Eagle HQ, Monday, 8:30 pm EAGLE HQ, MONDAY, 8:30 PM It was the tone of the email that bothered Sarah Chan the most. It felt like a threat. Alone in her office at the end of a long day, Sarah, the CEO of Eagle Electronics, opened up her laptop to read it again. Jorge Martinez, the president of Eagle’s largest and most profitable division, had written: The board gave you a mandate to revitalize the company, and you’ve instilled the entrepreneurial spirit we sorely needed. The Disruptive Initiative has repositioned us in the tech sector, and our stock price has increased significantly. Nonetheless, by harvesting cash flow from my unit to lavish funding on your pet projects, I believe you have endangered Eagle’s future. My unit has long been known for selling good products at fair prices and offering top-quality service and support. That is no longer the case. We are now struggling. My best customers are running to the competition, as are some of my top employees. I fear others may soon follow. My division needs $300 million over the next three years, and continued investment after that, to remain competitive. Given how formal the email was, she couldn’t believe he hadn’t cc’d anyone. Jorge was well-known in their industry, and she imagined it was only a matter of time before he shared his opinions more widely. She didn’t completely disagree with the facts as he’d laid them out. Founded in the early 1980s, Eagle Electronics originally derived its revenue exclusively from the manufacture and sale of personal computers and peripheral devices. In the early 2000s, it got out of the PC business because the founders realized it couldn’t compete with Dell and other firms. But peripherals remained the largest share of the company’s revenue and earnings, and Jorge had led that division for close to 10 years, with great success. He was known for his fiscal discipline and for making smart strategic decisions, such as expanding into emerging markets with lower-cost products. And Sarah had, in fact, been using the cash flow from the peripherals unit to fund new ventures.1 Soon after being named CEO, in 2012, she had started the Disruptive Initiative unit, an investment model for new-product development. CASE STUDY CLASSROOM NOTES 1 According to the BCG growth-share matrix , Jorge’s unit is a cash cow: It requires little investment and generates cash. She’d created it out of necessity when one of her rising-star designers, Jennifer Yu, told her she was leaving to start her own data management software company and asked Sarah if she wanted to be an angel investor. Because she wanted to keep Jennifer, and since there wasn’t direct overlap between the start-up and Eagle’s portfolio, Sarah proposed that the firm fund the initiative with an option to buy if it developed a minimum viable product and laid out a path to market.2 2 Big firms are often seen as too bureaucratic and risk-averse to innovate. But research from Olin Business School reveals that firms with more than 500 employees do nearly six times as much R&D as smaller firms. Jennifer did just that, and Eagle bought the venture 14 months later, with Jennifer realizing a significant financial gain. The arrangement became a model for other investments. Employees were allowed to submit product proposals, and if approved, Eagle would fund 75% of the start-up costs. The firm also offered other assistance to help start-ups meet their goals and deadlines. Employees initially left the company to work on their ventures, but Eagle had an option to buy within 18 months and often did, folding the employees back into the division that Jennifer now led. So far, Eagle had invested in 13 ideas, seven of which were still in start-up mode, and five of which had been acquired. Only one had fizzled out. 3 3 On average, only 25% of VC–backed start-ups return their invested capital. Should Sarah focus on internal research efforts instead? The initiative had received glowing attention in the financial and technology press. But it was far less popular internally. While much of Eagle’s growth was attributable to its acquisitions, integrating the new ventures had been problematic, and profitability varied.4 Plus, Sarah’s time and attention, not to mention the firm’s resources, had been so focused on them that the company’s bread-and-butter products—all part of Jorge’s division—were often ignored. The favored child was suddenly feeling like a stepchild, and that had led to high turnover and morale problems. 4 Is the new business model likely to become an engine of growth? Or are the integration challenges too daunting? As Sarah reread Jorge’s email, she winced at his use of the word “endangered.” Her intention hadn’t been to hurt any part of Eagle. Her goal was to prepare the company for the future. But his comment had hit a nerve. She hadn’t yet proved that the new business lines could generate significant profits or dominate their markets. The peripherals unit was Eagle’s lifeblood. And she couldn’t help wondering whether she had inadvertently damaged it. EAGLE HQ, TUESDAY, 10:01 AM Checking In The next morning, Sarah met with Jennifer to go over her division’s P&L. She knew she couldn’t divulge exactly what Jorge’s email said, but she did want her star employee’s perspective. She’d long admired not only Jennifer’s confidence but also her ability to think strategically, and the two women had become close. Sarah mentioned that Jorge was upset by what he saw as uneven treatment. “What else is new?” Jennifer asked, rolling her eyes. “I know Jorge has had complaints before, but this is different,” Sarah said. “Is it? He’s probably still disappointed that he’s not the CEO.” Jorge and Sarah had been the two leading candidates back in 2011 when Eagle’s founder-CEO announced he was leaving. Sarah had joined Eagle two years earlier as the head of strategic planning and business development at the same time that Jorge was promoted to head up the peripherals division. The rumors were that Jorge wasn’t picked as CEO because he had proven himself invaluable to the unit.5 5 Could resentment be coloring Jorge’s view of his unit’s situation? “Whether that’s true or not, he’s great at his job, so I owe him a hearing.” Jennifer went quiet as Sarah brought up her division’s dashboard on her screen so that they could review the numbers together. Performance continued to be mixed. The six ventures were bringing in $340 million a year in sales and $35 million in total earnings before interest and tax. Although the division was no longer loss-making, it represented less than 30% of Eagle’s sales. The percentage was moving in the right direction, but the unit struggled with quality issues and cost overruns, which were starting to affect profitability. Sarah and Jennifer spent the hour discussing the most pressing problems and potential solutions. As they wrapped up, Jennifer said, “I know we’re not where we want to be, but with a little more runway we’re going to be able to hit our targets. Also,” she added, “you’ll figure out what to do about Jorge. You always do.” SARAH’S HOUSE, TUESDAY, 6:55 PM Spinning Off When Sarah got home later that night, her husband, Bo, was chopping vegetables in their kitchen. She handed him her phone and said, “Read this.” Bo paused and scanned Jorge’s email. “Oh, brother,” he said, picking his knife back up. “That’s all you’re going to say?” Sarah asked, laughing ruefully. Bo was a venture capitalist and was taking time off before raising capital for his next fund. “What else should I say? He’s a grump. Ignore him.” “Ignore him? Bo, this is Jorge we’re talking about. I wouldn’t put it past him to forward this email to the board in 48 hours if I don’t respond. Or quit over this.”6 6 Is Jorge a flight risk? What would it mean for Eagle, and for Sarah, if he left? “Maybe it’s time he goes. Wouldn’t you be relieved? He’s always resisted change. And Eagle has always been a follower. If you want to lead the market, you’re going to have to take some risks. Maybe letting Jorge leave of his own volition is exactly the kind of risk you should take.” “Bo. Jorge is the peripherals division, and it accounts for 70% of sales and 80% of profits. If he leaves, half the staff and most of our customers will follow, taking all that cash with them. I know he and I don’t always see eye to eye, but maybe he has a point here.”7 7 What would be the ramifications for company performance if Sarah funded fewer new ventures and upped Jorge’s budget? “Then what’s holding you back from making the investment?” “Dumping money into a mature, low-growth division just seems like the wrong thing to do.8 That’s a recipe to stay exactly where we are, which means continuing to fall behind. We wouldn’t be able to make the same level of investments we’re making in new products.” 8 The rise of mobile computer devices and falling demand for desktop PCs has negatively impacted the market for computer peripheral equipment, according to Nasdaq.com. “Why don’t you just sell the peripherals division and use the cash to fund the products you’re excited about? Or spin it off and give Jorge the CEO job he’s always wanted?” Sarah’s first reaction was that Bo had lost his mind, but before she could accuse him of that, she reconsidered. Maybe it wasn’t such a terrible idea. It’d be hard—maybe impossible—to get the board to agree to it, but it would solve a lot of problems. And she’d finally be running the kind of company she wanted to. LOCAL CAFÉ, WEDNESDAY, 2:09 PM Now or Never Sarah asked Jorge to meet her at a café a few blocks from the office. Having such a sensitive conversation in the building didn’t seem prudent. Either one—or both—of them might lose their cool. Jorge skipped the pleasantries. “I don’t want to negotiate. I’ve made clear what I need to make my division succeed,” he said. “Three hundred million isn’t a small amount—” “But we have it. You’ve just got to stop siphoning it off of my division and let me reinvest it in our business.” Sarah and Jorge had been having discussions like this for the past few years, but he seemed more fired up and resolute than he ever had before. “I won’t deny that the growth from the ventures has been impressive over the past five years, but given how things are going over there, that’s not going to continue,” said Jorge. “I want to be honest with you. I think your affinity for Jennifer—the fact that you see yourself in her—is hindering your judgment here.”9 9 Has Sarah unfairly favored Jennifer? Is their friendship affecting her business judgment? Sarah didn’t want to believe that, but she wasn’t ready to fully deny it either. “But that’s not the point,” Jorge continued. “The point is the health of our business. You’ve got to stop strangling us. You claim that we’re not positioned to compete in new product categories, but you don’t give us the money we need to do that. You have to see how unfair that is.” The board had been harping on the fact that Eagle had no plans to enter the rapidly growing 3-D printing market, and Jorge had been countering that if the peripherals division had any research budget, it could come up with a compelling product, given its deep experience with printers. “Have you seen this quarter’s engagement results from the pulse survey?” he went on. “I’ve got a serious talent issue. Two of my best people left last week, and we’re fielding calls from customers who are considering other options. It’s time to stanch the bleeding.” She understood where Jorge was coming from. He and everyone else in peripherals felt unappreciated—like fallen stars. But she wouldn’t be forced into giving them more resources unless she was sure it was the right decision not just for his unit but for the company as whole. “You know as well as I do that Eagle is done without peripherals,” Jorge told Sarah as she paid the bill. “You may be right that someday these ventures will land on a product that will be the revenue engine my unit is now. But that’s a long way off—and far from certain. You’ll never get there without a strong peripherals division. You know what we need.” Question: Should Sarah reinvest in the core business or focus on new ventures? The Experts Respond Vijay Sankaran is the chief information officer at TD Ameritrade. Sarah should extend an olive branch to Jorge. She should say, “Let’s spend some time together to figure out the right investment approach for the business.” Jorge’s ultimatum might be politically motivated. He may resent Sarah’s appointment as CEO and the attention she’s paid to the Disruptive Initiative group. But at the end of the day, Eagle can’t survive or thrive without a strong peripherals division. And there’s no reason Sarah can’t continue to invest in the core business while also exploring innovative ideas. Bets on new business models shouldn’t come at the expense of the older but still-profitable ones. Sarah can start by asking Jorge questions: What challenges are facing your division? Where are the areas for growth? The two should discuss the broader context—capital constraints, competitive pressures—and then dig into the details to come up with a plan together. Sarah shouldn’t rest until she and Jorge are aligned on the level of investment and the goals and priorities associated with it. The figure might not be $300 million, but it probably won’t be zero. Sarah should also consider taking a more balanced approach in her leadership. Jorge may be justified in his claim that she has been playing favorites. She needs to learn from that mistake. Also, she should address Jorge’s resentment head-on. I’ve been in situations in which peers and I were vying for a promotion, and I became their boss. Sarah should say, “I get that it must have been tough not to get the job, but you bring a ton of value to the table, and I want to have a productive relationship with you.” As the CIO of TD Ameritrade, I’m responsible for teams that incubate new ideas as well as those that manage our data and analytics ecosystem. Everyone knows I’m excited about the innovation group. But they also know—because I remind them—that we rely on the core business for revenue and profits and intend to be exploratory and agile in those areas, too. Sarah needs to give Jorge and his division the same boost and solicit Jennifer’s support. She should encourage Jorge and Jennifer to become not just colleagues but partners who share ideas and best practices. And she should make her investment plan transparent. How much will each unit get, and what are the expected returns? Jorge and Jennifer will have different targets, but everyone should be crystal clear about what they are. Last, Sarah should proactively explain to her board members the situation with Jorge and what she’s doing about it. She should show that she’s capable of taking feedback, doing her own due diligence, and adjusting her strategy and management accordingly. Carine Clark is the CEO of Banyan, a marketing and reputation management software-as-a-service company. Sarah needs to show Jorge that she’s willing to listen, while also taking a hard line with him. Ultimately, he needs to put aside his resentment and accept that she is in charge. If he doesn’t want to work for her or doesn’t agree with her plan for Eagle’s future, then perhaps he should leave. Forward-thinking companies that are fortunate enough to have a cash cow typically use the funds they generate to invest in the future. If Jorge doesn’t understand that, he might be stuck in the past—akin to the president of IBM’s typewriter division demanding investment at the expense of the desktop computer unit or the executives at Kodak who favored the money-making film business instead of investing in digital. I’ve spent most of my career in a tug-of-war with guys like Jorge. At one company where I was the head of marketing, the executive who ran the firm’s cash cow wanted me to allocate my budget according to the percentage each division contributed to total revenue. That’s an easy way to avoid fights, but it doesn’t help you grow. I determined the minimum I had to invest to keep his business growing at a modest rate and spent the rest on new initiatives to make sure we got to market ahead of rivals or new entrants. Sarah can do the same with Jorge. She shouldn’t give him money just because he’s demanding it. That might shut him up for a while, but he’ll only come back asking for more. Instead, she should sit down with him to understand the problem he’s trying to solve and, once they agree on what that is, work to carve out the right investment. At another company where I was the CMO, I dealt with an executive who was insisting that we sponsor the Masters golf tournament. When I sat down with him to figure out why, he explained that he had one customer—on the brink of an enormous contract renewal—who really wanted to go. So we bought two tickets. It was a much cheaper solution. I’d advise that Sarah start by meeting with Jorge face-to-face and apologizing—for shifting her attention away from his division and for failing to create an environment in which he felt he could thrive. She should assure him that she’s committed to his division’s being wildly successful. Next, she’ll need to work with him to unpack the problem. Why does he want $300 million? What does he actually need? As they hammer out a plan for investment, they might both be surprised by what it will take to ensure the unit’s continued growth. Sarah should also emphasize that the senior executives across the company need to be aligned on what success looks like and how the firm will get there. As CEO, she will drive the company’s strategy, but everyone on her team needs to understand how they map to it and work together to achieve it. At the same time, Sarah should carefully consider whether she is overestimating the value of Jorge’s experience to Eagle. He’s been running the peripherals division for 10 years—a lifetime in the tech industry—and while he might have been the right guy to achieve its current success, he might not be the person who can take it to the next level. Innovation has not been his forte, and in rapidly changing segments such as 3-D printing, he’s probably already too late to the party. HBR’s fictionalized case studies present problems faced by leaders in real companies and offer solutions from experts. This one is based on the HBS Case Study “Hawk Electronics, Inc.” (case no. 918521-PDF-ENG), by Richard G. Hamermesh and John Lafkas.
