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August 25, 2019

When one division makes all the money but the other gets all the attention — Part I

Business

August 25, 2019

A CEO considers whether to invest in innovation or focus on the core.

Eagle HQ, Monday, 8:30 PM

It was the tone of the email that bothered Sarah Chan the most. It felt like a threat. Alone in her office at the end of a long day, Sarah, the CEO of Eagle Electronics, opened up her laptop to read it again. Jorge Martinez, the president of Eagle’s largest and most profitable division, had written:

“The board gave you a mandate to revitalise the company, and you’ve instilled the entrepreneurial spirit we sorely needed. The Disruptive Initiative has repositioned us in the tech sector, and our stock price has increased significantly. Nonetheless, by harvesting cash flow from my unit to lavish funding on your pet projects, I believe you have endangered Eagle’s future.

“My unit has long been known for selling good products at fair prices and offering top-quality service and support. That is no longer the case. We are now struggling. My best customers are running to the competition, as are some of my top employees. I fear others may soon follow. My division needs $300 million over the next three years, and continued investment after that, to remain competitive.” Given how formal the email was, she couldn’t believe he hadn’t cc’d anyone. Jorge was well known in their industry, and she imagined it was only a matter of time before he shared his opinions more widely.

She didn’t completely disagree with the facts as he’d laid them out. Founded in the early 1980s, Eagle Electronics originally derived its revenue exclusively from the manufacture and sale of personal computers and peripheral devices. In the early 2000s, it got out of the PC business because the founders realised it couldn’t compete with Dell and other firms. But peripherals remained the largest share of the company’s revenue and earnings, and Jorge had led that division for close to 10 years, with great success. He was known for his fiscal discipline and for making smart strategic decisions, such as expanding into emerging markets with lower-cost products.

And Sarah had, in fact, been using the cash flow from the peripherals unit to fund new ventures. Soon after being named CEO, in 2012, she had started the Disruptive Initiative unit, an investment model for new-product development.

She’d created it out of necessity when one of her rising-star designers, Jennifer Yu, told her she was leaving to start her own data management software company and asked Sarah if she wanted to be an angel investor.

Because she wanted to keep Jennifer, and since there wasn’t direct overlap between the startup and Eagle’s portfolio, Sarah proposed that the firm fund the initiative with an option to buy if it developed a minimum viable product and laid out a path to market.

Jennifer did just that, and Eagle bought the venture 14 months later, with Jennifer realising a significant financial gain. The arrangement became a model for other investments. Employees were allowed to submit product proposals, and if approved, Eagle would fund 75 percent of the startup costs. The firm also offered other assistance to help startups meet their goals and deadlines.

Employees initially left the company to work on their ventures, but Eagle had an option to buy within 18 months and often did, folding the employees back into the division that Jennifer now led. So far, Eagle had invested in 13 ideas, seven of which were still in startup mode, and five of which had been acquired. Only one had fizzled out.

The initiative had received glowing attention in the financial and technology press. But it was far less popular internally.

While much of Eagle’s growth was attributable to its acquisitions, integrating the new ventures had been problematic, and profitability varied. Plus, Sarah’s time and attention, not to mention the firm’s resources, had been so focused on them that the company’s bread-and-butter products — all part of Jorge’s division — were often ignored. The favoured child was suddenly feeling like a stepchild, and that had led to high turnover and morale problems.

As Sarah reread Jorge’s email, she winced at his use of the word “endangered.”

Her intention hadn’t been to hurt any part of Eagle. Her goal was to prepare the company for the future. But his comment had hit a nerve. She hadn’t yet proved that the new business lines could generate significant profits or dominate their markets. The peripherals unit was Eagle’s lifeblood. And she couldn’t help wondering whether she had inadvertently damaged it.

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