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Chapter 1

PAPER THIN: A MICROCOSM OF BAD BUSINESS

Lesson: Today, in good times and bad, everyone must be a turnaround manager.

I was standing in the aisles of a Publix Supermarket near my home in Boca Raton, Florida, when it became shockingly apparent how much trouble the Scott Paper Company was in. Scott's trouble was of particular concern to me. I had just accepted the job as its new chairman and chief executive officer.

After two hours of wandering the store's aisles, seeking out Scott's famous label products and talking to unsuspecting shoppers, I and my friend Dick Nicolosi were alarmed. Scott's packaging was so bad even the products were embarrassed. ScotTowels hid from customers. They seemed ashamed of what had become of them in recent years.

We talked with consumers as they went through the aisles. We asked their opinions about what was going on, why it was going on, and how they decided what products to buy. We were like eager high school students, doing a first public survey, preparing for a big exam.

Our shopping tour was an excellent way of getting firsthand knowledge about Scott's product categories. We found it remarkable that people talked with us easily and gave candid answers to the questions we asked.

We heard a bunch of things. One was that the Scott brands were considered old-fashioned, antiquated, and not particularly innovative. To shoppers, they were just plain boring. And Scott wasn't good at telling consumers how well its products would hold up compared with other brands.

The way Scott merchandise was priced and packaged was confusing. The variety of products and the way they were presented on store shelves and in advertising made it difficult for consumers to figure out which product represented the better value. In short, Scott wasn't keeping up with the competition.

Dick, a veteran of twenty-three years at Procter & Gamble (he became Scott's chief marketing executive), led me through an analysis of our findings to figure out what could be done. For the first time since being offered the job, I had serious doubts about whether anybody could save this company. I experienced the "Oh, God!" factor: I thought, what have I signed up for? The Scott people had let their boat take on a lot of water. It was going to take an entire marina of pumps to get all that water out and make the flagship seaworthy again.

Those were the quickest two hours I had spent in a long, long time. They went by like a moment.

The issues we identified were not solvable in a heartbeat. They were not small blips; they were fundamental for a consumer brand, and to change them would be like trying to reverse the course of the Queen Elizabeth II when it's at full-speed ahead. We needed time and careful plotting.

The next day, I called Scott's headhunter and warned him that, although I wasn't backing out, I was having second thoughts.

Two brothers, Irvin and Clarence Scott, founded Scott Paper in Philadelphia in 1879. The company began as a producer of bags and wrapping paper, but began manufacturing toilet tissue when indoor plumbing became more prevalent toward the turn of the century.

Some 115 years later, Scott was the eighth largest paper company in the United States, and had the second largest U.S. market share of tissue paper. In the world market, it was No. 1, with 15 percent of the marketplace.

By the time Gary Roubos, chairman of the search committee for the Scott Paper Company board of directors, interviewed me for the CEO job in 1994, he had already spent six months in the hunt. The company had come close to finding its CEO twice before. The first candidate stunned the board. He said, "Wake up! This company can't be saved. Not only don't I want the job but whoever takes this job is a fool."

The initial description given by Roubos to Tom Neff, president of the executive search firm of Spencer Stuart Inc., called for someone who combined a classic consumer packaged-goods background with experience running a business — ideally, a CEO, or maybe a chief operating officer, of a fairly substantial company with international operations. They were looking for people who grew up in companies like General Foods or Procter & Gamble.

Plans were made to offer the job to a second person who fit that profile but he was traveling internationally for a couple of weeks, delaying the committee's action. And based on what the search committee had learned from talking with the candidates and getting their harsh assessments of Scott Paper, something clicked. Roubos suggested that, before making a final decision, the search committee should think "out of the box." How about somebody who could restructure companies rather than just package and sell consumer goods?

That's when my phone rang.

Roubos, whose full-time job is as chairman of the $3 billion Dover Corporation, described the situation as he saw it at Scott.

He didn't try to bullshit me. He said, "This is acute. It's an overly bureaucratic organization, spending too much money on the wrong things. It's so slow-moving that it can't get out of its own way."

He told me that his own corporation has just twenty-two people running its corporate headquarters. It was immediately apparent that we shared an inclination toward leanness.

I asked him how Scott got into such a mess.

"It didn't happen overnight," Roubos said. "When I went on the board seven years ago, Scott was doing pretty well. But the paper business is cyclical. It was at the top of the cycle at that time and most of its big subsidiaries such as S.D. Warren were making money. But as the paper cycle turned down, it became very apparent that it was going to be very, very bad for Scott."

Many of the top management people at Scott hadn't changed in thirty years. It was very difficult for them to see a different way of doing things. The boring, old-fashioned packaging that consumers complained about reflected the old-fashioned thinking that had nearly wrecked the company. They tried, but the management that had grown up in that antiquated culture could never make the kind of changes that were necessary.

Roubos believed that the men and women running Scott knew they were in trouble and were trying very hard to figure a way out of it; they just couldn't see what it was. And having moved away from the company's core tissue business into so many ancillary and unrelated fields — ranging from health care to energy generation — Scott just wasn't a focused business.

The company, he confided, was considering a bankruptcy filing if dramatic change was not made.

As negotiations moved ahead, I told Roubos I agreed that there would be a need for a fairly dramatic change in direction and strategy, and I would only seriously consider the job if the board empowered me to accomplish that.

He didn't mince words with me. He said, "What would you do?"

I told him I would attack costs, put together a high-powered management team, focus strategy around the core business, and get rid of debt.

And that's what I did, from day one.

Once I signed on the dotted line, the next few weeks rushed by like a Chicago Bears blitz. I sold my new house in Boca Raton to Scott Paper for exactly what I paid for it. (The company subsequently resold it.) My wife, Judy, and I put our belongings back in storage and moved, along with our two dogs, into the Four Seasons Hotel in Philadelphia for seven weeks.

As my car pulled up to Scott World Headquarters on April 19, 1994, my first day on the job, I couldn't help but think of those poor orphaned rolls of Cottonelle toilet tissue and ScotTowels back in Florida. Quietly, I resolved that the next time we met they'd look so good they'd be jumping into shoppers' baskets.

Taking in the company's campus, with its three handsome office buildings, manicured lawns, elegant water fountains, geese, and flags representing each country where Scott did business, I knew what else had to be done. In my experience, the success of a corporation is inversely proportional to the size and opulence of its headquarters. Scott's buildings told the world what management thought about the shareholders' money. Running my hand over the marble walls in the foyer, I thought about the self-aggrandizing executives who had built them. I knew their days — and the buildings' — were numbered.

My honeymoon with Scott lasted only as long as it took the elevator to reach the sixth floor. That first week went by in a rush of meetings, ultimatums, and firings. The things I saw and heard were absolutely incredible. If Scott's shareholders had known what I discovered, they would surely have burned the place down.

There were 1,600 people working at the three headquarters buildings known as Scott Plaza, including 500 people with management responsibilities. At the top of the chart was an eleven-member ruling management committee. I ordered them immediately into a meeting.

"Ladies and gentlemen," I said, "this could be the best day of your life, or it could be the worst."

By reputation alone, they knew what I meant. For those who hadn't performed — virtually all of them — it would be the worst day of their professional lives.

I asked them to introduce themselves and explain their duties. One thing immediately caught my attention. There was no chief financial officer in attendance. The chief administrator, an engineer by training, said he handled financial details at these meetings. How absurd!

In due course, the eleven member operating committee was disbanded. Two of its members were given increased responsibilities. The others either resigned, were reassigned, or were fired.

When a business doesn't do well, no one can stand up and say, "Well, I'm not to blame." If you were part of the business, you must accept some of the blame. If you were running the company, you must accept most of the blame.

Some critics may think I fire people too quickly. But it's pretty easy to discern who is willing to make changes and who will maintain the status quo. I don't want the status quo. The former management screwed up. I didn't want them screwing me up.

When there are problems, I don't blame employees. I pick the right targets: management and the board of directors. That goes over well with employees. They know that if they're not efficient or productive, the fault usually lies above, not below. At my general staff meeting, I practically got a standing ovation when I talked about Scott management's underperformance. "Why are we where we are?" I said. "Leadership! A massive failure of leadership to perform!" It was already quite apparent to people on the inside.

At the same time I go after people who don't perform, I am incredibly loyal to those who do. When I put people in leadership positions, I am very supportive of them. And once I make a choice, I stick with it.

My takeover of Scott Paper was a bloodless coup, a most amazing and effective change in leadership, all done from within. It was peaceful and quiet; no hostile outsiders took part. The result was that no premiums or greenmail were paid to prevent an unwanted suitor from taking over, and in the end, tremendous value was created for the shareholders.

How did we do it?

The remedy started with awareness. In 1993, even before I arrived, there was an effort to look at value creation. How much value was Scott creating for its shareholders? The board of directors looked at the earnings that the business had generated and the cost of capital over the preceding five years. When earnings were compared with costs, the overall results were not encouraging.

No sooner was the board aware of the gap, however, than the gap widened. And it continued getting worse. Forget about just looking at the stock price. The work going on at Scott was not creating value.

The process by which decisions were made to invest capital was flawed and shortsighted. There wasn't sufficient vigor, and the process stank. At last, the board could no longer deny that the return on investment was poor and the course that was supposed to produce future earnings was not being plotted correctly.

At the same time, shareholder groups all across the United States, and particularly in long-depressed companies such as Scott, were becoming more vocal about their diminished investments.

On the positive side, the prevailing view was that the company's product still held great potential. There was nothing fundamentally wrong with the industry itself; the opportunity existed to improve margins. But Scott was being horribly managed, and opportunity was passing it by.

Everything pointed to a need for change, starting at — but not limited to — the top.

I was not the cause of the average Scott employee's discomfort in 1994. I was the result of the previous administration's having created a train wreck out of a once successful company. But people within the company had difficulty accepting that fact, particularly those in what were the company's pockets of excellence and competence.

Everything was not bad. Scott had some terrific people and some great business units, such as the European Consumer and Away-From-Home Worldwide divisions; the latter developed and marketed commercial and industrial cleaning products. Many of those people couldn't understand why everyone had to endure the pain and torture of the restructuring. The answer was that we had to become competitive across the board, not just in one division. We had to be efficient and unload a lot of the rubbish that years of poor management had heaped on itself.

Some of Scott's European operations were rare gems in an otherwise cloudy picture. The first time I met Paolo Forlin, then a senior vice president of Scott's European operations, with thirty-five years on the job, I asked him, point-blank, "Why is this corporation so screwed up?"

He hardly paused to think before answering.

"Philadelphia headquarters," he said. "Those people screw up everything."

Honest answer! I made Forlin — one of the few Scott senior executives in Europe who had performed — our new head of consumer products in Europe. He took over what most people might have thought was a cushy position, with Scott products leading in many categories across the Continent. But his mandate from me came in two words: "Do better."

After my first and only meeting with Scott's existing management committee, I sought out the company's chief financial officer, an amiable young man named Basil L. Anderson. Anderson was one of only two executives of whom the board of directors spoke highly.

"Why weren't you at the executive committee meeting?" I asked him.

"I've never been invited," he said.

"You are now."

Then I asked him about the corporate morale officer who sat in on executive meetings. A pleasant enough person being paid an obscene amount of money, her primary job was to ensure harmony in the executive suite. The hell with harmony. These people should have been tearing each other's hair out, demanding to know why this 115-year-old company was getting its ass beat on supermarket shelves every day. I told Anderson to get rid of her.

He told me that she didn't work for him. Wrong answer. Get rid of her, I repeated, and walked out. Half an hour later, I called him. "Did you do it?"

He got the message. By day's end, Scott was less one morale officer, but I had found the first executive worth keeping. Anderson recognized that if I had made a decision, I expected it to be carried out. And he cared about getting things done.

Later that week, one of our in-house lawyers fell asleep during an executive meeting. That was his last doze on our payroll. I woke him and told him to at least pretend to be interested. A few days later, he was a memory.

Scott Paper Company was a classic microcosm of what's wrong with the American corporation. More than $2.5 billion in debt and bloated beyond recognition, the Philadelphia paper producer was unable to shake off a decadent and dying corporate culture about to implement its third three-year reorganization plan in four years.

Scott was the largest tissue company in the world, but it was living in the past. A decade had passed since it had launched a proper marketing campaign. It had some great tissue paper brands, such as Scott and Viva. Scott, I thought, was a potentially great consumer products company masquerading as an out-of-date, poorly managed commodity paper company saddled with ancillary businesses such as health care, food service, energy generation, and coated paper.

Scott's debt was onerous, resting uneasily during a Dun & Bradstreet credit watch.

On the plus side, Scott had some good products and good facilities. The way I saw it, if I could get this dinosaur back to its core business — tissue paper — sell everything around it that didn't fit, and deal with the debt, I could rebuild it.

It would take massive restructuring, a new management team, asset sales, severe layoffs, and an entirely new marketing department.

All of these are a lot easier said than done. I believe that, when you go into a situation like this, you either get the pain and suffering accomplished in the first twelve months or you don't do it at all. There are no three-year restructuring plans in my line of work. If a restructuring is done over three years, moods and corporate directions change. The longer it takes, the greater the opportunity for the old corporate culture to corrupt it. Employees and strategies are held hostage; it's a tortuous process. The restructuring must be done in the first twelve months. (See Chapter 11, "Real Jobs, Real Cuts.")

What Scott Paper had lacked was a leader. It had seven different technologies to make paper, some excellent, some lousy. But instead of settling on the best, it continued applying all seven. That was crazy.

Even setting aside all the ancillary businesses, it was still in two different, high capital-intensive paper businesses: coated and tissue. Few companies could afford to do both, and Scott wasn't one of them.

But the biggest sin was that Scott Paper, the biggest manufacturer of tissue in the world, wasn't capitalizing on its reputation and the sales potential of its assorted household brand names.

A similar situation faces every company, every day, not just those teetering on the edge of the volcano. If you're successful and prosperous today, don't take it for granted tomorrow. My specialty has been saving companies on the verge of collapse, but I don't just pull them away from the brink. I give them strength and systems for surviving the long days and nights ahead.

Mine is not just a "turnaround" strategy. It's a smart business approach that will profit any manager or executive as business expands from regional and national to global opportunities. Run a tight, money-making ship today, and you can sail the world tomorrow.

Copyright © 1996 by Albert J. Dunlap