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Chapter 3: Laying the Foundation

Much of the corporate restructuring movement in the United States and Europe has been aimed at achieving this foundation for growth. Unfortunately, many companies, particularly in Europe and Asia, are not yet there. But restructuring and improving performance--starting to earn the right to grow, in our terminology--make up only half the picture. The other half is extraordinary leadership will.

So difficult is the task that the whole senior leadership team must share the resolve to grow. Creating this resolve is another critical part of the foundation for growth.

Many of the ideas in this chapter have emerged from our research into what we call "inflection" companies: enterprises that deliberately set out to increase their rate of growth and succeeded in doing so. These companies are distinct from our sample of 30 great growers. While the latter offer insights into how to sustain growth for a decade or more, the companies we cite in this chapter are notable for their success ill overcoming inertia to kickstart growth. Not all have managed to sustain that growth.

Earning the Right to Grow

To earn the right to grow, a company must achieve superior operating performance, sell any distracting or underperforming businesses, and build the confidence of the investment community--three critical steps that are illustrated in the recent history of the Warnaco Group.

Superior operating performance

The growth-sustaining companies in our research base are all outstanding operators, usually enjoying market-share leadership and lowcost producer status. They recognize that the issue is not growth or operational excellence, but growth and operational excellence. Superior operating performance is the product of a strong strategic position combined with executional expertise. These conditions enable management to lead and finance growth initiatives. How companies achieve superior operating performance has been the subject of hundreds of articles and books.

For more than a century, Warnaco earned a good living making bras and intimate apparel. As time passed, it branched out into men's clothing and active wear. By 1986, it had become a broadly diversified apparel maker worth $600 million, with a portfolio of popular brands including Olga, Geoffrey Beene, Hathaway, and Chaps by Ralph Lauren. Despite these business -building moves, solid growth had proved elusive for a decade, with sales increasing at just 5 percent a year. Worse, operating performance was unacceptable. Profits in 1986 were little different from those in 1978, and the company was not earning its cost of capital.

Years of cost cutting had left the business stable but only marginally profitable, and its growth pipeline empty. But this was soon to change. Andrew Galef and Linda Wachner led a leveraged buyout of the company in 1986, and Wachner became CEO.

Faced with a mountain of debt and underperforming businesses, Wachner knew she had to act quickly. She chose to focus first on improving operations, replacing most of top management and supplying her new team with cheap spiral-bound notebooks bearing the message "Do it now." She dragged her managers along to visit stores during the holiday selling season. Every Friday night, she responded to single-page memos of problems faced by division heads. Such actions signaled the sense of urgency that Wachner wanted to create in the new Warnaco. Her strong personal leadership and the new managers she brought in enabled the company to take the necessary tough actions to improve its operating performance.

Internal restructuring improved profitability early on. The Chaps by Ralph Lauren, Christian Dior, and Hathaway divisions were combined; all intimate apparel was brought together in one division; 15 underperforming stores were closed; and Olga international operations were consolidated. Slow-selling lines were dropped, working capital was managed more tightly, and manufacturing effectiveness programs were introduced. Warnaco also acquired low-cost factories in Asia.

These measures increased profits by 250 percent in 1987. Though not yet secure enough to grow sharply, Warnaco could at least consider investing in growth initiatives. Operating performance was stable and poised to improve from a sound base.

Strategic divestment

Companies with strategically distracting or badly performing businesses must use their judgment. Should they try to turn them around, or sell them off? Chief executives of growth-sustaining companies tend to opt for divestment rather than invest time, money, and energy in improving the performance of businesses that are not central to their companies' future. Most of the 30 successful growth companies in our sample shed such businesses, as did all nine of the "inflection" companies that made a deliberate choice to grow.

Chief executives contemplating growth usually follow a logic something like this: I can create far more shareholder value by investing senior management energy in improving our A businesses than by turning around our C businesses.' Needless to say, such an approach applies only to units that are not strategically important, and entails finding buyers at acceptable prices for the C businesses.

Pruning the portfolio of businesses through divestment creates capacity for growth. Although a business unit may still be earning adequate profits, these must be weighed against the opportunity costs of management distraction and competition for resources. Management attention and other resources are often more productively focused on growth opportunities than on businesses with limited potential. "We divest any part of the business we are not happy with...we are very disciplined," said Alfred Zeien, Gillette's chairman and chief executive. "We are convinced that the benefits of worldwide leadership are so great that we can't afford to waste time, money, and management talent where that leadership is not achievable."

Shedding unsatisfactory businesses has the added benefit of signaling strategic intent to both stock markets and employees. Conversely, not pruning increasingly irrelevant businesses can send mixed messages about a company's direction and resolve to grow.

At Warnaco) Wachner quickly launched a program of strategic divestment. When she took charge of the company, it was competing in four apparel groups and operating specialist retail stores. Seeking to improve cash flow and pay down debt, Wachner chose to divest and consolidate until only two lines of apparel were left. She kept cash generators that had strong distribution, but sold cash losers that did not (women's wear and 15 stores). Active wear, a Wachner favorite, was reluctantly sold in 1990 to raise cash for debt payments. By 1992, Warnaco focused exclusively on intimate apparel and menswear, profitable businesses that have laid the foundation for the company's subsequent impressive growth...