The reinventions of great companies
Pitney Bowes built a wonderful set of businesses that have served it well for 92 years, and the Company celebrated its 92nd anniversary on November 16th. On that evening, I attended the 75th Anniversary of the founding of the Company’s Oval Club, an organization that celebrates long service employees, by bringing retirees and long service active employees together.
One long tenured employee, Bob Hoffman, who retired after 56 years of service in 1995 and is now 92 years old, was very important to my success. I worked closely with him early in my time at the Company. Even then, I had many ideas about what the Company should do to grow its business. He would politely and thoroughly tell me which ones had merit and which ones had been tried and discarded because they were fatally flawed.
The longer I spoke with him, the more I appreciated those who came before me. The most important lessons I learned from Bob were that the leaders of the Company over several decades had been highly sophisticated and innovative, and had to make courageous decisions under extraordinary circumstances.
For example, Walter Wheeler, the Chairman from 1939 through 1969, had to deal with a regulatory threat to the company’s existence in the early 1930’s, the Great Depression throughout the 1930’s, a conversion of the factory to wartime production in the 1940’s, a life-threatening Justice Department antitrust suit in the 1950’s, a major pair of hurricanes far more destructive than Hurricane Sandy in 1955 that were severely damaging to the company’s major manufacturing facility in the South End of Stamford, a U.S. Justice Department antitrust lawsuit in 1957, and major diversification efforts throughout his tenure. Miraculously, he made enough good decisions for the company to thrive throughout his tenure.
The Company is challenged now because a major growth driver for physical mail, the expansion of consumer credit, declined in 2008, and probably will not return to its pre-2008 levels for at least a decade. The growth in consumer credit-related mail that substantially offset electronic substitution-driven mail volume reductions before 2008 declined because the credit bubble popped in disparate markets like credit cards, home mortgages and home equity loans, auto loans and leases, and personal loans. I do not expect that any of these markets will return to their pre-2008 levels for quite a long time, if ever.
This means that the Company will need to reinvent itself in ways that drive growth that are not dependent on mail volume levels. It has reinvented itself many times over its history. Some reinvention efforts that preceded my CEO tenure were great successes, like the formation of an internal financial services business, for which my predecessor George Harvey was the prime mover, even before he became the CEO in 1983. There were disastrous results, such as the Company’s foray into electronic cash registers in the early 1970’s, which led to a write-off of over 25% of the Company’s net worth at the time.
There are failed and successful reinventions at other iconic companies as well. Eastman Kodak is a sad case of a company that attempted on numerous occasions to reinvent itself and made consistently bad decisions. It got into pharmaceuticals with the acquisition of Sterling Drug in 1988, and sold Sterling in 1995; it entered the print services business in 1991 with the formation of Kodak Information Services, which was sold in 1997 to Danka; it got into the chemical business and then spun off that business as Eastman Chemical, a company that has done far better than its parent. It could not free itself from being dominated by the profitable camera film business until it was too late.
On the other hand, companies like Intel Corporation, which shifted from memory chips to microprocessors in the 1980’s, the Thomson Group, which changed from being a newspaper company to an information services and software company in the late 1990’s, and, over a longer period of time, Nokia, which changed from a rubber company to a digital telecommunications provider and Wipro, which started in the vegetable oil business and is now a leading provider of IT outsourcing services, are all success stories.
We did a fair amount of work at Pitney Bowes to identify the common factors in successful reinventions of companies, and built or acquired new potential growth engines, like software, marketing services, and mail services, but what makes most sense for the long term is not easily determinable from the outside.
There are many different stories and paths to successful reinventions. Great leadership is always needed. Xerox and IBM would either be gone or be like Eastman Kodak today if Anne Mulcahy and Lew Gerstner had not come at the right time and begun to lead them down new paths. However, there are additional common themes of successful reinventions:
- Although the execution phase of a reinvention takes many years, the decision process has to be clear, crisp and efficient. Many companies disappear before they can reinvent themselves. When it becomes clear that reinvention is needed, waiting until the perfect path becomes available is suicidal.
- The CEO and the Board have to be aligned on the reinvention path, and, then, they have to communicate clearly and frequently to all stakeholders: employees, customers, shareholders and other investors, the media, and the broader community. The process has to be as transparent as possible, so that stakeholders with useful feedback can contribute insights as the process unfolds. Hewlett-Packard is an example of a company that, during Carly Fiorina’s tenure, could not get agreement within its board about its reinvention path. For example, the board had an ugly public dispute about the Compaq acquisition. The company has struggled ever since, through a variety of governance crises.
- Successful reinventions are much harder to achieve with big, transformative acquisitions or mergers, than with a combination of organic changes, combined with many small, focused acquisitions. Large acquisitions may add assets and businesses needed for reinvention, but, unfortunately, they also add legacy assets that need to be sold or shut down. The process of sorting out the wanted from the unwanted pieces of a large acquisition is time-consuming and distracting, and it often causes the acquisition to fail.
- The movement from an existing, dying business to a new growth platform has to be done by acquiring or growing businesses complementary to what the company already has in place. The idea of moving from one business in which the company is an expert to a completely different business in a completely different industry in which it has no prior experience has about as much chance of success as going into an unrelated start-up business, which is very low.
- The company going through a reinvention has to accept the fact that it may lose shareholders who depend on the cash flow from the existing business for dividends or share repurchases, since capital has to be redeployed for growth and development in the new business space. Companies in a reinvention phase often take significant hits to the profit line, as Intel did in the 1980’s. The Thomson Corporation succeeded, in part, because it was privately held during the time that Dick Herrington led the company’s reinvention process. It is very difficult to keep the momentum going on a business with shareholders who expect quarterly results to be stable or growing when a company is trying to reinvent itself.
- Reinvention is easier to do in a situation in which the company’s survival is at stake, like the situation faced by Xerox or IBM, when there is a “burning platform,” than it is when decline is gradual, and the conditions that precipitate the significant decline have not yet happened and are not yet visible.
- Finally, reinvention is extremely difficult. Many, if not most, companies fail at it, either because they make the wrong decisions, like Eastman Kodak did, or wait too long to make the right ones. The reason we closely study stories like Intel and the Thomson Corporation is that successes like theirs are highly unusual. The longer I have been in business, the humbler I get about this kind of success story, because sustained or transformational success is very difficult to achieve.
For the sake of the many great people with whom I worked at Pitney Bowes for nearly three decades, I hope that it can follow the right reinvention path and celebrate another 92 years!