Tenneco’s case corporation adopts a customer focus

 

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Wisconsin-based Case Corporation was a wholly owned division within Houston-based Tenneco, Inc., until 1995. Its specialty is the manufacture of farm and construction equipment. From the early 1980s through the early 1990s, “Case made a virtual art of ignoring the market.” and found itself with excess manufacturing capacity, products it could not sell, bloated operating costs, and losses of well over $1 billion. During those years its management had made many efforts to fix the things that were wrong, but interference and micromanaging from its parent’s (Tenneco’s) managers resulted in limited progress.

The problems these managers wrestled with were many. One primary problem was the inward focus of Case’s managers. Instead of looking outward and focusing on customers, managers seemed trapped in the past, holding the nineteenth and early twentieth century view that “if we make it, people will buy it.” The company had enormous manufacturing capacity. To utilize these facilities to their fullest, Case continued to make products that were not competitive, thus overburdening its company-owned dealerships. For example, its line of tractors was underpowered in relation to its competitors’ models and lacked their automobile-like finishes. To move these tractors and other noncompetitive products to users, dealers had to continually cut their retail prices, thus cutting the company’s profit margins in the process.

Another problem was one of inefficiency. Case manufactured many of its products’ component parts in-house at a cost far higher than outsiders would have charged to make them. This practice carried with it the added burdens of too many people on the payroll and their related overhead costs.

In 1991 Tenneco’s board of directors hired a turnaround specialist, Michael H. Walsh, as Tenneco’s CEO. He hired an International Paper Company executive, Dana G. Mead, to take over the top-management job at Case. Mead inherited company dealerships “with eleven months of inventory—four months above the industry average—and no customers.” Armed with an infusion by Tenneco of much-needed cash and a commitment to avoid the mistakes of the past, Mead assembled a new leadership team. The team created a turnaround plan and was given the power to act on it. Managers’ bonuses were linked to achieving the plan’s targets, and additional motivation was provided through a promise that, if the company became profitable, it would be sold off and managed as an independent enterprise.

The first of many reforms dealt with the reduction of costs. Excess inventory was sold. Heavy debt incurred in the past was refinanced at lower rates of interest. Unprofitable products were dropped. Some plants were closed immediately and plans were laid to close others by 1997. As payrolls were cut, the manufacture of many components was and continues to be shifted to outside suppliers. Most of Case’s 250 dealerships were sold. But Case’s management “knows that cost cutting alone won’t sell more tractors.”

The company’s managers are building on reforms begun in 1992. Beginning in that year the company decided that it would be customer driven. It started by seeking customer feedback on its new design for a loader backhoe—a vehicle with entrenching and front-end loading capabilities. While the first test model was being built, “Case sent teams of engineers and marketing managers to talk to 150 key customers and users of rival machines. They quickly got an earful.” The company invited valued customers to test its prototype vehicle. Over several days they compared its performance against that of its competitors’ machines. Like many who tested the vehicle, Larry Willingham liked some features but not others. One dominant feature was its weight of about 16,000 pounds. It was too heavy for him to use because he would have to buy a new truck to transport it. When he returned a year later to see the proposed final production model of the loader backhoe, Willingham was pleased. Among other things, it weighed only 12,900 pounds. Said Willingham, “I definitely felt they listened to me.”

After getting the green light from its customers, Case totally overhauled the Burlington, Iowa, factory that now produces the new vehicle. Ten million dollars was invested just to improve the rust protection and painting operations. When the new model was introduced in 1995, it was an instant success with customers. Production could not keep up with demand. Case is expanding the involvement of its customers in its product design. Profits and sales have steadily increased since 1991, and overhead expenses have fallen. Case’s gross profit for 1994 was 23 percent, higher than any of its competitors’. Tenneco delivered on its promise to sell the company to investors. In 1995 Case became Case IH, consolidating International Harvester with Case. Tenneco’s decreased ownership in Case resulted in Case becoming 79% publicly owned.

Sources: Kevin Kelly, “Case Digs Out from Way Under,” Business Week (14 August 1995), pp.62–63; Case Corporation Company History, http://www.caseih.com/corporate/history/index.html; Case Corporation, http://www.caseih.com.

QUESTIONS

1.     What problems was Case facing before its turnaround team took over?

3.     What did Case’s turnaround team do to deal with each problem you have identified?

4.     How did Case become customer driven?

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