Instructions Read and answer these two questions

1. Recognize problem: facts/symptoms/causes

2. Definition of marketing concepts and issues

BORDENLETTING BRANDS WITHER

Borden was founded in 1857 by Gail Borden, Jr., a former Texas newspaperman. It sold condensed milk during the Civil War and later diversified into chemicals. In the 1960s Borden acquired such food brands as Cracker Jack and ReaLemon. Because of the wide earnings swings of cyclical chemical prices, Eugene J. Sullivan, the CEO, intensified the shift into consumer products in the l970s. In November 1991 Anthony DAmato took the held at Borden. He succeeded Romeo Ventres, a good friend, who convinced the board when he retired that his protg, DAmato was the ideal successor. The two men, however, had sharply different management styles. Ventres was an idea man who had great faith in his top managers and gave them free rein. DAmato was blunt, profane, and believed in personally becoming deeply involved in operations. DAmatos different management approach was not well received by some Borden top managers and the company went downhill fast under his chairmanship. But the seeds of Bordens problems were sowed before DAmato took the helm.Ventres had dreamed of transforming Borden from a rather unexciting conglomerate into a major food marketer. Between 1986 and 1991,Ventres spent nearly $2 billion on 91 acquisitions. In its rush to move quickly on its acquisition program, the company sometimes spent as little as two weeks researching an acquisition candidate before making a decision.Some acquisitions were small and medium-sized regional food and industrial companies. Ventres strategy was to obtain growth by marketing these regional brands beyond their regular market areas. By consolidating manufacturing and distribution, he thought Borden could become the low-cost producer of a variety of product lines, thereby gaining more clout in the marketplace. In the 1980s this strategy seemed to work well. With its acquisitions, company sales grew 61 percent between 1985 and 1989. Regional marketing and tailoring products to local tastes seemed a potent strategy. This strategy was praised as motivating regionals to create new products as well as borrow from one another. For example, in just 6 weeks, Snacktime, one of Bordens new regional brands, developed Krunchers!, a kettle-cooked potato chip differentiated from those made the conventional way through continuous frying. It generated $17 million in annual sales.In 1987, the milk business was among the most profitable in the industry. Borden, with its Elsie the cow symbol, was able to charge more than competitors could, which was surprising for a commodity such as milk, which is virtually the same product whatever cow it comes from. The company insisted that its high quality and service standards made the Borden difference. But when asked exactly what that difference was, a veteran dairyman in a succinct quote said, About a buck a gallon. Perhaps this was an indication of what was to come.

Premonitions

Flaws in the execution of the strategy were beginning to emerge by the end of the 1980s. In the race to expand the food portfolio, the company had ignored some of the well-known and successful brands it already had. For example, it had sold ice cream under the Lady Borden label for decades, but it ignored the golden opportunity in the 1980s to extend the line into superpremium ice cream, which was becoming highly popular. Borden showed the same negligence in not aggressively developing new products for many of its other strongest brand names. And one could wonder how much longer the price premium charged for milk and Lady Borden ice cream could hold up as the company moved into the skeptical 1990s.

Borden was now finding difficulty in digesting its hodgepodge of acquisitions. It continued to operate as a conglomeration of unintegrated businesses and thereby proved to be neither as efficient as major competitors nor as able to amass marketing clout. By the time DAmato took over, the company was clearly ailing. By the end of 1991, sales had declined 5 percent from the previous year, and net income had fallen 19 percent. DAmato quickly tried to consolidate the loosely structure organization, but all his efforts seemed only to make matters worse.

DAmatos Futility

Shortly after becoming CEO, DAmato tried to better integrate the mess of consumer food businesses. He wanted to tighten up and centralize the widely decentralized company. Even corporate offices were scattered between New York City and the hub of the companys operations in Columbus, Ohio. Such geographical distance suited the hands-off management style of Ventres, who rarely got involved in day-to-day operations and spent most of his time at Bordens small Park Avenue offices in New York. DAmato moved to centralize far-flung operations in Columbus. There he involved himself deeply in day-to-day operations. He increasingly saw the need to eliminate or sell many of Bordens small regional businesses while focusing most efforts on building national brands: a reversal of the strategy of Ventres. But DAmatos strategy for turning Borden around failed to meet expectations and even brought new problems.

DAmato was especially wedded to the notion that the brand recognition of certain brands should allow the company to charge a premium price. For example, Bordens own research had shown that 97 percent of consumers recognized Borden as a leading milk brand. DAmato saw this as supporting such a premium price. Then, in early 1992, raw milk prices dropped by about one-third. Borden doggedly held its prices while competitors lowered theirs to reflect the drop in commodity prices. Before, Borden began losing customers, who were realizing that milk is milk. Good brand recognition did not insulate a national brand from lower priced competition of other national brands and private brands. Only after almost a year of steadily declining sales did he abandon the premium-pricing policy. By then sales had fallen so drastically that the milk division was operating at a loss.

DAmato was also facing problems with advertising. In his strategy to build up Bordens major brands, he had boosted marketing efforts for Creamette, the leading national pasta brand. With the sizable promotional expenditures, the brands sales rose 1.6 percent in 1992. This may have seemed like a significant increase but for the fact that nationally pasta sales rose 5.5 percent! How could the promotional efforts have been so ineffective? Unbelievably, most of the advertising featured recipes aimed at increasing pasta consumption tather than at building selective demand for the Creamette brand.

The snack food division also bedeviled DAmato. He planned to launch a national Borden brand of chips and pretzels in the expectation that this could replace many of the companys regional snack brands. Combining the regionals manufacturing and distribution costs under a single brand should enable Borden both to cut costs and also gain marketing muscle. The company tested its new snack line in Michigan, but results were only mediocre. Unfortunately, Borden was going up against PepsiCos Frito-Lay and Anheuser-Buschs Eagle Snacksmajor entrenched national brands. It could not wedge its way in. The company finally refocused its efforts to attempt to build up regional brands such as Jays and Wise. But they were ineffective or too late.

Changing of the Guard

DAmatos sweeping strategy to rejuvenate the ailing Borden left the company worse off than before. Two of its four divisions, dairy and snacks were operating at losses. Its other two divisions, grocery products and chemicals, could take up the slack. On October 27, 1993, Standard and Poor downgraded much of Bordens debt. Since the beginning of 1993, Bordens share price had plummeted 43 percent.

In June 1993 DAmato hired Ervin Shames as president and heir apparent. Whereas DAmatos background had been in chemical engineering for most of his 30 years with Borden, Shames was an experienced food marketer, having spent 22 years in the industry, holding top positions with General Goods USA and Kraft USA. He most recently had been chair, president, and chief executive of Stride Rite Corporation. In making Shames president, DAmato gave him a compensation package that exceeded those of Bordens other top executives, including himself. Shames and DAmato now attempted to correct Bordens problems together. They quickly stopped offering deals to retailers to encourage heavier and-of-quarter shipments. While these deals temporarily boosted sales, they hurt profits and also stole business from the next quarter.

In October 1993 the independent directors of the board considered the possibility of selling the entire company. Hanson PLC and RJR Nabisco briefly appeared interested but talks broke down. Several other possible buyers, including Nestle SA also looked over Bordens portfolio of businesses but declined to negotiate. The weak condition of Borden was proving a major hindrance to any buyout. It likely would have to solve its own problems without outside help. Shames and DAmato believed that the biggest problem was the fact that the company was spread too thin in too many mediocre businesses. Even though the entire company could not be sold at this time, still certain parts should be. They had to decide which should be sold if the company was to be streamlined enough to reverse the consequences of its haphazard and even confused former growth mentality. But DAmato was not to see the conclusions of his latest efforts to turn around Borden. On December 1993 the board of directors fired him and left Shames in charge. At the same time, DAmatos predecessor and former supporter, R.J. Ventres, resigned from his board seat.

Recovery Efforts

Shames announced a $567 million restructuring plan in January 1994. It included the sale of the salty snacks division and other niche grocery lines. In a speech to security analysts, Shames identified four reasons for Bordens problems: lack of focus, insufficient emphasis on brand names, absence of first-rate executives and managers, and tangled bureaucracy. He vowed to purge weak managers and increase advertising with much greater focus on core lines, notably pasta, the namesake dairy products, and industrial businesses such as adhesives and wallcoverings. Shames also pledge to bring Borden from last place among food companies to the top 25 percent.

He began bringing in a new management team, many of them his former colleagues. In a major shake-up, three senior managers announced their early retirement. Some analysts were encouraged by Shames speech. They believed that Bordens bringing in an experienced outsider showed that the company was truly committed to the drastic changes needed for a turnaround. But others were more skeptical. After all, Borden had been restructuring for five years. With so many brands in its portfolio, reflecting nearly 100 recent acquisitions, Borden had lost focus. Key brands were often not sufficiently championed. Brand extensions, such as one for Lady Borden ice cream, were often overlooked or only half heartedly attempted. One wonders how many opportunities were ignored by a management team whose attention was caught up in a frenzy for acquisitions.

A Sputtering Recovery

The troubles of Borden did not go away. At a $1 million cash salary plus mouth-watering stock options, Shames was unable to turn things around. His initial efforts were to build sales volume, but this adversely affected the bottom line of profitability. For example, with pasta, Borden held firm on prices despite a recent 75 percent increase in wheat prices, while competitors raised prices. The result: Borden gained less than a point of market share, but lost on the bottom line. So eager was Borden for volume that in November 1993 it paid an Oklahoma City-based supermarket chain $9.5 million for preferential treatment on grocery shelves.

Shames failed to curb costs. Even though he shed 7,000 employees, payroll costs actually rose. This was not Shames fault. The board approved substantial salaries paid to former top executives. For example, DAmato was paid $750,000 in cash severance and $900,000 per year for four years plus $65,000 in secretarial and legal fee reimbursements. Borden still maintained a fleet of company jets to fly board members around the country. Club memberships of executives hardly attested to a firm on the verge of bankruptcy. The fat could not be trimmed, it seemed.

Efforts to sell off some of the units to ease the crushing burden of credit demands were also less than successful. For example, H.J. Heinz Company bought Bordens $225 million sales food service division for only 31 percent of annual revenues, a miserably low price for assets that should have brought $1 for every $1 in revenues.

In 1994 Borden was bought for $1.9 billion by Kohlberg Kravis Roberts and Co., a low figure for a $6 billion company but then it had been losing money. Robert Kidder, former top executive of Duracell, became CEO. Borden, once a top 20 public firm became the third largest private firm in the US. KKR directed hundreds of millions of dollars for updating plants, installing new system, and developing new products. In May 1995 Borden underwent a complete restructuring, with all marketing efforts split into 11 business units, each with its own board of directors, capital structure, and operational control, thus assuring 100 percent accountability. Could Borden be on the verge of a turnaround?