Thinking You Can Do Anything: The Case Of Masco Corporation
This article is part of a series on what causes a firm’s value to increase
Let’s end 2013 with one of the most timeless lessons in strategy. Once again I will be paraphrasing from Cynthia Montgomery’s 2012 great book titled The Strategist: Be the Leader Your Business Needs and my own research into Masco.
In 1986 Masco Corporation was considering a $1.5 billion move into the furniture manufacturing industry in the United States. Prior to this, the company had re-invented the faucet industry. Its portfolio included kitchen and bathroom cabinets, locks and building hardware and many other household products. These were “sleepy” industries before Masco entered, and Masco shook them up by “professionalizing” them and it extracted nice growth and profits. In fact in 1986 these businesses were expected to generate $2 billion of free cash flow over the next few years. Masco was labelled the “Master of the Mundane” and wanted to become the “Proctor and Gamble of Consumer Durables”.
Masco’s prior home run included products like the Delta and Peerless brand faucets. Masco’s “formula” was efficient manufacturing, good management, and great distribution through its channels and streams of new innovation. They also perfected branding to the end user (a pull strategy) and not just to the business channel (a push strategy), which was the norm then. Masco invented see-through packaging for the end user in the do-it-yourself channel after massive advertising on TV during the Olympics.
Masco’s Delta faucet solved the engineering problem of having only one handle. Homeowners loved them, as they did not have to bother with two handles and getting the mix of hot and cold correct. This product served an unmet need at the right time and right price. Masco was a runaway success in this space.
Masco was ready for a new challenge – to transform the fragmented and sleepy furniture manufacturing industry using virtually the same formula.
After all, the furniture industry appeared to be very similar to the faucet industry before Masco re-invented it. At the time it was a $14 billion industry in the United States. It did not make much money in terms of Return on Invested Capital. It had high transportation costs, low productivity and eroding prices. There were about 2500 manufacturers but 80% of sales came from just 400. Some were large companies but many were family owned businesses that had generated a living for generations for many of these families. Also sales and profits were very cyclical, correlated to things such as new home starts and sales of existing homes. Thus furniture purchases were highly discretionary and could be postponed. Management in the industry was seen as unsophisticated and there had not been much change for decades. There was not much brand recognition either. There had not been much advertising and research showed most consumers could not remember the brands of the furniture in their own homes. And finally the industry tolerated inefficiencies, extreme product variety and long lead times that frustrated customers.
So is this a grand opportunity to transform a sleepy, unsophisticated industry and reap huge rewards or warning signals that this could be a disaster? What would you recommend that Masco do in 1986?
Masco entered with force and size. In total, Masco spent $1.5 billion acquiring ten companies and another $250 million upgrading their manufacturing plants and investing in new marketing initiatives. The CEO was given the Gold Award in the Building Materials Industry citing his “… imagination, foresight and strategic sense”.
What happened? It was not pretty. After 32 years of consecutive earnings growth, two years into the initiative its net income fell 30%. Operating earnings from furniture came to $80 million on sales of $1.4 billion, making this an operating margin of 6% versus 14% for the rest of the company. After 10 years of struggle, Masco announced it would be exiting the furniture manufacturing industry. By then it was a $2 billion mistake and its share price was at a ten year low and shareholders were not happy,
Masco is doing just fine today, but what are the lessons of such a serious miscue? Part of it was discussed earlier this year about Strategy Law #1 – The Nature of Your Industry Determines the Average Profitability for All Competitors. Inhospitable industry structures simply create terrible starting conditions for a strategy and you are pushing uphill the whole way. Warren Buffet’s famous quote is right on: “When a management team with a reputation for brilliance tackles an industry with a reputation for bad economics, it is the reputation of the industry that remains in tact”. Every factor that Masco thought it could turn to its advantage turned out to be a barrier that was unmovable. The second lesson is thinking a previous winning formula can be applied to just about any situation and be made to work with hard work and good risk taking. Dr. Montgomery of Harvard calls this the myth of the super-manager. Combine the two lessons and the third lesson is you will fail more often than you win.
Bill Bigler is Director of MBA Programs and associate professor of strategy at LSU Shreveport. He spent twenty five years in the strategy consulting industry before returning to academia full time at LSUS. He is the immediate past president of the board of directors of the Association for Strategic Planning, one of the leading professional associations in the field of strategy. He can be reached at email@example.com and www.StrategyBest.com