Question

15.1 Case in Point: Newell Rubbermaid Leverages Cost Controls to Grow

Newell Company grew to be a diversified manufacturer and marketer of simple household items, cookware, and hardware. In the early 1950s, Newell Company’s business consisted solely of manufactured curtain rods that were sold through hardware stores and retailers like Sears. Since the 1960s, however, the company has diversified extensively through acquisitions of businesses for paintbrushes, writing pens, pots and pans, hairbrushes, and the like. Over 90% of its growth can be attributed to these many small acquisitions, whose performance Newell improved tremendously through aggressive restructuring and its corporate emphasis on cost cutting and cost controls. Usually within a year of the acquisition, Newell would bring in new leadership and install its own financial controller in the acquired unit. Then, three standard sets of controls were introduced: an integrated financial accounting system, a sales and order processing and tracking system, and a flexible manufacturing system. Once these systems were in place, managers were able to control costs by limiting expenses to those previously budgeted. Administration, accounting, and customer-related financial accounting aspects of the acquired business were also consolidated into Newell’s corporate headquarters to further reduce and control costs.

While Newell Company’s 16 different lines of business may appear quite different, they all share the common characteristics of being staple manufactured items sold primarily through volume retail channels like Wal-Mart, Target, and Kmart. Because Newell operates each line of business autonomously (separate manufacturing, research and development [R&D], and selling responsibilities for each), it is perhaps best described as pursuing a related, linked diversification strategy. The common linkages are both internal (accounting systems, product merchandising skills, and acquisition competency) and external (distribution channel of volume retailers). Beyond its internal systems and processes, Newell was also able to control costs through outcome controls. That is, business managers were paid a bonus based on the profitability of their particular unit—in fact, the firm’s strategy is to achieve profits, not simply growth at the expense of profits. Newell managers could expect a base salary equal to the industry average but could earn bonuses ranging from 35% to 100% based on their rank and unit profitability.

In 1999, Newell acquired Rubbermaid, a U.S.-based manufacturer of flexible plastic products like trash cans, reheatable and freezable food containers, and a broad range of other plastic storage containers designed for home and office use. While Rubbermaid was highly innovative (over 80% of its growth has come from internal new product development), it had difficulty controlling costs and was losing ground against powerful customers like Wal-Mart. Newell believed that the market power it wielded with retailers like Wal-Mart would help it turn Rubbermaid’s prospects around. The acquisition deal between these two companies resulted in a single company that was twice as big and became known as Newell Rubbermaid Inc. (NYSE: NWL). In 2010, Fortune named Newell Rubbermaid the number 7 “Most Admired Company” in the home equipment and furnishings category.

1. How do the controls Newell uses fit its strategy?

Answer 1

Newell's strategy from the early years of its expansion and growth included acquisition of smaller companies manufacturing and selling hardware products and restructuring the operations through various controls as highlighted below -

1. Performance improvement through aggressive restructuring of the operations through cost cutting measures.

2. The three different sets of control which include -

• an integrated financial accounting system - Which ensures the accounting is done properly with all the records of the transactions and corresponding accounting entries while the financial reporting ensures tracking of finances for better control.
• a sales and order processing and tracking system - Which ensures entry, booking, processing of sales orders against customer demand.
• a flexible manufacturing system - Which ensures control of the manufacturing and operations by recording and reporting manufacturing transactions.