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From the Ashes

From the Ashes

Sometimes the mark of a great company is how it bounces back from defeat.

Just because a company falters doesn't mean its days are numbered. Organic companies know how to renew themselves. In this story learn:Why customers are the key to corporate renewal Where to uncover hidden strengths How to combat the cultural barriers to change More than ever, companies face an onslaught of challenges that can drive them to a painful and premature demise. True, some companies hobbled by bad management or crippled by market forces should slip away quietly in the night; the energy and financial resources needed to sustain them can be put to better uses. Yet many companies on the brink of death can and should be saved. Like a critically ill patient with weak vital signs, some companies can totter on the edge, only to revive and thrive. Others aren't so fortunate.

The key to surviving is uncovering the unique life-sustaining abilities and strengths that lie-sometimes hidden-within most companies. Four companies that found the will to survive and rebound from critical conditions provide life-affirming lessons.

Finding the Hidden Value

Back when Wang Laboratories Inc. was flying high, President Ronald Reagan came on television one night to share another of his folksy jokes with a moral: As a boy, he recalled, his father led him to a barn filled with what seemed to be nothing but manure. "There must be a pony in there somewhere!" the young Reagan supposedly shouted. The people who built up Wang in the 1980s weren't quick to fathom how its corporate clients' need for open systems would erode its value. So as Wang veered toward bankruptcy in 1992, the task that faced Joe Tucci was not so different from young Ronnie's when standing outside that barn: Find the true value amidst the muck. "When you're doing a reinvention, you have to pick something that you're doing well, a core competency to build around," explains Tucci, chairman and CEO of Wang Global, the Billerica, Mass.-based company that emerged from Wang Laboratories after the bankruptcy.

Wang had built most of its fortunes around the design, manufacture and distribution of its VS minicomputer. But like other makers of proprietary systems, Wang got caught off guard by the rise of open systems computing. From a high of US $2.9 billion in its heyday from 1988 to 1989, gross sales plummeted to between US $1.7 and US $1.9 billion by 1992. Tucci says none of the proprietary systems makers had much of a chance against Unix-based open systems, but he notes that Wang competitors such as Hewlett-Packard Co. had other product lines they could shift their weight toward. Because Wang was a one-product-line company, its options were limited. "I could not develop a RISC-based, new, open platform," says Tucci. "Who was going to lend me the hundreds of millions of dollars to do that?" But Wang-in what Tucci calls "the end days"-was selling its VS systems to be installed in heterogeneous networks. At the request of customers, the company began to bid on installing network infrastructure, including peripherals and its own PCs. While Wang wavered in and out of bankruptcy for 13 months from 1992 to 1993, Tucci estimates that this service was bringing in about US $200 million in revenues. Yet researchers such as GartnerGroup Inc. of Stamford, Conn., were projecting that the market for network services would reach US $125 billion by 1997.

With that kind of a market, Tucci sold off or closed Wang's manufacturing facilities and some of its R&D capabilities and software development efforts.

Tucci then transformed Wang into a service company, retaining only the VS support for its existing customers. Today Wang's annual revenues exceed US $3 billion.

Selecting the germ of the old Wang from which to grow the new company was crucial, but it was far from the only challenge. The management style of the company had to shift from the research-minded culture instilled by founder Dr.

An Wang to an outward-looking sales and service organisation. Particularly during a bankruptcy, Tucci says, it's easy for a company to focus inward, yet it's most important that employees focus on customers.

Tucci says it was a major challenge to convince customers where Wang was going. "If I was dealing with a major service provider of mine in Chapter 11, I would want to make damn sure they'd succeed," he says. To that end, Wang Global launched image and PR campaigns that emphasised the company's new focus on network services.

Tucci also needed to recharge the roughly 4,000 people who remained from the old Wang and to make believers out of new hires. One successful tactic was distributing 50 shares of Wang Global stock to each employee.

According to Tucci, most of the client scepticism about Wang's survival has faded as the company has grown through acquisitions and strengthened its position with several partnerships, including the purchase of Olsy, an IT solutions and service subsidiary of Olivetti S.p.A, last year. And the pony-size business unit he chose to nurture at Wang's low point is growing into a venture that could well become a thoroughbred in the network services industry.

Unleashing the Competitive Spirit

As a poor Spain arose from decades of insular torpor, Iberia Airlines climbed skyward during the 1960s. A more open economy and a steady influx of foreign tourists fuelled the state-run carrier's growth. But in the early 1990s Iberia went into a nose dive. Grand designs to become a major international player by linking up with smaller Latin American airlines turned instead into a financial and managerial quagmire. Iberia, industry experts said, stumbled its way through the cultural, political and managerial challenges of operating in Spain's former colonies. During the same period, the Gulf War depressed international air traffic, compounding Iberia's problems. As losses mounted into the hundreds of millions of dollars by 1995, Iberia's executives were pleading for a Spanish government bailout from what they termed "technical bankruptcy." If Iberia were a private company instead of a protected state enterprise, it would have been closing up shop.

Yet by autumn 1998 Iberia was not only back in the black but had won an endorsement from American Airlines Inc. and British Airways PLC as part of a new strategic alliance among the three carriers. (At press time, British Airways and American Airlines were in the final phases of negotiating the purchase of a 10 percent stake in Iberia.) How did Iberia change its prospects in a few short years? The unexpected keys to the airline's turnaround came from an unlikely place: Brussels, the bureaucratic seat of the European Union. In the early 1990s the EU's member nations began creating a unified market that would eventually bring deregulation to every industry. Airlines, along with telcos, had long been sacred cows in Europe. In 1996 Iberia received an US $800 million state investment authorised by the European Commission to support restructuring the organisation as a private company. "If Iberia had remained a monopoly in Spain, perhaps [Iberia] would not have had to lower costs. But the market opened, and we went from having it all to having two other competitors who took 30 percent of the domestic market," says Guillermo Serrano, the airline's vice president of corporate affairs. Outside Spain, the old protectionist policies were also being dismantled. Competitors in the European market-Iberia's mainstay-began cutting fares and sharpening their operations. This forced Iberia's management to do an about-face. "We took steps to identify each business unit's aims, costs and what could be eliminated. This helped to change the mind-set [of employees]," Serrano says. "For the first time there were layoffs, and people saw they had to justify their jobs." From 1995 to 1997 the company shed 4,000 employees and slashed wages by an average of 8.3 percent. But such turmoil has actually nurtured a healthier company culture, Serrano believes. For example, Iberia's ground and passenger handling unit has been reorganised as a profit centre that must compete in a free market. Iberia also needs to pay attention to services such as information systems and catering that now run as profit centres. "Old employees began taking early retirement and the younger generations took over, some in management positions, and the vision changed," Serrano says.

Although forced to accept free-market principles, Iberia is proving to be a nimble competitor. In 1996 the company posted its first net profit of the decade and expects to report a 16 percent return on equity in 1998. The increased efficiency of its operations brought down total costs by US $245 million annually, and Iberia's debt dropped from US $1.3 billion dollars in 1994 to US $476 million in 1997. Iberia's core clientele has shifted to business customers. To gain their loyalty, the company launched a frequent flyer gold card, which now has one million subscribers.

With the newly acquired private-sector mind-set, the airline is scheduled for full privatization in 1999.

Cultural Rebirth

You've heard the one about how many psychotherapists it takes to change a light bulb: Just one, but the bulb has to want to change. The joke is easy to apply to the revival of Paul Harris Stores Inc. When Charlotte G. Fischer was brought in to reinvigorate the Indianapolis-based chain of 301 women's casual clothing stores in 1994, her basic challenge was not discovering how to reorient the product offerings, although she clearly had to do just that. The bedrock problem was how to change the attitudes and habits of a 42-year-old company that had fallen asleep at the switch while lifestyles, technology and its customers all had sped past.

The customers who once shopped loyally at Paul Harris Stores-fashion-conscious women on tight budgets who often shopped with children in tow-had slowly abandoned them. Many of the stores had become shabby, and there was little space for anyone accompanying the shopper to relax. Most critically, the chain had lost touch with the tastes and needs of its customers. It stuck to a narrow product line of sweaters, turtlenecks and stirrup pants while competitors offered complete mix-and-match wardrobes. It squeezed the most merchandise possible onto the retail floor, making it difficult to shop with children. Fischer, who is now chairman, president and CEO, saw that drastic change was needed but immediately hit a wall.

"The toughest thing I faced was the culture issue," Fischer recalls. "I was the first new chairman and CEO who was not family in the history of the company." Fischer's arrival came two years after the company emerged from bankruptcy protection in late 1992. Part of her challenge revolved around the pace of change. "Too much revolutionary change too quickly could have killed the company," she says. "But to bring in a few new players to move the company forward and to focus on our strategic game plan was critical." Fischer also had to contend with the dour mood of employees. "I was up against all these people [in the workforce] who thought [the company] would fold. It probably aged me 10 years in 4," Fischer says. So her first task became to convince employees that she had a vision for the company that could turn things around. The staff no longer had "a winning attitude," she recalls.

After many years of setbacks, employees had ceased to fight obstacles or embrace changes. "You have to begin to show small indications of change," Fischer says.

She started with a high-tech overhaul: ordering a new fax machine so that her secretary would no longer have to use a broken one on the second floor that only received and another on the first floor that could only send. "That made me be viewed as a big spender," she says quite seriously. Eventually, Fischer and the former vice president of finance, John H. Boyers, updated nearly all the IT at the company, including the links between the distribution centre and the stores.

Fischer's new team believed it could put the clothing chain back on track, so it went out to meet the long-neglected core customer. Survey takers visited homes and saw how the 25- to 50-year-old "soccer mums" who shop at their stores live. They were pressed for time and needed comfortable, mix-and-match clothes.

The first of Paul Harris's new stores based on the updated customer profiles opened in 1996. They featured expanded wardrobes of clothing, wider aisles to accommodate strollers and video areas for children.

So far, listening to customers has been a smart move. The chain has been adding about 50 stores a year and reported earnings last year of US $9.7 million on sales of US $209.2 million.

Sweet Home, Oklahoma

After two bankruptcies in five years, it would be an understatement to say that Orchids Paper Products Co. had lost its way. The 50-year-old manufacturer of toilet paper, napkins and tissues had badly misjudged its strengths based on a buoyant period in the late 1980s. Thinking Orchids could capture a growing market for private-label paper products in California, where it was headquartered until August 1995, company managers veered away from its low-cost product line. But the unexpectedly high cost structure of that strategy, combined with debt from a late-1980s leveraged buyout, brought Orchids to the brink of liquidation. At one point, its costs for raw materials and processing finally rose above what it could charge its customers. In 1992 Orchids filed for bankruptcy; then in 1995 it sought protection again.

Two veterans of Fortune 500 companies working at Orchids had a multifaceted strategy for saving the company: retrench to the core market of value-seeking customers, raise efficiency through new information technology and beat a tactical retreat to the executives' home turf in Oklahoma. "I'm from Oklahoma, and [Orchids' president] Mike [Sage] is from this part of the country, but frankly there's some bias against having headquarters here," says Orchids CFO Jim Swagerty, referring to the initial unpopularity of the move. But even if corporate snobs found little cachet in working in Sooner country, Swagerty and Sage saw a strategic opportunity. "The market we went for is more suited to the recycled paper we sell in Oklahoma," Sage says. Utility costs, a critical factor in the energy-intensive paper business, were also lower than in California. With a target market that now covers an area from Oklahoma to Chicago to the Atlantic, it made sense to set up shop in Pryor, Okla.

In 1995 Orchids lost US $500,000 each month. In fall 1998 the company was earning up to that amount each month. "We're making 15 to 20 percent on revenues," Swagerty says. "Not many tissue companies are making anywhere near that margin." The improvement isn't due wholly to a change of scenery. Swagerty credits the installation of a new ERP and accounting system from Macola Software Inc. of Marion, Ohio, with greatly improving efficiency. By giving employees in manufacturing and other departments greater access to order and production information, Orchids has much greater control over financials and customer service. And just as critical for a company trying to recover from a near-death experience, Swagerty says, were the audit features of the package that allowed investors and creditors to monitor progress. The Macola system has enabled Orchids to get more from its staff because access to relevant information can be programmed on a need-to-know basis. That was a key part of the turnaround: giving employees the information they needed to ensure the delivery of orders and to keep the operating costs low.

The last piece of the puzzle was getting the most out of a sharply reduced workforce. "We analysed our operations to reach the minimum number we need," Sage says. "One of our customer service clerks handles our LAN network. Our maintenance manager for the converting mill handles all the artwork revision for our packaging. People wear whatever hats they need to, so we're able to make good use of all our people." Sage acknowledges he is teaching the company a reverse lesson of his experience as an executive at The Procter & Gamble Co. He left the consumer-products mammoth in part because of its top-heavy management structure. "They make a very high margin and can afford that extreme level of attention to detail and have specialists for every function," he says. The much smaller Orchids doesn't have that luxury.

But then again, maybe it doesn't need layers of management. Swagerty says the trick to surviving is to take some of the lessons from Fortune 100 companies without crushing the entrepreneurial bent of a small company. "You can't superimpose a Procter & Gamble policy procedure here," he says. "Orchids would be dead in a week if it were run by committee." Besides stumbling badly at one time, Wang, Iberia, Paul Harris and Orchids share another common thread. Each rebounded from the dire situations they found themselves in or their own missteps had created by looking at the big picture, by reconnecting with customers and by filling a need in the marketplace. For organic companies, stubbornly sticking to old formulas and compulsively focusing on internal operations are death knells.

Senior Writer Gary Abramson can be reached at gabramson@cio.com.

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