Lessons of Newell
Newell-Rubbermaid is the company featured in the latest installment of "lessons" from Harvard Business Cases that I no longer intend to use.
Good Parenting. Newell provides a powerful example of the importance of making the whole worth more than the sum of the parts. An “acid test” for this is whether being part of a larger corporate entity adds value to a firm’s individual businesses, and whether that value creation continues over time. By every indication we have from the case, Newell has excelled at this.
Strategy Inside and Out. Effective corporate strategies must be consistent both internally and externally. Internally, corporate strategies are systems of interconnected elements that continually reinforce each other. Newell’s strategy started with a clear vision of how the firm would compete. To implement that vision, the company built the requisite resources, tailored its organization to the strategy, and entered a set of concordant businesses that had remarkably similar key success factors. As Daniel Ferguson said in an interview in the 1990’s “we are only in one business.” The products were different, to be sure, but the logic and the resources that were critical to competitive advantage were the same. Externally, the strategy positioned the firm to take advantage of the development of discount retailing. The company was prescient in identifying the trend (or so they say), and in developing a strategy that was consistent with those opportunities.
The Limits of Strategy. Newell’s decisions to acquire Calphalon and Rubbermaid are examples of a company acting in an exploratory manner to increase its growth and profitability. After a long period of Newellizing dozens of companies, many of Newell’s product/market segments have reached “critical mass”. The two aforementioned acquisitions represent considerable opportunities and risks for Newell. Its struggles in this regard are instructive, eye-opening in fact, and provide considerable insight into the difficulties managers face when they venture beyond familiar waters. The issues that this case emphasizes concern the need for firms to balance two forms of organizational learning known as exploration and exploitation. Clearly, Newell has a successful formula. Sticking to their knitting (exploitation) has reaped them tremendous gains. But these benefits and advantages have a shelf-life. The acquisitions that they undertook require that they acquire and/or develop very new resources and capabilities (exploration). As of 2004, it looks as if they have not succeeded in striking the right balance between these two forms of learning.
The Limits of Strategy Research: The opening paragraph of the case states that “pointing to research that showed companies with over $10 Billion in market capitalization commanded higher price/earnings multiples, he (McDonough) believed it was critical for Newell to reach this level of capitalization.” There are many, many problems with the logic that underlies this belief. One of them involves the validity and generalizability of management research. This study would seem to suggest that “good things” will happen after having reached the $10 Billion mark. Surely financial analysts and institutional investors and market watchers have better ways of assessing firms than this. The question that McDonough should have been asking was “what else were the firms doing that resulted in higher prices earnings multiples.” He might have also inquired about the relevance of the study to his industry and whether the findings were mitigated by any number of firm-specific characteristics, e.g. prior performance, age, size, management caliber, etc. Acquisitions undertaken just for the sake of growth are probably acquisitions that should not be undertaken.