Strategies For Survival

By GEORGE J. CHURCH

Rarely has a sour note turned so sweet so fast. While production, jobs, incomes and consumer spending soared in the U.S. last year, corporate profits fell. To be sure, they fell only 0.8%, but that result stood out like the proverbial uncertain trumpet in a triumphal march. By April, analysts had begun muttering about "profitless prosperity" when--bingo! Within days, company earnings reports for the first quarter of 1999 heralded what the government eventually calculated was the strongest profit rebound in four years.

So what's going on here? There is no mystery about what caused the 1998 squeeze: company executives could not raise prices, no matter how much an increase might have been justified by rising costs, without losing market share to a host of U.S. and global competitors. The current rebound is more difficult to explain: competition is certainly no less keen, nor price boosts any less risky. But Abby Joseph Cohen, chair of the investment-policy committee of Goldman Sachs, gives much of the credit to corporate managers who have figured out effective strategies for prospering in that environment. To scratch beneath the surface, TIME looked at some of the enterprises that have wiggled out of the squeeze and extracted a few tips from the successful:

STREAMLINE

Stop scattering attention and resources among all sorts of businesses. Concentrate on what you do best--even at the price of painful amputations.

After losing $410 million in fiscal 1998, which ended Sept. 30, electronic-controls and communications conglomerate Rockwell International took the drastic step of spinning off its semiconductor business into a separate company. It is a giant, with sales of roughly $1.3 billion, or nearly a fifth of Rockwell's total 1998 volume of $6.8 billion. But Rockwell CEO Don Davis insists that the move was necessary to allow Rockwell to concentrate more on its core businesses, principally factory automation and aviation controls. (A possible result of divided attention: Rockwell in 1998 overestimated demand for new high-speed computer modems and got caught with what turned out to be outdated products.) Why this particular target for surgery? The semiconductor business is more volatile than Rockwell's other lines, says Davis; its investment needs are different, and the way employees are paid and promoted is different. Also, most of its business is in California, while Rockwell's other plants and customers are mainly in the Midwest. After the split-up last December, Rockwell began moving its corporate headquarters from Costa Mesa, Calif., to Milwaukee, Wis. It has also moved back into the black. For fiscal 1999, Davis predicts a profit of $570 million on revenues of $7 billion.

Hewlett-Packard is getting out of the business it began with: making measuring devices. "Sentimentally, it was a very hard decision," says CEO Lew Platt--not least because "I spent more than half my career in measurements." But measuring devices had come to account for only 17% of HP's volume, and a collapse in Asian markets turned them into a drag on overall profits. Those now come mainly from computers and related equipment, but HP got into that field as a kind of sideline and, with its attention divided, has long been regarded as trailing more innovative rivals. "We fell behind in the early days of the Internet," admits Platt.

In fiscal 1998, which ended Oct. 31, HP suffered its first profit decline in six years, to $2.9 billion, from $3.1 billion the year before. Since announcing the spin-off in March (it will take a year to become fully effective), HP has been doing better: earnings in the February-through-April quarter, second of fiscal 1999, jumped 34% above a year earlier. As a first fruit of its sharpened focus, HP in May announced a new line of computers and software, and even a new computer language that Platt hopes will give HP a reputation as a "thought leader." He will not be around, however, to see the results: he has announced his resignation, though he has not set a date. The reason, he says, is that at age 58, "I am ready to work a little less hard." But some analysts see his exit as part of the restructuring. Says a Wall Streeter: "Part of the way to get a new focus on the business is to get new management."

FOLLOW THE MONEY

Push hard on your most profitable products or services, and be ruthless in de-emphasizing the rest.

Clothing makers "are getting squeezed on two sides," says Leslie McCall, an industry analyst at the investment firm Brown Brothers Harriman & Co. Discount chains such as Wal-Mart and Target "are putting price pressure on them," she explains, "at the same time that the big department-store chains are making expensive demands about service." For example, stores that once put price tags on garments and supplied hangers for the clothes now insist that apparel makers do both.

Yet while the industry as a whole last year earned little more than a nickel of profit on each dollar of sales, Hong Kong-based Tommy Hilfiger pocketed profits of almost 11[cents] on the sales dollar. Part of the reason is the pulling power of the Hilfiger brand, which appears on perfume, sunglasses and footwear as well as men's and women's garments. Creation of a hot-selling line of junior jeans last fall also helped. But another reason, says McCall, is that the company was choosy about what to stress. Says she: "When Tommy launched its women's line, it put out a whole collection, from tailored blouses down to jeans. The casuals were just flying off the racks, but the tailored stuff wasn't. The company responded quickly, rushing to the stores with more of the casual product, and did not push the unsuccessful stuff on the consumer just because it had it ready to ship."

REPENT

Admit your errors, and atone for them. Companies, says Cohen, have been "standing up for the first time in generations and saying, 'We made a mistake.'" She is thinking mostly about keeping unproductive assets too long before shedding them, but there are other blunders to be corrected.

Witness Robert Mondavi Corp.: for a decade it had increased revenues at an average of 15.5% a year, leading an industrywide wine boom. Profits kept pace until 1998, but then they dropped more than 20% from a year earlier, to $29 million. Partly that was bad luck, the delayed effect of late rains in 1996 that ruined harvests and kept the company from making enough of its best-selling Woodbridge Chardonnay to meet demand a year later. But Mondavi neglected to warn retailers of the shortage and failed to put them on allocation--tell them each store could get only part of its order. Instead the winery just shipped what it could, then stopped. Angry retailers canceled their orders--not just for Chardonnay but for all Woodbridge wines, which account for more than two-thirds of Mondavi's sales.

It took Mondavi another year to get its shelf space back, which it accomplished by wooing retailers and cutting prices. The average wholesale price for a 12-bottle case of Woodbridge dropped from $37.75 in 1998 to $36.65 this year. Partly to balance that, it raised prices on some of its more expensive wines (yes, there are still some businesses in which that is possible). Mostly because of increased Woodbridge volume after the price cuts, profits in the most recent quarter bounced up 24% over the previous year.

INTEGRATE BUT DON'T CONGLOMERATE

Expanding by profitable acquisitions and bringing all the stages of making and selling a product under one corporate roof are old, old strategies. But there are some industries in which they are still innovative.

Take the making of metal buildings and building products: it is a most unglamorous, cyclical and slow-growth business. Yet it yields Houston-based NCI Building Systems more than a dime of operating income on each dollar of sales, according to chairman C.A. Rundell Jr. That is nearly double the industry average. Besides, NCI has grown from a small regional operator to one with 38 plants in 17 states and another in Mexico, and sales of $675 million for fiscal 1998, which ended Oct. 31 (vs. less than $40 million nine years earlier).

The reason is a careful strategy of making acquisitions that expand NCI geographically and also fit into an integrated structure that makes NCI the lowest-cost producer in its industry. Sheer size helps: the company has become one of the 10 biggest U.S. buyers of steel, enabling it to wangle discounts unavailable to competitors. It also saves on transportation costs by locating--or buying--plants close to steel mills. NCI builds its own automatic welding equipment, specially designed to weld mainframes of buildings together. Five years ago, it began buying painting plants, and it is the only company in the industry that paints its own steel. Rundell boasts that "typically we are able to double the profit performance" of any company NCI takes over. Financial analysts praise NCI's managers for resisting all temptations to stray from their anti-conglomerate pattern. In all their acquisitions, says Bill Baker of Dain Raucher Inc., "they have never been seduced into areas they know nothing about."

MIX IT UP

Few companies have escaped the profit squeeze with one strategy alone. Most combine several approaches, or shift from one to another. Besides spinning off parts of their businesses, Hewlett-Packard and Rockwell International are carrying on more traditional--and in Rockwell's case, quite drastic--cost-cutting programs in remaining operations. Tommy Hilfiger has not only adjusted quickly to a changed marketing mix but also shifted garment production into Asian plants, where labor costs are lowest.

Dell Computer Corp. has followed a particularly effective mix of policies. It originally prospered largely by cutting out the middleman and selling custom-built products directly to buyers. That strategy was probably old in the agora of ancient Athens, but it was new to the computer industry in 1983, when Michael Dell started selling hand-built PCs out of his dormitory room at the University of Texas. As it grew into a giant, Dell Computer insisted on keeping only a six-day inventory, vs. a six- to eight-week supply for most of its competitors. That not only lowered costs but also gave Dell the ability to turn on a technological dime--a vital capability in an industry in which hot new products may become obsolete well before supplies can be cleared out of the inventory pipeline.

Accordingly, Dell has withstood a profit squeeze on PCs. Estimates are that last year it posted an operating profit of $268 on each PC it shipped, while Compaq earned only $64 a unit and IBM actually lost $127. Even so, Dell is not relying just on PCs to extend its proud record of being the only company among the FORTUNE 500 that has increased revenues and profits more than 40% in each of the past three years. It is, in fact, somewhat de-emphasizing PCs to put more of a manufacturing and marketing push on such higher-margin products as servers, workstations, notebooks and storage. These products accounted for 39% of Dell's sales in the first quarter of 1999, up from 24% in the first quarter of 1997. Rick Schutte, a high-tech analyst at Goldman Sachs, believes the company is shooting for 50% in two to three years and that it will get there--largely because its PC profits will enable it to price the high-end products below competitors that have scanty or no profits on PCs.

These strategies do not tell the full story behind this year's profit rebound. The Asian turmoil that burned Hewlett-Packard, Rockwell and many other U.S. companies in 1998 has yielded to a weak recovery that is at least less profit-destroying than a continued collapse. Contrary to all predictions, the American boom has not only rolled on but also speeded up. And marketing errors such as Mondavi's are relatively easy to recover from in an atmosphere of rising incomes and free consumer spending. But even if the 1998 profit lag was an aberration, as many economists think, U.S. and global production capacity still exceeds demand, and price competition is relentlessly sharp. Keeping profits up still requires astute strategy--and not a little ruthlessness.

--Reported by Mubarak Dahir/St. Louis, Deborah Fowler/Houston, Laird Harrison/Northern California and Rebecca Winters/New York

With reporting by Mubarak Dahir/St. Louis, Deborah Fowler/Houston, Laird Harrison/Northern California and Rebecca Winters/New York