The Strategist: Be the Leader Your Business Needs

What’s your inclination at this point?

Usually when the time comes for a decision in my classes, “Do it” wins definitively, by at least a 2-to-1 margin.

So what, in fact, happened?

Masco did enter and in a bold way. Over two years, it bought Henredon (high-end furniture) for $300 million, Drexel Heritage (mid-price) for $275 million, and Lexington Furniture (low–middle) for $250 million. Combined, the revenues from the three made Masco the second-largest player in the U.S. furniture industry. It followed up by spending $500 million for Universal Furniture Limited (low end), which had manufacturing operations in ten countries on three continents and followed a ready-to-assemble concept—component parts were manufactured in low-cost countries and shipped in containers to five U.S. locations for assembly. Now Masco was both the largest furniture company in the world and one of the only firms with products spanning nearly every price point, a strategy that had worked well for the firm in faucets.

In total, Masco spent $1.5 billion acquiring ten companies and another $250 million upgrading their manufacturing facilities and investing in new marketing programs.

Presenting Manoogian with its Gold Award in the Building Materials Industry, the Wall Street Transcript cited his

imagination, foresight and strategic sense…. Manoogian has acquired low growth, mature products and become the dominant player in those product categories…. [H]is most recent set of acquisitions has been in the furniture industry. His strategy is to do to the furniture industry what he did to the faucet and kitchen cabinet industry….

With this historical update, the classroom crackles with energy. Executives who had advocated for bold action nod their heads to one another or give each other high-fives and thumbs-up, pleased that they’ve nailed their first Harvard case. I hear little “told-you-so” comments directed at the naysayers, who sit in grim silence. Someone once even called across the room: “Don’t worry, Bob. One bad decision won’t ruin your reputation. We won’t hold it against you the rest of the program.”

But it doesn’t take long for those who opposed entry to speak up.

“But how did Masco do?”

“They bought great brand names,” says someone.

“But how did they do?”

“They’re number one in market share. What more do you want?”

“But did they make money?”

There, as it’s said, is the rub.

When I post Masco’s financial results, silence falls as people absorb the numbers. In a few seconds, there are whispered expletives around the room.

After thirty-two years of consecutive earnings growth, Masco’s net income fell 30 percent. Two years later, operating earnings from furniture came to $80 million on sales of $1.4 billion, an operating margin of 6 percent, versus 14 percent for the rest of the company. After many years of struggle, Masco announced its intentions to sell its furniture businesses, leading one analyst to comment:

In the spring, management will go on the road with restated financials illustrating their “core” earnings growth as if they never entered the furniture business. They hope to rebuild investor confidence in the old [pre-furniture] Masco … as a growth company by showing their track record and prospects in the building materials arena. Given the $2 billion furniture “mistake,” this won’t be easy.

In a sad postscript, Masco discovered that exiting the furniture business was much harder than entering it. After a number of deals fell through, it eventually succeeded in selling its furniture firms, at a loss of some $650 million.

When it was all over, CEO Manoogian admitted, “The decision to go into the home furnishings business was probably one of the worst decisions I’ve made in 35 years.”

It’s a sobering moment in the classroom. The executives there didn’t intend to open their careers at the Harvard Business School by losing hundreds of millions of dollars their first morning.

So, let me ask you again, as I do the managers in my class: “Are you the strategist your business needs?”

3

THE MYTH OF THE SUPER-MANAGER

AS A STRATEGIST, what can you learn from Masco’s foray into furniture and the support most executives give that ill-fated decision?

Even if you were undecided or skeptical about the furniture industry, I’m willing to bet that some part of you supported Masco’s move. No one respects timid, passive managers. Bold, visionary leaders who have the confidence to take their firms in exciting new directions are widely admired. Isn’t that a key part of strategy and leadership?

In truth, it is. But the confidence every good strategist needs can readily balloon into overconfidence. A belief that is unspoken but implied in much management thinking and writing today is that a highly competent manager can produce success in virtually any situation. One writer calls this “the sense of omnipotence that plagues American management, the belief that no event or situation is too complex or too unpredictable to be brought under management control.”

I call this belief, when taken to its extreme, the myth of the super-manager. It seems to come naturally to many successful entrepreneurs and senior managers who see themselves as action-oriented problem solvers, confident doers for whom difficulties are daunting but solvable challenges. I see it behind Masco’s leap into furniture manufacturing and behind executives’ choice of the same path every time I teach the case. Confidence matters. But there’s much more to strategy and leadership than a steadfast belief that a daring vision backed by good management can overcome virtually all obstacles. Without the rest of it, “bold” too often becomes “reckless.”

Look at what such thinking did to Masco. Operating profitability dropped to half its historical average, and the firm’s stock price was lower when it left the furniture industry than when it entered ten years earlier. And money was only part of the cost. Where Wall Street had spoken of Masco as a “Master of the Mundane,” it began to speak of the company’s “past glory” and “bitter shareholders.”

The company lost momentum as its leaders spent years distracted by a massive venture that ultimately failed.

For Masco, its move into furniture was a defining moment, but not a positive one. A legacy built over decades was shattered, an affirmation of a well-known Warren Buffett maxim: “It takes twenty years to build a reputation and five minutes to ruin it.” All because the strategist got this one choice wrong.

What happened?

Your instinct, like most managers’, is probably to seek the answer by looking at Masco itself and its leaders. Surely, the ultimate fault lies there. But to get the full picture, you must look as much outside as inside the firm.

Here is a first clue.

As our faculty team was preparing to teach the case for the first time, a colleague, the most senior in the room, said, “Wait a minute. This story sounds very familiar.” He left the meeting and went back to his office files. There he found “Mengel Company (A),” a case so old it was typed on onionskin paper.

Set in 1946, the Mengel case describes the firm’s plans to revolutionize the highly fragmented furniture industry. Mengel’s bold idea? Build scale, gain efficiencies by leveraging its manufacturing skills, and establish brand identity. To do this, it would buck industry practice and spend $500,000 on national advertising to “make the average consumer style-conscious” and build its “Permanized” brand name.

I had never heard of Mengel, but with an eerie sense of déjà vu, I wondered if Masco’s leaders had known about them.

My own research in the industry led to the following list. What do you think these seemingly disparate companies have in common?

Consolidated Foods

Champion International

Mead

General Housewares

Ludlow

Intermark

Georgia Pacific

Beatrice Foods

Scott Paper

Burlington Industries

Gulf + Western

Like Mengel and Masco, these are all companies that tried and failed to find fortune in furniture manufacturing.