours in the life of Jack Welch came from the Associated Press wire. Saturday’s talks with both boards of directors ended too late for Welch to take a limo to game one of the World Series. Instead, he took the D train. He’s an executive who will do whatever it takes to make something work, even if it means leaving the comfort of an executive limo for the noise and crowds of a subway. How quickly can you change your plans? When opportunity knocks, will you answer, or continue to proceed with your plans? Are you prepared for extraordinary action? Are your biggest and best accomplishments ahead of you or behind you? Will you be taking the D train? Call Key Operator When Xerox CEO Paul Allaire said in a teleconference with analysts on October 3, 2000 that the company has an unsustainable business model, we had to listen again to be sure of what we heard. Called back to Xerox last May, Allaire knew there was operational disarray, poor implementation and a crisis of confidence in management. When 3Q results were estimated at a loss of 15-20 cents per share (the first quarterly loss in sixteen years), Allaire advised the market of the revised forecast and announced the need for a basic transformation of Xerox. Sometimes the best laid plans lead to unintended consequences. It seems that after Xerox reorganized its entire sales force to increase effectiveness, sales dropped, a not uncommon event when an organization undergoes internal change. Concurrent with the sales reorganization, Xerox consolidated three dozen billing centers into three, leading to significant layoffs. Salespeople were said to be spending most of their time on billing problems, adding to the drop in sales. The sales force turnover rate is reported to be in the “low 20% range”, down from last year. (The Wall Street Journal, 10/20/00). The company also took massive charges at the time of the reorganizations. Now, Xerox faces aggressive cost reductions ($1 billion), asset disposals ($4 billion worth) and other methods to generate more cash including reducing their stock dividend by a nickel (a 75% reduction). In late October, actual results came in at a loss of 20 cents per share plus an additional six cent charge relating to Mexican operations. Xerox recovered from the effects of powerful competition in the 1970s. Can that happen again? Will Allaire have enough time to implement a business model that is sustainable? When you consider implementing changes that will benefit your organization in the long-run, how well can you estimate the time it will take for individuals to adjust to the changes, and become productive in new roles? Do you have time to implement change gradually, and revise along the way? Do you have the resources to ensure that changes are executed well? When things aren’t working out as you planned, what do you do? Huge Grocery Bill About 85% of Priceline.com’s revenues come from the sale of airline tickets. About a year ago, founder and CEO Jay Walker announced, in a move to diversify, “There is no category we won’t be in.” (The Wall Street Journal, 10/6/00). One category will close down within the next few months: Priceline Web House Club, a private firm licensing Priceline patents, was losing $5 million a week letting customers name their own price on groceries and gasoline. Priceline.com remains involved in airline tickets, hotel rooms, mortgages, new cars, rental cars and long-distance services. Priceline has accomplished something retailers haven’t done well so far: it gets consumers to disclose the price they are willing to pay. We expect that such information will be valuable and in some sectors, the Priceline business model will work, especially given their patented processes. In the meantime, the company is learning valuable lessons about categories where their processes won’t work. We read in The New York Times (10/6/00) that Walker will lose the $179 million he personally invested in Web House Club, of the total $360 million in private capital raised. That’s peanuts compared to the change in the value of his holdings in Priceline.com, which went from $8 billion in April 1999 to around $220 million recently. Walker will feel the pinch of a higher grocery bill. How well do you learn from one category and apply that learning to another sector? What’s your pain threshold: $1 million a day, a week, a month, a year? How patient will you or can you be in new ventures? All This & That Maybe massive restructuring has become a core competency at AT&T. The company hasn’t achieved expected synergy in its current form, and its stock price has been hammered. So, it’s back to what worked in the past: spin off and restructure. After the initial breakup into the Baby Bells in 1984, AT&T got rid of NCR in 1996 and spun off its equipment unit which became Lucent Technologies (Lucent is having its own woes, bringing back retired CEO Henry Schacht to replace fired CEO Richard McGinn). This time, AT&T announced that it will divide itself into four parts: business services, consumer services, broadband and wireless, each under the AT&T brand. CEO C. Michael Armstrong has acted decisively since his arrival in 1997 to find replacement revenue for the fast-sinking long distance income AT&T had relied on almost exclusively when he arrived. He bought Telecommunications, Inc. in 1998 and entered the cable television business. Armstrong said of the 10/25/00 restructuring, “We’re combining the power of a common vision with the focus and flexibility of separate companies. Each of these new companies will move faster in meeting customer needs, but they’ll serve them under one of the world’s most recognized and respected brands and they’ll still be able to offer bundled services through inter-company agreements.” We’ll see. We know one thing for sure: if this plan fails, AT&T will restructure again. Does the structure of your organization make sense for today? Is it worth the time and effort to restructure? What makes more sense for your organization: consolidation of business under one corporate umbrella or the specialization of business units? What makes sense for shareholders and for customers? A piece of the action Pebbles for the Rock We’re always on the alert for pay for performance schemes that align the interests of different parties and create powerful incentives for improved performance. We read on The Dow Jones Newswire (October 3, 2000) that Prudential Securities is considering offering wealthy clients a choice in how they compensate brokers: flat or variable fees. Under the variable fee scheme, if the broker performs better than a selected benchmark index, the advisory fee will be higher. When performance falls short of the benchmark, the fee is lower. Merrill Lynch is said to be considering three factors for paying brokers: total assets gathered; client satisfaction; and performance versus an index. How well are your compensation plans working? Are you vulnerable to competitors offering different plans? Are you willing to experiment? Do you offer clients alternatives in how they pay your organization? Competing with customers Biting the apple and flying away In most business to business relationships, there are clear boundaries concerning roles. One partner doesn’t cross the line and get into the business of another partner. Unless, of course, there’s an opportunity for profitable growth. Two stories in recent weeks may not be enough for a trend, but we’re paying attention. According to The Wall Street Journal (9/29/00), the folks at Apple Computer are considering opening up retail stores to sell their products. The company must be tempted to replicate the success of competitor Gateway’s stores. While many manufacturers have their own stores, this is a new move for Apple, which is likely to alienate long term loyal distributors of Apple products. We also read in The Wall Street Journal (10/23/00) that Singapore Airlines and Lufthansa have warned Boeing that its strategic move into aircraft maintenance services threatens the airlines’ own business. Where do you and your business partners draw the boundaries for your individual activities? Are the boundaries in the same place? When redundancies exist, what do you do about them? Do your customers or clients view your organization as a competitor? Does that help or hurt business? Follow Up Here are selected updates on stories covered in prior issues of Executive Times: Ø Just after publishing the October 2000 issue of Executive Times, where we led with stories about family members and their dynamics, we read of the merger of Firstar and U.S. Bancorp which brings together the Grundhofer brothers. Older brother Jack, U.S. Bancorp CEO, will work for younger brother, Jerry, CEO of Firstar. Ø The March 2000 issue of Executive Times mentioned the Ford Motor Company program for employees to purchase computers at a reduced cost. We read in the Minneapolis Star Tribune (October 5, 2000) that 75% of Ford’s U.S. workers have already taken advantage of the program, which will be expanded soon worldwide. Ø We’ve been waiting for the business press to pick up on the focus of the lead story about variable customer service standards in the March 2000 issue of Executive Times. For a complete tale of how to treat customers differently, read “Why Service Stinks”, the cover story in the 10/23/00 issue of Business Week. Legacies When some organizations merge, people and social issues can overpower the financial issues. That’s when it takes strong and effective leadership to act in ways that build and sustain a strong organization. When Chemical Bank and Chase Manhattan Bank merged in 1995, one key player performed such a leadership role. Tom Labrecque could have expected a long-term CEO role at the old Chase, as well as at the merged bank. Instead, he agreed to take the number two position, with no agreement to become CEO in the future. He could have found another merger partner where he would assume the lead role. Always a banker and a gentleman, Labrecque acted in ways that put his personal interests behind those of other stakeholders, and ensured a successful merger, and a stronger organization. Labrecque retired from Chase in 1999, knowing the organization was in good hands. He was diagnosed with lung cancer around Labor Day, and died in New York on October 16, 2000, at age 62. Shareholder activist Michael Price said of Labrecque, “Of all the companies we’ve ever invested in, he was by far the best CEO.” (The New York Times, 10/19/00). Reading (Note: readers of the web version of Executive Times can click on the book covers or titles to order copies directly from amazon.com. When you order through these links, Hopkins & Company receives a small payment from amazon.com. Subscribers to the print version of Executive Times can receive the web version at no additional cost. Send e-mail to hopkinsandcompany@att.net with a request to be placed on the web version distribution list. Also, not all books we read make it to the pages of Executive Times. Check out other book selections on our bookshelf at http://www.hopkinsandcompany.com/bookshelf.html). Brilliant We always thought that a hedge fund took different positions that would offset one another. After reading When Genius Failed: The Rise and Fall of Long Term Capital Management by Roger Lowenstein, we learned that Long Term Capital Management failed mostly because it placed the same bets worldwide, and when it came time to liquidate its positions, there were no buyers for what LTCM held. That’s the ultimate basis risk. Lowenstein interviewed many of the players involved in the creation of LTCM and had access to many documents that helped unravel exactly what happened. He walks the reader through the drama with clear explanations of what happened and why. Economics is more art than science, and this book confirms that. The models created by Nobel prize winners assumed that the future would behave like the past, in a rational manner. Their mathematical precision, backed up by their academic credentials, and prior success attracted huge amounts of money into the hedge fund. “Long-Term was so self-certain as to believe that the markets would never---not even for a wild swing some August and September---stray so far from its predictions.” Their decline occurred because human and market behavior isn’t always rational and predictable. This is a great story of hubris and dumb mistakes by very smart people. Highly recommended. Visit http://www.hopkinsandcompany.com/books/when genius failed.htm for an expanded review and more quotes. Tangled Web Executives looking for ways to improve their use of e- business may find a roadmap in Don Tapscott, David Ticoll and Alex Lowy’s new book, Digital Capital: Harnessing the Power of Business Webs, but the route won’t be found easily. The authors are familiar writers in the business bestseller market. Tapscott’s The Digital Economy and Growing Up Digital have been popular, as has the team’s co-edited work, Blueprint to a Digital Economy. Digital Capital is an attempt to help executives begin to formulate individual strategies on developing and implementing ways to create value in a world full of b-webs. If that’s where you need help, give this book a try. We struggled through the 250 pages trying to make sense of agoras, value chains, distributive networks and aggregations. While we knew many of the examples presented, we finished the book still feeling we didn’t get it, but not wanting to spend any more time trying. Visit http://www.hopkinsandcompany.com/books/digital capital.htm for an expanded review and more quotes. Recommended with caution. Second chance Close to death from testicular cancer in 1996, Lance Armstrong fought the disease and recovered strength to win the Tour de France in 1999 and 2000. He tells an inspirational story in his book, It’s Not About the Bike: My Journey Back to Life. Armstrong attacked cancer with the spirit and courage he uses to attack riders in bike races. This book discloses Armstrong’s transformation from a cocky, angry, edgy athlete to a maturing parent and cancer survivor. Most of us face transforming experiences in our lives. In some ways, all past experience forms us for how we will deal with suffering or other new challenges. Armstrong used all his strength and wits to refocus his priorities and beat cancer. “We each cope differently with the specter of our deaths. Some people deny it. Some pray. Some numb themselves with tequila. I was tempted to do a little of each of those things. But I think we are supposed to try to face it straightforwardly, armed with nothing but courage. The definition of courage is: the quality of spirit that enables one to encounter danger with firmness and without fear.” Each of us can listen and learn from the experiences of others. Armstrong’s story, told with the help of writer Sally Jenkins, can inspire us to think about our own priorities and attitudes. The story is told with candor and directness. Read this book, especially if you can use a dose of inspiration. Buy it and give it to someone you know who is struggling with some aspect of life’s challenges. The Whole Menagerie One thing about Tom Clancy books: you get your money’s worth per page. Weighing in at over 3 pounds and over 1,000 pages, The Bear and the Dragon will be bought and read by Clancy lovers, guaranteeing this work as a best seller. Whether it stacks to other novels, including Clancy’s, is another issue. For the first two hundred pages or so, we’re introduced to scores of characters that can cause something of a struggle to keep individuals sorted out. Loyal readers know many of the players from prior books, but that doesn’t stop Clancy from some lengthy exposition on each and every passing character in the United States, China and Russia. Maybe Clancy read War and Peace and wanted to match the heft of that novel. The intervening six hundred pages set the stage for action among the introduced characters. An editor could have deleted about 500 pages of this section, but we imagine Clancy focus groups disclosed that readers love him so much that they just want to keep on reading and reading, no matter what. The final two hundred pages pick up the action, and, of course, bring everything to the expected conclusion in the last thirty or so pages. The good guys act like good guys and the bad guys learn a lesson. We liked The Hunt for Red October more than any other Clancy book, and The Bear and the Dragon doesn’t come close to that standard. Take a pass.
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