Troubleshooters

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At first glance, one might wonder why Wilmington, Delaware-based DuPont Co.’s Kurt Landgraf was put in charge of a new business unit earlier this year that’s expected to boost long-term revenue growth. After all, analysts such as Jeffrey Cianci of Bear, Stearns & Co. credit the 51-year-old former CFO for aggressive cost cutting. Cianci goes so far as to call Landgraf “Commando Kurt” for his efforts on that front.

But now the commando has been charged not with cost-cutting, but with growing revenues, as he is the first to acknowledge. “Life sciences is the growth engine for what DuPont wants to do in the next century,” he says.

Landgraf isn’t alone. For decades now, CFOs have had to prove themselves adept at troubleshooting by exercising ample ability to cut costs. But as Russell Kersh’s failure at Sunbeam shows, finance executives must now show they are capable of doing much more to manage the transition. In fact, cost cutting has taken a backseat to revenue growth as an area in which CFOs must prove they have the most to offer. And that presents an entirely new set of challenges.

In Landgraf’s case, his background prior to becoming DuPont’s CFO should stand him in good stead in the role of growth engineer. Long before taking the company’s top finance spot in 1996, he was focused on producing revenue. In his first corporate job, at Johnson & Johnson Inc., he left an analyst’s desk in finance to become a sales representative, and later moved into production scheduling, where he coordinated marketing, manufacturing, and sales efforts. Eventually, he was promoted to what he considers to have been his most important position at J&J–that of a consumer- brand manager–where he says he was “totally customer-oriented at the most basic level.”

In 1974, Landgraf left to take a position in pharmaceutical marketing services at The Upjohn Co., where he analyzed market research that he says was far more sophisticated and data-intensive than that produced for consumer products, which is typically based on focus groups. But he says his most important job at Upjohn was head of new-product planning, where, as he puts it, he had to make decisions on “where to spend money, how to spend money, and when to stop spending money.”

That experience was not wasted when he moved to DuPont’s pharmaceuticals division in 1990. A year later, he headed up its drug joint venture with Merck & Co. The widely heralded venture provided DuPont with a low-risk way of marketing the drugs it was developing. The joint venture was so successful that DuPont recently bought out Merck’s stake for $2.6 billion.

Surmounting Skepticism

Nor did Landgraf’s evident top-line talent languish when he became CFO in 1996, as he quickly embarked on acquisitions to develop the life-sciences business, leveraging the firm’s debt-free balance sheet to do so. When investors still remained skeptical about DuPont’s commitment to faster growth, Landgraf helped convince its board to shed Conoco Inc., an oil firm valued at $20 billion to $25 billion that DuPont bought for $7.3 billion in 1981.

Although he notes that the board included financially sophisticated members and that DuPont’s CEO, Chad Holliday, agreed with his thinking, Landgraf says the task of convincing the board was difficult, simply because of the amount of money involved. The issue, Landgraf says, wasn’t whether to sell Conoco to fund the life-sciences business, but when. And in the end, Landgraf was able to convince the board that “now was the time to IPO an oil company.”

As all of this illustrates, Landgraf’s approach to growth isn’t simply about bringing in additional revenues, but also reflects a savvy understanding of what types of acquisitions, divestitures, and other moves can promise growth in both the bottom and top lines. And that’s an area where financial acumen, as well as marketing skill, is needed.

Ticket to the Top

Since DuPont announced it would shed Conoco, the stock has climbed from about 60 to 80, and analysts expect the stock’s price/earnings multiple to expand as DuPont’s business becomes less cyclical. That, in turn, has positioned Landgraf to succeed CEO Holliday.

First, however, he must get DuPont’s new engine started. The matter has assumed even greater urgency in light of the disappointing earnings that the company announced for the second quarter of this year. Yet achieving success in his new role requires a perspective that Landgraf says is much different from “the traditional CFO mindset of cost controls as an earnings-growth driver.”

Other CFOs who have moved out of finance and into the more strategic role of generating top- line growth include Alan Lacy at Sears, Roebuck & Co. and Thomas Deloach at Mobil Corp., who are trying to turn around existing business instead of heading new ones. And still others are doing so via the more traditional route of taking the reins of other companies.

Among the latest to take their perspective to the helm of another company is Frank Weise III, former CFO of Campbell Soup Co., who recently took over as president and CEO of Cott Corp., a troubled beverage-maker based in Toronto. Weise played much the same role in April 1995 at Campbell, when he moved out of the CFO slot he had held for three years to head up its struggling bakery and confectionery division. Like Landgraf’s, Weise’s marketing skills were honed in a series of operating stints that preceded his ascendance to a CFO’s spot. Weise first developed his nose for revenue during a 25- year career at Procter & Gamble Co. By the time he left in 1992, his time there had included some 15 assignments, all of which called for him “to go in and fix a problem.” These ranged from troubles plaguing product areas such as food and over-the-counter drugs to difficulties in foreign markets.

At Campbell, Weise helped triple top-line growth of the bakery and confectionery business by implementing new promotional techniques and sales formats, often based on ideas he’d learned at Procter & Gamble. “We took the same tools and reapplied them,” he says.

Seeing Beyond Silos

While Weise and Landgraf had extensive experience in operations before becoming CFOs, both contend their work as finance executives helped prepare them for their latest stints, because it provided a more strategic take on the business. “I was never treated as the bookkeeper,” says Weise, who instead got a broader perspective thanks to his relationship with Campbell’s CEO at the time, David Johnson. “I was his business partner,” says Weise. “I was his right hand.” Unfortunately, he says, “many CFOs don’t look beyond the silos of finance,” if only because their CEOs don’t give them the chance. And Weise says that’s shortsighted of management, insofar as it wastes the leadership and relentless focus on results that a CFO can bring as head of an operating business.

Yet Campbell ultimately did that with Weise, passing over him to name Dale Morrison as Johnson’s successor. So in January 1997, Weise left to become chairman and CEO of Confab, a privately held, then­$200 million (in revenues) maker of women’s hygiene and incontinence-care products, in King of Prussia, Pennsylvania, whose founder had heavily leveraged its balance sheet to expand into the diaper business. There, as at Campbell, Weise combined his CFO experience with his marketing skills to produce both top- and bottom-line growth. He reduced the number of suppliers, working with the remainder to reduce waste, and put the brakes on unnecessary capital spending. “We took out millions without terminating one employee,” Weise boasts.

But he also accelerated research-and- development spending to improve diaper quality. More R&D from a fierce cost cutter? “The thing is to do it right,” says Weise. Sure enough, the diaper business went from zero to almost $100 million in little more than two years. And last April, Weise sold Confab to Tyco International Ltd., in Exeter, New Hampshire. While the amount wasn’t disclosed, Weise said Confab went for a “pretty good price.”

At Cott, Weise’s plans call for exiting beer and frozen foods and focusing on Cott’s core business by adding new carbonated drinks; New Age beverages such as low-calorie, fruit- flavored sodas; and bottled water.

What’s behind the expectation that CFOs should be able to enhance the top line as well as the bottom? In part, the trend reflects both the increasing complexity of financial transactions and their rising significance in overall corporate profitability. That is apparent in the ongoing wave of strategically oriented merger activity, technological investment, and globalization. “Whether it’s derivatives, foreign-exchange exposure, or corporate leverage, these are places where a CFO can deliver,” says Roger Brinner, managing director and chief economist with The Parthenon Group, a consulting and investment firm in Boston.

Financial Creativity

A closer look at Landgraf’s background shows how. As CFO of DuPont, he won kudos from Wall Street for avoiding the temptation all too common in strategic deals: overpaying for opportunities. DuPont’s agreement to buy out Merck’s stake in its drug venture is expected to dilute earnings by a mere 3 to 4 cents in 1998 and 1999 before adding to them in 2000. Says Bill Fiala, an analyst for Edward Jones, an investment firm in St. Louis, DuPont “has been very controlled in what it pays for acquisitions, because Landgraf has been unwilling to dilute earnings.” Instead, says Fiala, “DuPont is known for being willing to negotiate and get creative in structuring deals.”

That flexibility was apparent in DuPont’s late- 1997, $1.7 billion deal with privately held Pioneer Hi-Bred International Inc., the largest agriculture seed company in the country and a prize that had eluded others for years. Since Des Moines­based Pioneer wanted to stay independent, DuPont agreed to limit its stake to 20 percent and not seek to enlarge it for 16 years. By being flexible in its approach, DuPont won an enviable position in the booming area of plant biotechnology.

The venture was in line with management’s goal of shifting DuPont’s focus from chemicals to pharmaceuticals and food, both part of the life-sciences group Landgraf now heads. Whereas the chemicals market is worth somewhere around $50 billion, and DuPont already has a 50 percent share, pharmaceuticals is a $300 billion market and food is around $500 billion. To make life sciences, now 20 percent of the company’s earnings, at least 35 percent over the next five years, acquisitions will continue to play a big role. To help finance them, DuPont expects to use the $4 billion to $5 billion in pretax earnings that the initial public offering of a 20 percent stake in Conoco is expected to immediately generate. Eventually, the rest of Conoco could also be used.

DuPont has already made about $7 billion in acquisitions since January of last year, sending the company’s debt-to-capital ratio to 70 percent from 40 percent. Says Landgraf: “I believe in appropriate levels of debt as long as you use the debt for investments whose growth will exceed the cost of capital.” Yet those investments won’t be limited to acquisitions. Landgraf says he is looking for alliances in pharmaceuticals in Europe and the Far East, and research links with universities and biotech firms around the world. “My strategic thinking is that we enter into alliances, equity augmentations [such as the one with Pioneer], and geographic partnerships,” he says.

To do that, he will need all the confidence he can get from Wall Street. “It’s going to be a deal-driven strategy,” says Bear Stearns’s Cianci. “They need lots of financial discipline to do it.”

Landgraf says his stint as CFO helped provide that. It was, he says, “the best place you can be to gain a strategic overview of the entire corporation. There is no experience that prepares you better to understand the needs of shareholders and what it’s like to deal with the investment community.”

But if marketing experience is so helpful to parlaying a strategic perspective into revenue, how can CFOs without it oversee operations? Landgraf recommends that they “take a significant amount of their time and use it to learn the business of their companies.” That’s easier said than done, of course. But Landgraf insists that the time and travel required to visit plant sites and get to know business managers are worth the trouble.

Second, he says, the CFO must begin to operate not merely as a company’s chief auditor or accountant but instead as a member of senior management with responsibility for strategic planning. The change, he says, amounts to “helping people succeed, instead of explaining why they can’t.”

A Taste for Problem Solving

The challenge facing Alan Lacy at Sears is perhaps more basic. But while the former CFO has his work cut out for him turning around the retailer’s struggling credit-card operation, success there will also hinge on finding new ways to grow the business. Lacy, who had spent his entire career until late last year as a financial executive, claims that the transition was easy. “I enjoy problem solving,” he says. And, of course, credit cards are a financial business. In fact, running such an operation is no doubt the easiest jump for a CFO to make. Remember that another former CFO, IBM’s W. Wilson Lowery, was chosen to run IBM Credit Corp. two years ago. And even as CFO, Lacy was a troubleshooter at Sears. He notes that he has recently spent more time in the top finance spot working on the troubled credit-card division than on anything else. Before the credit-card problems surfaced in early 1996, he had been involved in divestitures of lackluster performers like Prodigy, an electronic information service, and Advantis, a networking services firm, both joint ventures with IBM. And in Lacy’s previous job as CFO of Kraft Inc., where about 20 percent of the large conglomerate’s businesses were struggling at any given time, he says he focused on the difficult units, not the stars. “As CFO, I typically spent more of my time working on troubles,” he says.

In explaining why Prodigy and Advantis were sold, Lacy echoes Landgraf’s point about the value of knowing when to stop spending money on a business. “Companies sometimes should pull the plug on ideas sooner than they do instead of succumbing to the inertia that leads them to fund nonstrategically relevant ideas or investments too long,” says Lacy. “Hopefully, I’ve developed an earlier warning system to detect the signs of a bad investment.”

To get the credit-card business back on track, Lacy must not only address its problems with such measures as beefed-up collection procedures, but also come up with an entirely new strategy. “Most people think the credit- card business is suffering from poor underwriting and bad credit risk, and no doubt we’ve had some of that,” he acknowledges. “But the thing I focus on is the growth of the business,” he says. “I’m trying to make sure we get the business on the proper growth track.” Sears’s previous strategy produced a lot of growth, but ultimately backfired by relying on those cardholders most likely to default (see “Where Credit is Due,” CFO, November 1997). Now the credit-card business is likely to account for only an estimated 20 percent of Sears’s earnings this year, compared with 50 percent previously. So the challenge of turning the division back into a different kind of profit center requires a whole new way of doing business.

With that in mind, Lacy has hired Total System Services, a credit- and charge-card data processing company in Columbus, Georgia, to beef up its controls. Although it’s more expensive than Sears’s current system, Lacy contends the investment will allow Sears to offer different interest rates to different cardholders instead of a sky-high, 21 percent rate to all, regardless of their creditworthiness. While the higher rate fattened margins, better-heeled consumers got much lower rates elsewhere, leaving Sears with higher-risk customers. Lacy concedes that “we have to improve the value proposition we offer the card holder,” and says Sears is planning new services to attract them, including a reward program much like the airlines’ frequent-flyer programs.

As a result of the new approach, says Lacy, “I’m very hopeful that in 1999 we’ll be back on a profitable growth track.” What’s the biggest difference between his old and new roles? Says Lacy: “I’m now more top-line oriented and more focused on growing the business and the brand.”

But he says his CFO experience helped because he came to see “issues, challenges, and opportunities cross-functionally rather than from a pure marketing, finance, or operations silo.”

Lacy’s latest efforts have impressed Wall Street so far. And given Sears’s problems, success would represent quite a feather in Lacy’s cap, says Robert Hershey, partner in charge of KPMG Peat Marwick LLP’s finance practice. He contends that the “broader business perspective” gained by CFOs in Lacy’s position “gives them the credibility to be considered” for other jobs.

Just ask Frank Weise.

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