virtually all hands go up. Yours probably would, too.
On top of its marketing challenges, the industry was riddled with inefficiencies, extreme product variety, and long lead times that frustrated customers. Buyers often received partial shipments; for example, a dining table might arrive weeks or months before the chairs that went with it.
The real issue, though, is not whether there are problems in the industry but what they mean. Are all these problems an opportunity for a courageous company with the right skills? Or are they red flags warning outsiders to stay away?
When I ask my executives whether they would take the plunge, most respond with a resounding “Yes!” They’re energized, not intimidated, by the challenges. Most say, in effect, “Where there’s challenge, there’s opportunity.” If it were an easy business, they say, some company would already have seized the opportunity: It would be much tougher to dislodge a strong leader than to gain ground in an industry like this where there are no big players, no Microsofts already established. “It’s a horse race,” someone once said, “and all the other horses are slow.”
Further, they note, the furniture industry is much like the faucet industry before Masco entered. The opportunity is a great fit with Masco’s manufacturing skills, its marketing savvy, and its strong management capabilities. It’s another chance for Masco to bring money, sophistication, and discipline to a fragmented, unsophisticated, and chaotic industry.
Opponents can’t get past how awful the furniture business is. They can’t imagine any company overcoming such huge hurdles. So the arguments go back and forth. Enthusiasm and a gung-ho spirit on one side struggle against caution and concern on the other. In one discussion, an exasperated proponent blurted out, “Look, this isn’t about being passive investors in some yet-to-be-invented furniture industry index fund. We’re going to be players in this game. We can make things happen. If Starbucks or Under Armour had listened to you naysayers, they wouldn’t have done anything!”
What’s your inclination at this point?
Usually when the time comes for a decision in my classes, “Do it” wins definitively, by at least a 2-to-1 margin.
So what, in fact, happened?
Masco did enter and in a bold way. Over two years, it bought Henredon (high-end furniture) for $300 million, Drexel Heritage (mid-price) for $275 million, and Lexington Furniture (low–middle) for $250 million. Combined, the revenues from the three made Masco the second-largest player in the U.S. furniture industry. It followed up by spending $500 million for Universal Furniture Limited (low end), which had manufacturing operations in ten countries on three continents and followed a ready-to-assemble concept—component parts were manufactured in low-cost countries and shipped in containers to five U.S. locations for assembly. Now Masco was both the largest furniture company in the world and one of the only firms with products spanning nearly every price point, a strategy that had worked well for the firm in faucets.
In total, Masco spent $1.5 billion acquiring ten companies and another $250 million upgrading their manufacturing facilities and investing in new marketing programs.
Presenting Manoogian with its Gold Award in the Building Materials Industry, the Wall Street Transcript cited his
imagination, foresight and strategic sense…. Manoogian has acquired low growth, mature products and become the dominant player in those product categories…. [H]is most recent set of acquisitions has been in the furniture industry. His strategy is to do to the furniture industry what he did to the faucet and kitchen cabinet industry….4
With this historical update, the classroom crackles with energy. Executives who had advocated for bold action nod their heads to one another or give each other high-fives and thumbs-up, pleased that they’ve nailed their first Harvard case. I hear little “told-you-so” comments directed at the naysayers, who sit in grim silence. Someone once even called across the room: “Don’t worry, Bob. One bad decision won’t ruin your reputation. We won’t hold it against you the rest of the program.”
But it doesn’t take long for those who opposed entry to speak up.
“But how did Masco do?”
“They bought great brand names,” says someone.
“But how did they do?”
“They’re number one in market share. What more do you want?”
“But did they make money?”
There, as it’s said, is the rub.
When I post Masco’s financial results, silence falls as people absorb the numbers. In a few seconds, there are whispered expletives around the room.
After thirty-two years of consecutive earnings growth, Masco’s net income fell 30 percent. Two years later, operating earnings from furniture came to $80 million on sales of $1.4 billion, an operating margin of 6 percent, versus 14 percent for the rest of the company. After many years of struggle, Masco announced its intentions to sell its furniture businesses, leading one analyst to comment:
In the spring, management will go on the road with restated financials illustrating their “core” earnings growth as if they never entered the furniture business. They hope to rebuild investor confidence in the old [pre-furniture] Masco … as a growth company by showing their track record and prospects in the building materials arena. Given the $2 billion furniture “mistake,” this won’t be easy.
In a sad postscript, Masco discovered that exiting the furniture business was much harder than entering it. After a number of deals fell through, it eventually succeeded in selling its furniture firms, at a loss of some $650 million.5 When it was all over, CEO Manoogian admitted, “The decision to go into the home furnishings business was probably one of the worst decisions I’ve made in 35 years.”6
It’s a sobering moment in the classroom. The executives there didn’t intend to open their careers at the Harvard Business School by losing hundreds of millions of dollars their first morning.
So, let me ask you again, as I do the managers in my class: “Are you the strategist your business needs?”
3
THE MYTH OF THE SUPER-MANAGER
AS A STRATEGIST, what can you learn from Masco’s foray into furniture and the support most executives give that ill-fated decision?
Even if you were undecided or skeptical about the furniture industry, I’m willing to bet that some part of you supported Masco’s move. No one respects timid, passive managers. Bold, visionary leaders who have the confidence to take their firms in exciting new directions are widely admired. Isn’t that a key part of strategy and leadership?
In truth, it is. But the confidence every good strategist needs can readily balloon into overconfidence. A belief that is unspoken but implied in much management thinking and writing today is that a highly competent manager can produce success in virtually any situation. One writer calls this “the sense of omnipotence that plagues American management, the belief that no event or situation is too complex or too unpredictable to be brought under management control.”1
I call this belief, when taken to its extreme, the myth of the super-manager. It seems to come naturally to many successful entrepreneurs and senior managers who see themselves as action-oriented problem solvers, confident doers for whom difficulties are daunting but solvable challenges. I see it behind Masco’s leap into furniture manufacturing and behind executives’ choice of the same path every time I teach the case. Confidence matters. But there’s much more to strategy and leadership than a steadfast belief that a daring vision backed by good management can overcome virtually all obstacles. Without the rest of it, “bold” too often becomes “reckless.”
Look at what such thinking did to Masco. Operating profitability dropped to half its historical average, and the firm’s stock price was lower when it left the furniture industry than when it entered ten years earlier. And money was only part of the cost. Where Wall Street had spoken of Masco as a