Making Strategic Changes for the 21st Century

Speaker Name: Richard R. Allen
Speaker Title: Chairman and CEO
Speaker Company: LADD Furniture, Inc

Richard R. AllenI am very pleased and honored to be here this afternoon to participate in your Harlan E. Boyles Distinguished CEO Lecture Series. I always enjoy getting back to the university environment and I feel a special kinship to ASU--my daughter, Suzy, is currently a student here. Bill Creekmuir, LADD's chief financial officer, is a member of the Walker College of Business Advisory Council and Ken Church, the president of Clayton-Marcus, one of LADD's best-performing operating companies, is an Appalachian graduate. LADD has also employed several ASU interns who have made significant contributions to our business. Dean Peacock, as I have come to learn more about your program here at Appalachian, I am impressed with its vitality and I look forward to a continuing relationship.

My comments this afternoon will focus on some of the significant changes that are occurring in our economy and in our society and the implications these changes have for establishing strategies to meet competition in the 21st century. In addition, I will leave you with some thoughts as to how your education, performance, and personal leadership skills need to fit in with these strategies. I'll illustrate some of my points with references to the United States furniture industry and some of the actions that we at LADD Furniture are taking to prepare our company for the competitive challenges in the next century.

The furniture industry is a significant part of the United States economy with overall consumer demand estimated to be approximately $50 billion in 1995. At the wholesale level, the industry is about $20 billion in size. The growth of the industry is relatively slow with an historic growth rate of between 5 and 5.5 percent. It is a cyclical industry that is sensitive to interest rates, housing activity and consumer confidence. The demographic profile of the United States population also plays a significant role in the furniture demand equation. Like many other industries, the furniture industry has recently been undergoing a significant amount of structural change.

The furniture industry is very important to North Carolina. There are over 750 furniture manufacturing plants employing 90,000 workers in our state. These plants produce $5 billion of furniture products which represents approximately 23 percent of all furniture manufactured in the United States. Each job in the furniture industry creates 2.5 jobs when various support businesses are considered. Therefore, over 200,000 North Carolinians depend on the furniture industry for their livelihood.

LADD Furniture was founded in 1981 as a $70 million leveraged buy-out of three furniture companies from The Sperry & Hutchinson Company--the Green Stamp people. LADD derives its name from the three companies which were purchases--"L" for Lea Industries, "AD" for American Drew and "D" for Daystrom. The company was founded during a very difficult recessionary period in the furniture industry. After starting with a very highly leveraged balance sheet with $69.5 million of debt in 1981, the prime interest rate promptly increased to 22 percent. That got the attention of those of us who founded the company and had pledged all we had--our houses, cars, kids, and dogs--to this new venture.

During 1982, LADD's first full year of operation, sales totaled approximately $115 million. As a result of our efforts to strategically change the business, we were successful in reducing debt by nearly $50 million through consolidation of operations, the sale of idled plants and reductions in working capital. We focused all of our energies on profit-making products and services that we felt would provide long-term growth opportunity.

In 1983, after successfully reducing debts and increasing profitability, we made an initial public offering of LADD's stock and became a public company. Since that time, LADD has been very active in acquiring additional furniture companies and, in some cases, divesting ourselves of assets that we did not feel would meet our long-term strategic goals.

Today, LADD has sales of approximately $600 million and, like 1982, is making significant strategic changes with the announced divestiture of four operating companies that we believe no longer fit with our long-term goals. These goals have been established as a result of a very careful evaluation of what we believe will be required in the 21st century to be a successful competitor in the United States furniture industry.

When I was younger and just beginning my business career, the 21st century seemed far in the distant future. Science fiction books were authored beginning with the year 2000. A sci-fi movie titled "2001" featured a talking computer which seemed far-fetched at the time. Today, talking computers are a reality in our daily lives with audio response systems at banks, airlines and even furniture companies. That distant future is upon us. The year 2000 is a mere four years away.

Looking at business in the future is somewhat like playing blackjack. You know what's in your hand at the present time, but the unknown card can bring glory or disaster. Consider the unforeseen influence during this century of computers, 800 telephone numbers, lasers, fax machines, airplanes, AIDS, photo copiers, ATM machines, television, etc.--the list goes on. We cannot predict the future with any degree of certainty but we can develop plans and strategies to cope with the changes we see going on around us.

As you know from your business courses, any effort to develop strategies should start with an analysis of the trends influencing the world around us. These trends will either be threats or opportunities, depending on the strategies we employ. Let me highlight five trends that should be considered in developing strategies for the future.

1. Internationalization of Business. We live in a world where instant communications and the flow of ideas and resources from country to country and around the world is very fast. Many American businesses find themselves in competition with foreign competitors in the market place. Some businesses find that they can source raw materials and labor more economically in other parts of the world. Our current trade deficit stands as a testimonial to the attractiveness of foreign goods to American consumers in terms of both price and quality. And, we can expect this trend toward internationalization to continue to accelerate.

The American automobile industry received a wake-up call in the late 1970s and early 1980s when the Japanese produced and exported automobiles that were sportier, of higher quality, and a better value for American consumers. United States manufacturers had fallen asleep at the switch. They had not invested in machinery, equipment and technology that would permit them to compete effectively in a world that demanded more fuel-efficient cars which were smaller and had more convenience features.

Today, India and China, both developing countries, are emerging as significant markets for U.S. products as well as sources of low-cost labor. For example, in India, with a total population of 800 million people, there are 200 million people who have a standard of living that is above that of France. These workers are generally well-educated, they are English-speaking and have a strong work ethic at low wage rates. Ph.D. engineers can be hired for approximately $500 per month. Some of India's largest conglomerates have developed extensive contract consulting businesses in engineering, science, and computer programming which are utilized by numerous companies in countries around the world.

European companies have developed high levels of sophisticated automation in their factories which has been driven by the high labor and benefit costs in those countries. For example, in the furniture manufacturing area, Germany and Italy lead the world in the development and manufacture of computer-controlled woodworking machinery.

The most aggressive global competitors obtain resources from a variety of countries. For example, it would not be impossible for a Japanese conglomerate, using capital derived from the sale of automobiles to United States consumers, to buy automated, computer-controlled woodworking machinery in Italy or Germany and install it in a factory in Mexico. Using low-cost Mexican labor and wood purchased in both North and South America, products could be efficiently and economically manufactured for export to U.S. markets. Such is the competition of the 21st century.

To compete in this global business environment, LADD has adopted an aggressive international strategy. Today, we selectively source labor and materials from Thailand, the Philippines, China, Indonesia and Taiwan, and import them in the form of semi-finished parts and products to our United States plants. They are then combined with parts manufactured in the United States and value is added to complete our products. These products are subsequently marketed in the United States and are exported to more than 50 countries around the world. We have turned a threat into an opportunity.

2. The Impact of Technology. The pace of change in technology is mind-boggling. It certainly creates what Alvin Toffler called "Future Shock." We are rapidly becoming an information-based society that requires the latest computer and communications technology to cope with the speed with which business must be conducted.

Looking back, innovative products such as the automobile took 30 to 40 years to become embedded in American culture. Computers were introduced to business in the 1950s and had a profound impact on the way businesses handled paperwork over the next 25 years. The personal computer was introduced in the early 1980s. Over a period of only 10 to 12 years, the PC has revolutionized American business and home information processing. Today, I can carry more computer horsepower in a three- or four-pound laptop than I had in the room full of computers I worked with when I was in college. Think how fast the fax machine came on the business scene--over three or four years, fax machines became a basic requirement of business. And today, cellular telephones, bar coding systems, voicemail systems, ATM machines, etc. make the speed and pace of our society seem to be increasing at an uncontrollable rate.

Time is the one element that is most outside of man's control. We are losing the "time float" in which we make decisions or plans. For example, when battles were fought with sailing ships, captains could plan strategy, sometimes for hours, after sighting a sail on the horizon. Modern warships and planes have to react in minutes or sometimes seconds when confronted with a potential enemy. Unfortunately, these shortened reaction times occasionally lead to mistakes such as the United States jets shooting down friendly helicopters over northern Iraq. Reaction times will continue to be reduced to nanoseconds, perhaps to the point that man is no longer critical to the decision. In the future, this requirement for rapid decision making will also impact the business community. Computer simulations will allow companies to preprogram their reactions to a variety of different competitive situations.

3. Demographic Changes. Significant demographic changes are occurring in America with the aging of the baby boomers. This group of the American population, born after World War II, is quite different from past generations and is reaching its peak earnings years. Further, we are approaching a period of time when a fundamental shift in wealth will occur in America--that is, the wealth developed and accumulated by the parents of our baby boom generation. This transfer of wealth will occur over the next 10 to 15 years and is likely to have a profound effect on consumer spending patterns and attitudes. The big question is: How will this change the United States markets and how can this phenomenon be turned into business opportunity?

American life has changed dramatically. Life isn't so simple anymore. People have become smarter, better educated and more sophisticated. They demand higher quality and value in the things they buy and they expect instant gratification. We no longer are willing to wait for the products we want.

We live in a world of personal telephones, fax machines, digital beepers, car phones, home satellite dishes, cable T.V., video disks, digital audio tapes and home computers that are on-line with the Internet around the world. This global, fast-paced, information-based environment is ever present where we live, where we work and where we play.

The traditional view of the American family has also changed. No longer do people grow up, go to school, get married, buy a house, raise children and retire. A more typical lifestyle now is to grow up, go to school, buy a home, get married, have a child, go back to school, get divorced, buy another home, retire and start a second career. In terms of the home furnishings industry in which I compete, this obviously has profound implications--which, by the way, we view as opportunity.

4. Changes in Our Distribution Systems. Where and how we buy products and services has important implications for business in the future. In the United States furniture industry, we had an estimated 35,000 individual retail outlets in the mid-1980s and current estimates put that number around 18,000 to 20,000. This is a significant change! Similarly, aggressive and fast-growing retailers such as Wal-Mart, Sam's Club, Circuit City, Target, etc. have had a significant impact on retailing in general in terms of price and selection. Other retailers, such as The Federated Group, are acquiring and consolidating traditional department store chains to achieve the efficiencies of scale and size. Mail order and catalog shopping have increased significantly. Some consumers shop via television through QVC and HSN. The message here is that the number of different distribution channels available to sell through is increasing. We need to find new ways to market and sell our products in this business environment.

5. Increasing Regulation. Unfortunately, regulation of our personal, economic and business lives is increasing daily. This trend can be expected to continue throughout the rest of this decade and into the next century. Increased regulations have caused corporations, including LADD, to add specialists to read, interpret and keep track of the regulations. This is in addition to the numerous and expensive changes required to meet these bureaucratic solutions to business and societal problems.

Laws and regulations such as OSHA, EPA, Clean Air, Clean Water, Affirmative Action, Storm Water Run-Off and ADA have made doing business in America increasingly complex, burdensome and, in many instances, uneconomic. We will enter the 21st century with a significant "burden" in terms of the requirement to meet past and new regulations. Some of our foreign competitors do not have the same regulatory costs and complexity and, therefore, this trend is definitely a threat.

What then are the strategies that businesses should be applying to meet the challenges of the 21st century and how can you, as business students, develop personal strategies to be a productive part of the business environment of the future?

1. Adopt Global Thinking. Global thinking must include all countries around the world for all aspects of your business activities. Increasing the sale of American products and services to other parts of the world is, of course, an important objective. We must balance our trade payments and this can only be accomplished if we make American products more valuable to foreign consumers. Successful exporting means an important resource, capital, will flow back to American businesses and factories insuring that jobs will be retained in the United States. Selling internationally is fundamental to the American business economy and it is an opportunity for every business enterprise.

On the other hand, it is important to be mindful of the competitive threat that the ability to source resources in other parts of the world represents. Resources include materials, supplies, labor, capital and ideas. Global thinking is important today and it will be critical in the next century.

To train the next generation of leaders and managers, we must make international business an integral part of all business education courses, not a separate, specialized course of study. I am pleased to note that the Walker College of Business has acknowledged the need for understanding the global economy in its statement of skills and competencies expected of all its graduates.

2. Embrace and Actively Employ New Technologies. By this, I mean the active, aggressive and effective use of information processing, communication and manufacturing technologies to efficiently manage the business enterprise and produce products. The successful competitors over the next five or ten years will become exceedingly good at identifying, applying, and utilizing technology in all phases of their business operations. Information technology has already made the collection and analysis of vast amounts of information possible and economical. Decisions are increasingly based on factual information instead of untimely and imprecise data as in the past. In the future, the number of alternatives evaluated will increase as business executives examine the consequences of more complex courses of action.

3. Increase the Speed of Business with Quick Response. The pace of business is increasing dramatically! American automobile companies used to say it required three to four years to develop a new car. Today, they successfully develop new cars in two years and the goal of one company is to realize the ability to develop whole new cars in only 18 months. Clearly, technology is an important part of the plan to achieve this quickened product development pace.

Similarly, lead times in which retailers expect manufacturers to fill their orders have decreased dramatically. Consumers have even higher expectations for shorter delivery times. Today, orders are processed on a 24-hour basis. Warehouses and distribution centers operate around the clock. Delivery services permit manufacturers to move products from the factory through the distribution center to the consumer in a matter of days instead of weeks. If you order a new General Electric refrigerator on Tuesday, the order is transferred by fax or computer to a regional distribution center the same day and a truck is loaded in the evening for delivery the next day to the store in which you placed the order. In some instances, the retailer can deliver your refrigerator on the second day--all without inventories in the retailer's warehouse.

Even custom products can be delivered rapidly. In France, if you are interested in a custom-designed group of kitchen cabinets, a retailer will help you create and design the size, shape, shelving configuration, door type and finish of your kitchen cabinets on a computer in a matter of minutes. Once designed, you can put on a virtual reality headpiece to view these cabinets from different directions to be sure they meet your specifications. After the order is approved and you make the proper electronic deposit by credit card, the computer electronically transmits the order specifications to the factory where a computer prepares a custom program to manufacture the cabinets you ordered. Using computer-controlled machinery, flat panels are cut, bored, doweled and assembled with a minimal amount of human labor. The products are then packaged and put on a truck for delivery to you the same week. That is four to five days--including delivery time!

At LADD's American of Martinsville plant in Martinsville, Virginia, we have installed a computer-controlled machining line that permits the intermixing of uniquely different parts down the same line. This automated line has eliminated set-up times and has reduced the lead time for custom designed hotel furniture from 10 to 12 weeks to a matter of days. Quick response for serving customers is a competitive advantage today, but will be a requirement for survival in the 21st century.

4. Invest for the Longer Term. American businessmen and women must invest capital and other resources for the long-term benefit of their businesses. In America, we have become so short-term oriented that we sometimes do not make the investments required to insure our long-term survival.

America's financial markets tend to reward quarter by quarter, short-term performance with high stock prices. American business leaders find themselves caught between the short-term performance demanded by shareholders and the longer-term investments required to make fundamental changes in the future competitive position of the business. We often try to compete with European and Asian competitors using outdated facilities and equipment because the costs or write-offs required to update and remodel would impact short-term results. We must take a longer view and invest in facilities, equipment, people and product development efforts in order to secure and improve the basic earning power of our businesses.

5. Develop a Change-Oriented Organizational Culture. With a dynamic and rapid-paced environment before us, we must encourage all of our people to embrace change, to make change happen and to be change agents in their respective functional organizations. Change is not easy and natural! Change is threatening to many people. It must be encouraged and nurtured by the leaders and top managers of the business. Change must become a way of life for a business to be a successful competitor in the 21st century. At LADD, we call it a "bias for action." To maintain our focus on a change-oriented culture, we have added a "bias for action" to the annual performance evaluations of each of our managers and supervisors.

Now, let's talk about four personal strategies that you, as business students moving into the work force, might consider in order to successfully meet the challenges of the business environment in the 21st century.

1. Continue Your Education. Recognize that the need for continuous education is important today and will be increasingly critical in the future for a successful business career. When I graduated from engineering school in 1963, my professors told me that the "half life" of an engineer was 15 years. More recently, a publication from my school, The University of Michigan, stated that the "half life" for an engineer today is but four years. When I received my MBA in 1964, most business students believed that once they achieved their degree, they were set for life. Today, the world has changed dramatically. New technology, fast-paced decision making, rapid development of new products and rapidly changing markets demand continuous input into our personal information base. A life-long commitment to staying up-to-date will be a basic requirement.

2. Embrace Technology. Successful people in the new millennium must develop skills and capabilities to utilize all types of technology in the pursuit of their business objectives. Here at Appalachian, you are receiving a firm grounding in the use of computer technology. However, with computer hardware and software changing rapidly, new technologies are going to evolve each and every year. It is very important as business students that you make a commitment to understanding the wide variety of technologies that are available and learn enough about them to determine whether they can be effectively and economically employed in your business.

When I walk through a grocery store and see a laser scanner reading the price and product number on groceries at the checkout stand, I can't help but ask how that type of technology might be employed on the production line of our American Drew plant in North Wilkesboro or how we might eliminate the hand keying of shipping information at our Lea Industries plant in Waynesville. A couple of years ago, when I read about using computer graphics to design clothing, I asked myself how our Clayton Marcus Company in Hickory could use computer graphics to create an image of a new sofa design to help consumers visualize their purchase. Understanding and successfully utilizing advanced technologies requires a personal commitment to staying current with new developments and a vision as to how the new technologies might be employed in unorthodox ways to achieve a business goal.

3. Be a Leader. Be committed to becoming a leader, not just a manager. As business students, I know you have studied the basic principles of management and understand what a successful manager does. Managers plan and budget, they organize and staff, and they control and solve problems. These characteristics all are designed to create order in a business organization. By contrast, business leaders set direction, they align constituencies throughout the organization and they motivate and inspire people to achieve a goal. These actions produce change. Leaders produce change. In my opinion, to be successful in the business environment of the future, you must commit yourselves to be not only good managers but outstanding business leaders.

4. Get Involved in the Political Process. We need a great deal more "common sense" in our politics. Business people with practical experience in "getting things done" can be a balancing influence on the bureaucrats who think they know what is best for business. Change on the regulation front and in the form of creating an environment in which business people can prosper will not come unless we get involved in the political process and make our views known and heard. This does not necessarily require running for office. But it does mean that every business man or woman must take an active interest in the proposals advanced by politicians and bureaucrats. We must be sure that we protect the social, regulatory and cultural environment that has allowed the American free enterprise system to prosper and flourish. Each one of us has a responsibility for protecting America's free enterprise system if we hope to be rewarded by it.

The 21st century is nearly upon us--the year 2000 is only four years away. We live in a period of time when more changes are occurring than at any time in history. From all indications, the pace of change is likely to increase. To cope with this dynamic environment, I have outlined five business strategies and four personal strategies that I believe can lead you to success in the new millennium. Hopefully, these ideas will be helpful to you as you plan and pursue your business careers.

Good luck to each one of you!