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August 26, 2008

News & Opinion: How the Wise Decide: Dermot Dunphy, Part III

By: 800-CEO-READ @ 8:31 PM – Filed under: Leadership & Strategy

This blog post comes from the authors of How the Wise Decide. To read part I, click here and part II. Here's part III:
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Dermot Dunphy, Part III

The real challenge confronting Dermot Dunphy as he pursued his vision for Sealed Ait was how to keep the technological edge that allowed Sealed Air to charge premium prices. Dunphy knew from his own experience that R&D was essentially a joke among most packaging companies. They knew what was important: cutting costs so they could cut prices, then doing it all over again. Conventional marketing wisdom would see Bubble Wrap as a built-in advantage to get Sealed Air in the door among new customers. Then it could grab a bigger share of each customer's wallet by offering an expanded portfolio of more conventional products.
And then, of course, Sealed Air would be back in the thick of cutting costs in order to cut prices.
Again, Dunphy chose a different direction. He didn't want to compete with anyone in the commodity business. Instead, he saw Bubble Wrap as only the first of a full line of package protecting products that would emerge from vigorous R&D. Sealed Air would hire researchers in chemistry and mechanical engineering to develop products that didn't yet exist for customers who knew little or nothing about Sealed Air at that point. And like his decision about the sales force, this solution would be costly and time consuming. But Dunphy knew technology was the only thing that separated Sealed Air from the price cutters.
The combination of a sales force that understood that it sold a benefit rather than a product and a research and engineering team that applied creativity to what was otherwise a moribund business launched Sealed Air on a course from which it hasn't deviated in more than three decades.
"Every other company in the industry sent people out with catalogs saying 'How many bags do you need? Here's our price.' We sent people out with engineering studies who said 'Let us look at your back room, let us into your factory. We'll show you the economic benefits of adopting our thought processes, our designs, and, of course, our products."[i]
If Dunphy had used his vision's objectives selectively he might have hired the best sales force but skimped on product R&D, thus wasting the sales team's talents. Conversely, without smart sales people Sealed Air's technologically sophisticated products might have languished on warehouse shelves or been sold at unsustainably low prices. By applying his vision every time he made a call, Dunphy ensured that Sealed Air's decisions were coordinated.
Yet even someone as dedicated to following his vision as Dunphy found himself occasionally tempted to take a short cut. When a company in Tulsa, Oklahoma, that produced stretch film to wrap and anchor boxes on pallets came on the market, Dunphy wanted to take a look. He chartered a small jet to ferry the top management team from its New Jersey headquarters to visit the Tulsa company. On the ride home Dunphy reflected on the day, pleased with what he had seen, and began talking about the next steps to move forward with the deal to acquire what he described as a "decent, high-margin business."
Then Sealed Air's senior vice president in charge of international activities, a key executive in the company, spoiled Dunphy's reverie. He told Dunphy that their trip to Tulsa had confirmed what he already suspected: there was no cutting edge technology involved in stretch wrap. To acquire the company Sealed Air would have to deviate from its long-standing vision embodied in Dunphy's Seven Principles.
"He was slightly shocked that I was considering breaking away from our high standards," Dunphy recalls. "He half seriously, half amusingly, but rather bitingly accused me of trying to build a bigger company so that I could boast about it to Harvard Business School friends at my forthcoming reunion. That got the message across pretty clearly!" Needless to say, Sealed Air didn't make the purchase.
There may have been some short-term cost from following Dunphy's vision so relentlessly, but the long-term benefits were tremendous. By the time Dunphy retired in 2000 his relentless focus on making every decision according to his vision had paid huge dividends. Sealed Air had more than 350 employees in R&D labs scattered around the world and had developed an array of innovative new products in such diverse areas as food and medical packaging. The unprofitable little turnaround that he joined in 1971 had more than $225 million in net income on more than $3 billion in sales and was generating gross margins of 35 to 38 percent in an industry that typically saw returns in the low 20s.[ii,iii] The original investors who hired him saw their holdings rise 8,300 percent over the CEO's three decades of leadership.[iv] As we point out in How the Wise Decide, packaging may not be a glamorous business, but returns of 8,300 percent certainly are.
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More tomorrow from the authors of How the Wise Decide.

footnotes

[i] Dunphy interview with Harvard Business School, page 8

[ii] Sealed Air press release, January 25, 2001, http://ir.sealedair.com/releasedetail.cfm?releaseid=74113.

[iii] Dunphy interview with Harvard Business School, page 13.

[iv] Sealed Air press release, October 25, 1999, http://ir.sealedair.com/ReleaseDetail.cfm?ReleaseID=74279.