CHARLES KNIGHT AND
THE EMERSON ELECTRIC COMPANY
( This profile is based on two company sponsored
histories, one written by Charles Knight and the
Other written while he was CEO)
The Emerson Electric Company was founded in St. Louis in 1890. The founders
were two Scottish inventors and a wealthy local investor. Their vision was to invent and
manufacture a variety of electrical products, beginning with motors that powered electric
fans. The company prospered for three decades and then entered a long period of
financial struggles beginning in 1920 and lasting up to World War II. That war gave the
company new life as it secured contracts to manufacture artillery shell components and
gun turrets for bombers. After the war the company continued to prosper but by 1953 it
was still a medium size company which manufactured fans and electric motors in
addition to its defense contracts. And its profitability was in question.
In 1954 a new chief executive officer, W.R. “Buck” Persons, was hired. Under
his leadership, from 1954 to 1974, Emerson expanded and diversified. It became a large
corporation with most of its activity confined to the United States. That accomplishment
occurred during a time of peace and prosperity in the United States.
In addition to his successful growth strategy, Persons led the search for a
successor would keep the company on a strong growth trajectory. His hand-picked
successor was Charles “Chuck” Knight. The company’s board of directors approved
because it expected Knight to retain the Persons success formula. As CEO Knight
retained the company’s focus on management process as the key to everything else. He
succeeded in maintaining the company’s growth during the period 1974 –2000 and in the
process made Emerson a truly global corporation. That accomplishment occurred during
a time of domestic and international turmoil.
Under Persons and Knight the company achieved 43 straight years of increases
in earnings and earnings per share. Six months after David Farr succeeded Knight as
CEO the company had to announce the end of that streak due to a sharp drop in revenue.
The Knight story is one of tough challenges and generally successful responses:
1.
2.
3.
He concluded that the product portfolio he inherited would not support
the company’s growth targets. So he stepped up the acquisitions process
using a new strategic planning function to identify targets.
He concluded that Emerson’s market shares were too small to produce
the superior financial results that were the company’s targets. So he
adopted a goal of using acquisitions to achieve large market shares.
He discovered that with globalization the U.S. was losing its status as
the standard for performance. So Emerson adopted international
benchmarking
1
4.
He concluded that the company’s policy of being a close technological
follower put it at a competitive disadvantage. So Emerson adopted the
goal of being the technological leader in all of its divisions.
He discovered that the increasing size of Emerson made it necessary to
institute new methods of planning, communicating , controlling and
management development. So Emerson’s vaunted management process
was modified accordingly.
He found, in the 1990s, that investors were changing their criteria for
evaluating stocks. So Emerson modified its financial planning
accordingly.
5.
6.
The rest of the Persons-Knight story follows.
I.
A CLOSER LOOK AT BUCK PERSONS’ TENURE: 1954-1973
Prior to coming to Emerson, Persons worked at the Lincoln Electric Company as
vice president and general sales manager. Persons was an engineer by training and a
gifted salesman by nature and experience. And he achieved great success at Lincoln by
exercising those skills. That record led Emerson’s board to believe that Persons would be
able to arrest Emerson’s downward profit trend.
Persons officially became Emerson’s CEO on January 1, 1954. His experience at
Lincoln Electric led him to immediately evaluate Emerson’s manufacturing costs and
pricing, both of which were found wanting. A consultant was brought in to help with the
analysis. The findings resulted in a reduction in the number of products being
manufactured, a detailed look at the actual costs of making and marketing each product,
and a change in pricing so that all products were profitable or discontinued if they could
not be successfully priced at profitable levels ( Emerson Electric Company, p. 142).
Persons’ first year on the job was made more stressful by difficulties with the
company’s labor union. The union was used to asking for and getting periodic wage
increases and 1954 was a year when an increase was demanded. Persons tried to convince
the union that an increase would cripple the company. He shared the company’s financial
information with the union to make the case. He pointed out that competitors had opened
new plants in low wage areas, giving them a 50 to 90 cents an hour wage advantage over
Emerson. He pleaded with the union to accept a 10 percent REDUCTION in wages to
enable Emerson to, “ rebuild the company’s sales organization, reengineer all Emerson
products for lower costs, to introduce new ‘non-seasonal products to level out
employment,’ and to reexamine manufacturing operations.” ( Emerson Electric
Company, p. 143). The union did drop its demand for a wage increase but asked for a
profit-sharing plan instead. Emerson agreed in principle but asked for time to work out a
plan. The union tried to force quicker action by calling a work stoppage on September
20th. Persons saw the strike as a power struggle to, “ …decide who was going to run the
business.” ( Emerson Electric Company, p.144). The strike lasted 10 weeks and ended
when the company agreed to a one year experiment with a profit sharing plan.
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Persons viewed the strike as a breakdown in communications and launched an
effort to meet with all employees and reestablish good communication. Eventually he
added a monthly opinion survey of all employees at each of Emerson’s locations.
But Persons also concluded that the company would have to move its production
of motors to locations with lower labor costs. That decision was communicated to the
employees and soon thereafter Emerson found a low cost labor site in Paragould,
Arkansas. The new Emerson plant opened there in 1956 and by 1960 labor costs per hour
at Paragould were $ 1.60 per hour compared with $ 2.40 per hour in St. Louis. The
Paragould success was followed by the opening of additional plants in other low cost
labor areas. Decentralization became a key part of Emerson’s new competitiveness
strategy.
The decentralization process caused Persons to reevaluate the “quality of the
management process” at Emerson ( Emerson Electric Company, p.150). He was
particularly concerned about finding ways for company managers to promote
constructive change. The boldest action he took to address this problem was his decision
to take small groups of managers with him on week-long ore boat trips. The boats carried
iron ore from Minnesota to Chicago. They had room for eight paying passengers. The
one-week trip isolated the passengers from their daily routines and gave them plenty of
time to talk with one another.
Persons expected cost cutting, product quality improvements and better pricing to
boost Emerson’s profits. But he did not believe that those actions alone would be
sufficient to guarantee long run success. His instincts told him that Emerson needed to
become a big company and to do so through diversification. In 1955 the consulting firm
of Arthur D. Little was hired to study Emerson’s growth needs and options. Little
concluded that Emerson would have to achieve growth through diversification in order to
meet the company’s profitability targets of a pretax profit of 12 percent on Electrical
Division products ( 2 percent at the time of the study) and 8 percent in the Armaments
Division ( less than 1 percent at the time). Persons considered internal diversification
through research and development. But past experience led him to conclude that an easier
approach, and one more likely to succeed, would be through acquisitions. And so
Emerson added another element to its growth strategy – acquisitions.
The first acquistion took place on April 1, 1957 and it triggered a major strategic
decision regarding how Emerson should manage its new acquisitions. The acquired firm
was Pryne and Company, a California firm that made kitchen ventilator units. Pryne’s
founder, Ralph Pryne, planned to retire and wanted to sell his business. But he also had
great pride and affection for his company; he wanted it to continue in existence; and he
wanted it to maintain its identity. Emerson honored that desire and closed the deal by
agreeing to run Pryne and Co. as a separate entity with its identity intact. Making that
decision was not easy. Emerson’s advertising agency, a highly respected firm,
recommended that Emerson put the corporate brand on the acquisition, as was common
practice in American industry in those days. After agonizing over the decision Persons
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and his team decided to not only agree to Pryne’s request but also to make that approach
the corporate policy. As Persons put it, “ We were buying product names that had a very
distinct position with customers. We were buying organizations that we didn’t intend to
throw out. We wanted to help them grow and become more sophisticated…If we had
simply consolidated these acquisitions, they would have been lost, and the opportunities
in those businesses could not have been recognized. That was the whole purpose of the
divisional concept.” Thus was born Emerson Electric’s adoption of the “independent”
divisions strategy for acquisitions.
The Emerson acquisitions strategy emphasized focusing on areas where the
company already had a strong knowledge base --- electric, electromechanical, and
electronic businesses. ( Emerson Electric Company, p. 156) Two of the company’s next
three acquisitions reflected that emphasis. The three were Day-Brite ( commercial
lighting), White-Rodgers ( a leading manufacturer of thermostats and gas controls for
furnaces and appliances), and U.S. Electrical Motors ( integral horse power electric
motors). What might be considered the three most important acquisitions in the 1960s
also fit that mold. The three were: Ridge (a leading manufacturer of professional hand
and power tools for plumbing, industrial, electrical and commercial markets); In-SinkErator ( a leading producer of household waste disposers); and Browning ( a leading
manufacturer of mechanical power transmission products).
A total of three dozen acquisitions were made during Persons’ years as C.E.O.
(Emerson Electric Company, p.170).In addition, the Armaments Division had its name
changed to the Electronics and Avionics Division in 1955 ( Emerson Electric Company, –
p. 172).
While acquisitions became a key or perhaps the key to Emerson’s growth, the
internal development of new products was also important. The first major success in this
area during the Persons era was the development of a radial-arm saw. Introduced in 1956
this product enabled Emerson to capture a large share of the business of the major retailer
Sears. In fact, by 1963 that business was so large that Emerson began construction on a
new factory to specialize on power tools for Sears.
Emerson’s approach to new product development was to encourage the divisional
managements to take the lead. However, Persons thought that corporate headquarters
ought to play a supporting role. That view led him to establish several specialized
research and development laboratories at the corporate level.
As Emerson grew rapidly Persons found himself spending most of his time on
planning, controlling and communicating. Doing so was complicated by the need to
change the company’s management structure and processes in step with the changes in
size and complexity.
While most of Persons’ time was devoted to management matters, he did find
time to engage in important marketing efforts. He, himself, had been an outstanding
salesman at Lincoln Electric and he was a firm believer in devoting top management time
4
to key accounts. And so he made it a practice to personally court the top management of
some of Emerson’s key accounts.
Persons’ final contribution to Emerson’s success was to ensure outstanding
successor management. In the early 1970s he decided to put a successor in place by no
later than 1975 when he, himself, would be 65-years old. A search was launched and two
consulting companies were hired to pare an original list of a hundred candidates down to
six. One of the consultants was Chuck Knight who had consulted for most of Emerson’s
divisions, sat on the Motor Division’s board and had extensive foreign experience. When
Persons found himself dissatisfied with all of the final six he offered the job to Knight.
Knight at first turned him down but was finally convinced. The Emerson board of
directors elected him vice chairman of the board on December 5, 1972 and in October
1973 he become C.E.O. Persons remained as chairman until the summer of 1974.
Knight’s selection was made in spite of a concern on the part of the board about
Knight’s age. He was only 37 years old at the time. But that was offset by his deep
knowledge base and by the assurance that he would, “ come in and operate this company
with the policies and approaches that have proven so successful,” so that Emerson will
have, “ the continuation of a winning formula.”
III. A CLOSER LOOK AT CHUCK KNIGHT’S TENURE: 1974-2000
Chuck Knight was raised to be a business leader. His father, Lester Knight, was a
Chicago area engineer who had founded a successful consulting company, Lester B.
Knight and Associates. The father had a vision of Chuck eventually taking over that
company and so, early on, he began mentoring and testing Chuck by giving him a series
of business assignments. The summer following Chuck’s freshman year in high school he
worked as a laborer in a plaster mould company owned by his father. The next summer
he worked in a Canadian metal foundry; and during his college years Chuck spent
summers at different jobs ranging from a Chicago roofing company to a diesel engine
plant in Europe and a steel mill in Argentina. After Chuck received an M.B.A. degree
from Cornell University he was sent to Germany where he worked in an entry level
management job at a German supplier of automobile parts. In 1961 Chuck was named
head of the European subsidiary of Lester B. Knight International Corporation. That job
involved, in Chuck’s words, “ a lot of organization studies, a lot of foundry work, a lot of
plant work .” ( Emerson Electric Company, p.190).
In 1963 Lester Knight gave Chuck his first consulting assignment with Emerson.
Chuck’s job was to help Emerson digest a newly acquired firm, U.S. Electrical Motors.
Numerous other consulting jobs with Emerson followed, culminating in Chuck being
assigned to help Persons select the next Emerson C.E.O.
1. Knight’s Immediate Challenges
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True to the expectations of Persons and the board of directors, Knight recognized
and valued the beliefs, values and skills which had taken root at Emerson during the
Persons years. Knight regularly talked about them, cited them as key elements of the
corporate culture, and practiced what he preached.
A strong believer in lists, Knight identified what he believed to be Emerson’s key
beliefs and values in a book he co-authored in 2005. That list referred to the situation
during his tenure as C.E.O. but can be considered a reasonably accurate statement of the
situation when he began. That list consisted of: (Knight, pp.4-6):
•
•
•
•
•
•
•
•
•
•
“We insist on integrity in everything we do. Emerson’s reputation is priceless,
and we have zero tolerance for misconduct or malfeasance. Not only is this
ethically the right thing to do, but we also save time and expense by operating
on the basis of trust – among managers, between managers and employees,
and between the company, its board, its investors, customers, suppliers and
partners.”
“Our board, investors, customers and employees all want the same thing:
consistent high performance.”
“Profitability is a state of mind. To achieve winning results over the long term
we must consistently generate high profits. We believe we can do this if our
people are fully committed, focused, disciplined and willing to work hard.”
“Finding new ways to add value for customers is the path to success.”
“We must be the industry leader in our key markets. As number one we are in
the best position to leverage our scale, manage costs, and invest for continued
growth and profitability.”
“The key to market leadership is technology leadership”
“Maintaining a strong balance sheet is a powerful competitive advantage”
“Long-term success requires a committed organization.”
“Key managers must have autonomy to perform at their best.”
“We can improve productivity only through people. Their contributions of
ideas, energy and enthusiasm – their commitment – are essential to our ability
to achieve constant improvement in everything we do. It is management’s
responsibility to create an environment where people can make a difference.”
That admirable list not withstanding, Knight took command at a time when
Emerson faced a number of challenges. Knight’s list of the top priority issues included
(Knight, 2005, p. x):
•
•
•
The company’s portfolio of businesses was concentrated in mature industries
not likely to achieve outstanding growth.
The company’s international presence was inadequate. Only twelve percent of
sales came from outside the United States.
In spite of the value given to technological leadership, the fact was that,“ Our
technology was weak. We were a fast follower, but we needed to change the
game to build leadership and transform our technology base from mechanical
and electromechanical technologies to electronics.”
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•
•
Acquisitions had diminished due to fears of government antitrust actions.
The management process needed updating, including adoption of a formal
process to produce a long run strategic plan (Emerson Electric Company,
p.195). As Knight once put it,“ I admired and wanted to keep the lean
organization and small-company informality but also recognized the need for
more rigor, discipline, and professionalism at all levels of management. We
had to find a way to develop new management talent and keep the pipeline
filled. To get the kind of performance we were looking for ---above-average
profitability sustained consistently year after year without compromise – we
needed to engrain new ways of working (Knight, 2005, p. x).
Knight served as CEO for 27 years. During that time sales rose fifteen-fold while
net earnings grew eighteen-fold. “Meanwhile,” as he put it,“ we transformed the
company under the guidance of an outstanding group of managers…We revamped our
portfolio, building strong business platforms that are world leaders in technology. We
took the company global and established leadership positions in every major region as
well as an international manufacturing base that is the world standard for efficient, bestcost operations. We forged deep relationships with our customers; we no longer provide
them simply with good products at attractive prices but with high-value services and
solutions that enable them to compete more effectively on a global scale.”
(Knight,2005,p.xi)
2. Modernizing and Managing the Vaunted Emerson Management Process
Knight tirelessly explained Emerson’s success during his tenure as due first and
foremost to what he calls “the management process” which originated in the 1950s.
Knight claimed that the management process enabled Emerson to,“ develop superior
strategies at all levels of the company” and to, “ execute them with discipline and
intensity.” ( Knight, 2005, p.3).
The management process was energized by the ten values cited earlier ( “We insist on
integrity in everything we do”, etc.). Knight describes it as having six key elements
(Knight, 2005,p.7):
1.
2.
3.
4.
5.
6.
Keeping things simple
A commitment to planning
A strong system of follow-up and control
An action orientation throughout the company
An emphasis on operational excellence
Creating an environment in which people can and do make a difference
Knight devoted a significant portion of his time to managing and modernizing the
management process. One of his earliest actions was to modernize key element number 2
( a commitment to planning) by creating the corporate level job of assistant vice president
– strategic planning. He promoted Joe Adorjan to that position and asked him to guide
Emerson in developing its first long run strategic plan.
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3. Getting things done
Knight took great pride in Emerson’s ability to “get things done. As he
once put it, “ We’ve designed our organization with a bias toward action, where
communications flow around problems and projects, where decisions are made at the
level where the best information is available, and where a small, talented staff adds high
value but doesn’t slow down or get in the way of operating management.’ ( Knight, p.
53). He went on to list the following “Three Tests of an Action-Oriented Organization
(Knight, p.55):
(1) The organization must plan and control profits at the same level and
that level must be as close to customers and markets as possible.
(2) Corporate staffs should be kept small (Because. “Large staffs tend to
foster a political environment in which the objective is to stymie
positive change.”).
(3) “Communication should flow directly between and among people who
need to know and can execute plans. ( “If information runs primarily
through official channels, beware.”).
At the middle to upper level management level, Emerson’s planning cycle played
a major role in the communication process. It enabled Knight and other corporate level
leaders to communicate strategies and decisions face to face and to get immediate
feedback. The planning process also enabled Knight to get to know hundreds of managers
in all divisions.
At the operating level Emerson’s “getting things done” communication process
was dubbed “communicative management.” Knight once explained the term as follows
(Knight, p.57):
“ (Communicative management) is distinct from participative
management which to some observers implies a kind of
workplace democracy that, taken to an extreme, can paralyze
an organization. As the term implies, communicative management
is about two-way communications – explaining what we’re doing
and why and listening to and acting on employee ideas and
concerns. Doing this effectively requires a decentralized
approach. We invest heavily in two-way communications
including requiring managers at all levels to hold frequent
face-to-face meetings with the people working for them.”
The key to effective “communicative management” and a “bias toward action” is
the selection and nur turing of managers. Management development was therefore one of
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Emerson’s major concerns under both Parsons and Knight. During Knight’s tenure that
policy was driven by the following four principles ( Knight, p.60):
“ 1. Talented managers are assets of the corporation – not of
the divisions or other units in which they happen to work.”
2. The corporation has the obligation to create opportunities
for these managers.
3. These opportunities will involve job rotation and stretch
assignments. We don’t move people based on their
credentials and experience but rather on their success
in prior jobs.
4. Our managers have the obligation to create their own
careers. We provide opportunities and it’s up to our
people to take advantage of them.”
It might be expected that such a set of principles would cause a certain type of
individual to be drawn to a management career at Emerson, and that was the case
according to Knight ( Knight, p. 64). The type of person attracted to Emerson might also
be expected to place a high value on being well compensated for performance. And that
was also the case. Managers were rewarded with a combination of salary plus both short
term and long term incentives. Knight claimed that, “ Emerson’s approach…puts a
significant portion of compensation at risk – more so than is typical at other large
companies.” (Knight, p.66). The compensation approach for division level executives
during Knight’s tenure was (Knight, p. 66):
1. Short term – A base salary plus a year-end bonus based on the year’s
performance.
2. Long term – “ Three types of stock compensation …designed to reinforce
performance targets, retain key executives, and reward performance. About
three thousand managers are eligible for stock options which are discretionary
awards made every two or three years.”
With so many managers on Emerson’s payroll, there had to be significant
variations in leadership styles. Nevertheless, Emerson’s system encouraged some basic
commonalities. Knight’s view of what those leadership commonalities should be
appeared in a 1980 Time magazine article. That list consisted of (Loeb, p.82):
1.
2.
3.
4.
5.
6.
7.
8.
Set priorities.
Don’t delegate tough problems.
Set and demand high standards of excellence.
Have a sense of urgency.
Pay attention to details.
Be committed.
Don’t waste time worrying about things you can’t do anything about.
Have the ability to fail. “You cannot innovate unless you are willing to accept
some mistakes.”
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9. Be tough but fair with people.
10. Have fun. “You can’t accomplish anything unless you’re having some fun.”
Item number nine of the above list was a signature part of Knight’s interactions
with his managers. Particularly in planning conferences he was particularly aggressive in
asking questions. But he was fair and it appears that in general the managers accepted or
even admired Knight’s approach.
4. Technological leadership
Being a close technological follower worked well for Emerson during the Parsons
years. That appears to have been the right strategy for those times. But Emerson’s
competitive environment seemed to be changing when Knight became CEO and he
therefore adopted a new strategy of technological leadership. The result was a technology
management process described in detail in Knight’s 2005 book and summarized as
follows ( Knight, p. 3):
“Emerson transformed itself into a technology leader through
our management process. We start with shared beliefs about
the importance of the objective, including a high-level
commitment from the board of directors and the top
executive team. Then we set stretch goals, plan how we
will meet them, track and control our progress and pay
for results. We are selective and disciplined in limiting
spending to programs and projects that are likely to yield
new products and to help us in the relatively near future.
Thus we focus on applied technology…We provide special
funding for programs and projects that are beyond the
means of a single division. We open new channels to
outside sources of critical technologies. We integrate
stand-alone products across divisions into higher-value
customer solutions. We champion new technology
projects and support them with corporate resources.
Finally, we honor achievements.”
Initially Emerson’s technology development efforts were focused in the United
States. But as the company transformed itself into a truly global corporation, spending on
technology efforts began to be located in other countries. In the mid-1990s the process of
overseas siting of technology spending arrived in China. There Emerson not only
financed research and development projects but also sponsored PhD programs (Knight,
pp. 131-132).
5. Operational Excellence
One of Knight’s proudest accomplishments was Emerson’s success at achieving
relatively high profit margins. As he put it in his 2005 book ( p. 88):
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“Emerson is renowned for achieving consistently high
profit margins. We strive for consistent high profitability
because it is essential to creating shareholder value…During
the past two decades, our average profitability, measured
as earnings before interest and taxes as a percentage of sales,
has run 30 percent higher than that of a group of peer
companies…We’ve done this through good times and bad,
continually finding ways to maintain profit margins in spite
of pricing pressures, competition, inflation, the dilutive
impact of acquisitions ( most of which had lower margins
than Emerson), the costs of maintaining technology
leadership and other factors. Our ability to deliver high
profits consistently is a function of operational excellence.”
Persons had introduced the emphasis on continuous efforts to reduce costs . Cost
reduction was Emerson’s “religion” in the 1960s and 1970s. As Knight explained, “ (W)e
implemented an aggressive program of cost reductions. Through our annual planning
process, we established profit margin targets by division and product line. We also
identified the amount of cost reduction necessary to close the gap between available price
increases and inflation in our cost factors (hourly and salaried compensation, materials
and overhead costs). Before the year started we specified programs and steps to meet 70
percent of our annual cost-reduction target, with the remaining 30 percent identified and
implemented during the year.” ( Knight,p.89).
Emerson was so successful with that approach that the company was caught by
surprise when it lost a long established hermetic motors contract to a Brazilian
competitor. It turned out that the Brazilians had licensed European technology and with
their lower labor costs and efficient management were able to beat Emerson’s prices by
30 percent. Looking back on that shock, Knight remembers, “ Not only did we lose a big,
long-standing business, but also we were forced to close our hermetic motors operation in
Oxford (Mississippi). We lost hundreds of hourly jobs and a significant number of
salaried jobs, at both the plant and in division headquarters in St. Louis. We determined
that such an experience would never happen again. We also learned two lessons: first, we
could no longer take for granted that we were the cost leaders in our markets ; and
second, we would have to keep a close eye on foreign competitors and realign our cost
structure, as required, in time to prevent the complete loss of other product lines.”
(Knight, p. 91).
Emerson’s response to that shock evolved in several directions. One was to
change the company’s competitive benchmarks from “best in the United States” to “best
in the world.” (Knight, p.92). Another was to adopt a new cost reduction strategy. The
new strategy was called the Best Cost Producer Strategy. “The idea was not to compete
exclusively on price but rather on value – the optimum combination of products, services
and pricing – as perceived by our customers: best cost, not lowest cost.” (Knight, p.92).
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Another part of Emerson’s response was a decision to begin moving production to
locations outside of the United States. “Managers in many divisions initially resisted
moving jobs. They were concerned about the cost and risk of establishing new, offshore
facilities as well as the impact on the welfare of U.S. employees. However, as increasing
global competition forced (Emerson’s) prices down in a broad range of products, the
economic case for relocation became overwhelming.” ( Knight, p.94). Between 1983 and
1988 Emerson closed fifty plants in the United States and moved production to lower cost
countries, particularly Mexico. The experience in Mexico justified those moves. As
Knight reported ( Knight, p. 95):
“ (W)e found that after an initial start-up period our new Mexican
plants achieved quality and productivity levels equal to or better
than those of our U.S. plants. This performance reflected the
wage and salary differential between Mexico and the United
States… A degreed engineer in Mexico cost only 25 percent
of the annual compensation of a high school graduate in the
United States, whereas a Mexican vocational high school
graduate with a thorough knowledge of math and blueprint
reading cost only 15 percent of a counterpart north of the
border.”
Relocation continued in the 1990s. The fall of communism in Eastern Europe
presented an opportunity to set up operations in that area. Plants were also located in
Asian countries, including a major thrust into China. The result was described by Knight
after retirement as follows ( Knight, p. 107):
“In the early 1980s we had basically no meaningful hourly jobs
in low-cost countries, but after twenty years of continually
investing in such locations, nearly 40 percent of our hourly
employment was in low-cost areas helping…to contain hourly
compensation inflation to approximately 1 percent. This
compares with 3-4 percent in hour remaining U.S. plants.”
In those remaining U.S. plants there was also a new order. Again, as reported by
Knight ( Knight, p.107):
“ Armed with facts regarding the realities of global competition
and education gained from profit reviews, plant managers and HR
professionals communicated the need for change and moderation
to our traditional workforce. The average rate of annual general
wage increases in the United Statees, for example, fell from 4
percent to less than 3 percent. We made lump sum payments in
lieu of general wage increases in alternative years. Two-tier
wage structures were introduced and the use of temporary
employees was expanded. Medical plans were redesigned, and
employee copays were increased…Despite these tough actions,
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our opinion survey scores actually went up, a testament to the
tremendous strength of our communication policies and to our
people’s understanding of the challenges we faced.”
The relocation of plants outside of the United States enabled Emerson to maintain
its profitability edge in the 1980s. But the situation changed in the 1990s as global
competition put such strong pressure on Emerson’s margins that the company changed its
profit planning process. The new process was named “the profit waterfall”. Essentially it
was a tool which tried to identify, in more detail than before, all of the variables that
affected profits. Forty-five exhibits were needed to do that. (Knight, p.97).
One final example of operational excellence during Knight’s tenure was
Emerson’s adoption of a new focus on procurement and supplier relations. This began in
the late 1980s and was reflective of a general trend in American management circles at
the time. One element of the new approach was Emerson’s adoption of the then popular
concept of “lean manufacturing.” That was done with Knight’s typical commitment to be
one of the best in the world at using the approach. Related to these changes was
Emerson’s decisions to become expert at using the internet to conduct “E-Business.”
All of those efforts are reported with some pride by Knight in Performance without
Compromise ( Knight, 2005).
6. Acquisitions
Knight inherited a company addicted to acquisitions and proceeded to accelerate
the process while imposing on it a tighter strategic discipline. Between 1973 and 2000
Emerson completed more than 200 acquisitions, representing an investment of over $ 10
billion. The subsequent performance of the acquisitions was, in general, outstanding.
Knight reports that for businesses acquired and owned for five years or more the internal
rate of return on the acquisitions averaged 15 percent annually.(Knight, p.143) .That
history began after a brief pause. As explained by Knight ( Knight, p. 145):
“ Emerson became an active acquirer in the mid-1950s.
Between 1957 and 1970, we bought more than twenty
companies …In 1970, we essentially stopped doing deals
of strategic significance. Our longtime counsel advised the
board that major deals faced increasing scrutiny from
federal antitrust officials. Emerson shifted its focus to small
deals to extend its product lines and gain access to new
technologies.”
Soon after I became CEO in October 1973, it became
apparent through the planning process that Emerson would
not be able to maintain healthy earnings growth without
restarting the flow of large deals… We became more active
in mergers and acquisitions almost immediately…We differ…
from many active acquirers. We buy exclusively for the long
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term. We are not a holding company that makes money
through financial engineering but rather an operating
company that owns certain types of business in which our
participation can add significant value. We are especially
interested in the quality of management and organization in
the companies we acquire because they are critical to the
success of our post-deal integration strategy.”
Emerson’s seven guiding principles for acquisitions during the Knight years were
( Knight, pp. 146 – 153):
1.
2.
3.
4.
5.
6.
7.
“All Acquisitions Require Top Management Involvement”
“ Every Transaction Must Have a Sponsor”
“No Transaction Proceeds Without a Plan”
“ The Emerson Management Process (Must Create) Value”
“ Ego Has No Place in Deal Making”
“ Acquisitions Are About People”
“ Never Stint on Due Diligence”
Among the 200 plus acquisitions made during Knight’s tenure, several are
worth citing because of their particular impact on Emerson. Rosemont, Inc , a leader in
pressure sensors, was acquired in 1976 and became the basis of Emerson’s subsequent
expansion in the area of process management.. In the 1970s Emerson acquired Copeland
Corporation, a leading manufacturer of compressors with a revolutionary new technology
in development ( the scroll compressor). That acquisition allowed Emerson to become a
leader in the compressor industry. In 1987 Emerson acquired Liebert, a leader in the
business of controls for temperature and humidity. That acquisition became a catalyst for
Emerson’s expansion in the power management business. ( Knight,205,pp. 40-44).
7. Growth in the 1990s
In the 1990s Knight and his team recognized a growth challenge and took actions
to deal with it. Up to 1992 the company’s strategy was to grow through new products,
acquisitions and global expansion and the planning process that directed those efforts was
as follows ( Knight, 2005, p. 184):
“In our planning process we…relied on a tool called the sales
gap chart. It displayed current sales and made projections for
the next five years based on an analysis of the sources of growth:
the market’s natural growth rate, the division’s change in market
penetration, price changes, new products, product line extensions,
and international growth. The idea was that if projected growth
did not meet or exceed our target, the division would face a gap.
Then it became division management’s job to tell us the
specific steps it would take go close the gap.”
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This produced satisfactory results for years, but by the early 1990s it was decided
that more needed to be done. One reason for the change in thinking was that Emerson
was planning for a ten percent a year growth rate but some peer companies were getting
12 to 15 percent growth rates. Another reason was that growth was slowing at the level of
the existing continuing operations of the company. A third reason was a report from
Emerson’s task force formed to look at opportunities for growth.
One immediate result of the new concern for growth was to divide the divisional
planning conferences into two separate sessions – one devoted to growth planning and
the second focusing on profit reviews. The reasoning was that when both subjects were
handled at one conference, growth planning did not receive adequate attention. (Knight,
2005, p.186). The result of that change, between 1992 and 1997, was a proliferation of
growth programs initiated by the divisions ( nearly 1,000), many of which received
corporate funding.
Then, in 1997, acting in part on the advice of consultant Gary Hamel, Emerson
decided to coordinate marketing efforts across internal company boundaries. One result
of the new thinking was a change in branding. Knight describes some elements of that
decision as follows ( Knight, 2005, pp.193 ff):
“ It seems obvious, but every great company must be skilled at
understanding customers. That starts with excellence in marketing,
a discipline historically undervalued at Emerson. However, our
timing for addressing the issue proved fortuitous. New information
technology was revolutionizing the discipline, enabling new ways
to communicate with customers and enhancing the prospects of
building deep, abiding relationships with them…”
“We had a collection of divisional brands, most of which were not
identified with Emerson. This diverse collection limited our ability
to pursue initiatives with customers. At the same time, it hampered
our corporate image. I had long been frustrated that Emerson
did not receive the recognition it deserved as a technology leader,
for example, because our achievements were closely identified with
particular divisions.”
“ But despite the good reasons to elevate the corporate brand, I was
initially skeptical. For twenty-five years I had attached substantial
value to acquiring dozens of companies with great brand legacies.
Brands like Rosemont, Ridgid and Liebert were widely recognized
as industry leaders. I worried that amplifying the Emerson identity
could compromise the identify and autonomy of our individual lines.
So we approached changes to our brand architecture carefully and
deliberately.”
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The result of that careful approach was a new corporate logo that, “ gave our
managers a platform and a kind of permission to work together across our traditional
organizational boundaries.” ( Knight, 2005, p.195).
There were other changes in Emerson’s marketing approach. One was an
educational program named Industrial Strength Marketing, “through which we rotated
our top nine hundred managers…(T)he program not only opened our eyes to new ways of
marketing but also provided a road map for change.” ( Knight, 2005,p.196). Another
change was the so-called “marquee account” program. “(T)he program organized
account teams that focused on particular global customers, putting Emerson resources in
place that cut across our organizational boundaries. The purpose was to allow the
customer to see Emerson as a single integrated supplier rather than a collection of
independent divisions, each with a unique approach.” ( Knight, 2005, p.197).
8. Successor management
In many ways, Knight followed Persons with respect to successor management.
One important difference was that Persons had felt a need to look outside of the company
whereas Knight believed there would be ample good candidates within existing
management ranks. Emerson’s management development program under Knight had seen
to that.
One way in which Knight followed Persons example was with respect to the
matter of how soon to make the changeover.. In 2005, Knight had this to say about a
long tenure for a CEO ( Knight, p.2007):
“ Emerson has had only three CEOs in the past fifty years..This
leadership continuity is an enormous advantage for Emerson.
It reinforces the consistency that we seek and limits the
possibilities of our making unnecessary changes in direction
or policy. It also sets senior executives’ expectations and
dampens organizational policies. When CEOs take over at a
relatively young age and serve long tenures, there is less
jockeying for position than in the senior ranks of many big
corporations .Rather, the senior people at Emerson are more
focused on doing their jobs without giving much thought to
whether one day the will become CEO.”
With that history in mind, Knight began the search for his successor in the mid1990s. The goal was to find someone who knew the company inside and out and who
was young enough to “leave a mark.” That had been the approach used by Buck Persons
and it appealed to Knight. The company had a deep pool of management talent and that’s
where the search began. Eventually the list was narrowed down to four candidates. Out of
that group David Farr was chosen. Farr was forty-one years old, had joined Emerson
straight out of an MBA program and distinguished himself as he moved up through the
ranks eventually becoming group vice president of industrial components and equipment.
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Farr succeeded Knight in October 2000. Over the next seven years Farr fully
justified his selection, even though his tenure began with a revenue drop so sharp that the
forty-three year streak of annual increases in earnings came to a halt. From 2001 to 2007
Emerson’s sales per share rose from $18.44 to $28.40; earnings per share rose from
$1.20 to 2.66; and net profit overall rose from $ 1.032 billion to $ 2.136 billion. Key to
that performance was Emerson’s on-going globalization strategy. In 2007, for the first
time in Emerson’s history, international markets generated more revenue than the U.S.
II.
CONCLUSION
On the record, Chuck Knight and Buck Persons formed a mutual admiration
society. In Emerson’s one-hundredth anniversary publication Knight was quoted as
saying this about Persons (Emerson Electric Com;pany, p.193):
“ He took a weak company and made it a great one.
Granted, I guess I’ve reaped some of the benefits of
that. The base was in place and then we were really
able to expand it, but he put a lot of fundamentals
in place … The whole drive for cost control, the
move to the South that he made, when he made it.
That was very strategic. His whole acquisitions
program was very successful. I think by any measure
you must say he did an excellent job in acquisitions.
His view of the need to get going in international
business. The concept of planning conferences, the
divisional autonomy ---all these are fundamental.”
Knight added that Persons ran an outstanding transition process. As Knight put it, “
Buck gave me free rein. I had been working so closely with him on people problems
and actually helping him in our recruiting, that the transition, organizationally and
peoplewise, was probably the easiest part of the operation. Persons demonstrated his
overwhelming support to make it work,…(including) his willingness to let me rethink
things he had decided and policies he had in place without taking it as criticism on my
part of what he had done. His doing that openly got me all kinds of credibility with
the organization, and quickly. “ ( Emerson Electric Company,p. 192).
Persons, in turn, had this to say about Knight ( Emerson Electric Company,p.
193):
“ I was sure of some basics about Chuck: that he was
going to work hard, that he had good people skills,
and that he was going to work with the team that was
in place there. The basic transition was under control.
So then I started backing off because I knew he was
going to operate differently than I did in many ways.
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And he has”
“ I knew that there were going to be changes, and
that he was going to accelerate the rate of
acquisitions, and he has. At the same time he’s
worked to expand internal growth …”
“Chuck is a guy who is in a hurry. He wants to
get there; he wants to build the company up,; and
he has set high targets…”
“ I’d also say that Emerson is 10 times more
sophisticated financially today than it was when
I left. Chuck has done a lot of very interesting
things. He’s really creative, and he just drives
his staff to be as creative as he is, and he
encourages them to bring in brighter and brighter
ideas.”
Corporate manager James Hardymon gave his view of the relative
contributions of the two leaders with the statement that , “ I really think Buck put a
tremendous process in place. And I think Chuck made it more strategic.” ( p.216).
Another corporate executive, Larry Keyes said that under Knight,
“Emerson,developed a level of greater sophistication in the planning process. Planning
became a much more meaningful vehicle in terms of driving for growth. Chuck brought
many other degrees of emphasis or intensity to the process, not the least of which was his
own style, which was very combative. The division officers had better be ready to defend
anything and everything that was part of (the planning) conference. So the planning
process became more intense, more combative, more challenging to make sure that every
single facet of an important issue had bee dissected, argued and discussed.” ( Emerson
Electric Company, p216).
A division executive, Jan Ver Hagen, added. “ Sure you have to get used to be
challenged by Chuck. That’s part of it. But the nice thing about Chuck is that it’s not
personal. (Y)ou’ll see him later in the evening after dinner, and he’ll put his arm around
you, and it all over with. You made your point. You had a good conference.” ( Emerson
Electric Company, p.217).
Finally, Knight’s successor, David Farr said, “ Six months after I succeeded
Chuck Knight as Emerson’s CEO in October 2000, we faced a significant issue we had
not expected: with a sudden and sharp drop in revenues, we had to announce the end of
our forty-three year streak of annual increases in earnings and earnings per share…Yet
the end of the earnings streak really had no impact on how the company is organized and
managed…The engrained management process that had sustained our consistent earnings
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performance for so long proved just as valuable in giving us the tools to manage in
extraordinary economic time.” ( Knight, 2005, p. 221).
III.
REFERENCES
Emerson Electric Compan. A Century of Manufacturing: 1890-1990. Emerson Electric
Company. St. Louis, 1989
Knight, Charles F. with Davis Dyer. Performance without Compromise. Boston: Harvard
Business School Press. 2005
Loeb, Marshall, “ Executive View: A Guide to Taking Charge,” Time, February 25,1980.
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