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.5 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.”6
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.”1
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.”2 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.3 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.
Most were regarded as well-run companies. Like Masco, they considered a fragmented, chaotic industry to be an opportunity for good managers to apply their skills. With great expectations and high hopes of success, they all jumped in with the intention of reshaping the industry through the infusion of “professional management.” Years later, they all left.
UNDERSTANDING THE FORCES
Most executives find this list both revealing and disconcerting. These were companies with considerable track records, yet they all failed in the same endeavor. Was there something problematic about the endeavor itself? Was something at work in the furniture industry that was outside the control of these companies and their leaders?
Here’s another clue.
Look at the chart on Relative Industry Profitability. It shows the average return on equity for twenty industries over the twenty-year period from 1990 to 2010. The chart was compiled from Standard & Poor’s and Compustat databases that include data on all companies that traded on U.S. stock exchanges.
Relative Industry Profitability: 1990–2010 Return on Equity
Are you surprised by how much profitability varies by industry? Compare Tobacco companies at 36.1 percent average annual return on equity—which means leading firms in the industry do even better—with Airlines at -10 percent or Commercial Equipment at -2 percent.
In my experience, most executives understand that average profitability will differ from industry to industry, but the scale of variation often comes as a surprise. Annual average returns in the most profitable industries are well more than double those in median industries, and more than four or five times those at the bottom of the distribution. Researchers have found similar differences in other countries, in both advanced and emerging economies.4
Are
