Strategies For Survival

  • 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Rockwell in 1998 overestimated demand for new high-speed computer modems and got caught with what turned out to be outdated products.)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."

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