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

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

Eagle HQ, Tuesday, 10:01a.m.

The next morning, Sarah met with Jennifer to go over her division’s profit and loss. She knew she couldn’t divulge exactly what Jorge’s email said, but she did want her star employee’s perspective. She’d long admired not only Jennifer’s confidence but also her ability to think strategically, and the two women had become close. Sarah mentioned that Jorge was upset by what he saw as uneven treatment.

“What else is new?” Jennifer asked, rolling her eyes.

“I know Jorge has had complaints before, but this is different,” Sarah said.

“Is it? He’s probably still disappointed that he’s not the CEO.”

Jorge and Sarah had been the two leading candidates back in 2011 when Eagle’s founder-CEO announced he was leaving. Sarah had joined Eagle two years earlier as the head of strategic planning and business development at the same time that Jorge was promoted to head up the peripherals division. The rumors were that Jorge wasn’t picked as CEO because he had proved himself invaluable to the unit.

“Whether that’s true or not, he’s great at his job, so I owe him a hearing.”

Jennifer went quiet as Sarah brought up her division’s dashboard on her screen so that they could review the numbers together. Performance continued to be mixed. The six ventures were bringing in $340 million a year in sales and $35 million in total earnings before interest and tax. Although the division was no longer loss-making, it represented less than 30% of Eagle’s sales. The percentage was moving in the right direction, but the unit struggled with quality issues and cost overruns, which were starting to affect profitability. Sarah and Jennifer spent the hour discussing the most pressing problems and potential solutions.

As they wrapped up, Jennifer said, “I know we’re not where we want to be, but with a little more runway we’re going to be able to hit our targets. Also,” she added, “you’ll figure out what to do about Jorge. You always do.”

Sarah’s house, Tuesday, 6:55p.m.

SPINNING OFF

When Sarah got home later that night, her husband, Bo, was chopping vegetables in their kitchen. She handed him her phone and said, “Read this.”

Bo paused and scanned Jorge’s email. “Oh, brother,” he said, picking his knife back up.

“That’s all you’re going to say?” Sarah asked, laughing ruefully.

Bo was a venture capitalist and was taking time off before raising capital for his next fund. “What else should I say? He’s a grump. Ignore him.”

“Ignore him? Bo, this is Jorge we’re talking about. I wouldn’t put it past him to forward this email to the board in 48 hours if I don’t respond. Or quit over this.”

“Maybe it’s time he goes. Wouldn’t you be relieved? He’s always resisted change. And Eagle has always been a follower. If you want to lead the market, you’re going to have to take some risks. Maybe letting Jorge leave of his own volition is exactly the kind of risk you should take.”

“Bo. Jorge is the peripherals division, and it accounts for 70% of sales and 80% of profits. If he leaves, half the staff and most of our customers will follow, taking all that cash with them. I know he and I don’t always see eye to eye, but maybe he has a point here.”

“Then what’s holding you back from making the investment?”

“Dumping money into a mature, low-growth division just seems like the wrong thing to do. That’s a recipe to stay exactly where we are, which means continuing to fall behind. We wouldn’t be able to make the same level of investments we’re making in new products.”

“Why don’t you just sell the peripherals division and use the cash to fund the products you’re excited about? Or spin it off and give Jorge the CEO job he’s always wanted?”

Sarah’s first reaction was that Bo had lost his mind, but before she could accuse him of that, she reconsidered. Maybe it wasn’t such a terrible idea. It’d be hard — maybe impossible — to get the board to agree to it, but it would solve a lot of problems. And she’d finally be running the kind of company she wanted to.

Local Cafe, Wednesday, 2:09p.m

NOW OR NEVER

Sarah asked Jorge to meet her at a café a few blocks from the office. Having such a sensitive conversation in the building didn’t seem prudent. Either one — or both — of them might lose their cool.

Jorge skipped the pleasantries. “I don’t want to negotiate. I’ve made clear what I need to make my division succeed,” he said.

“Three hundred million isn’t a small amount — ”

“But we have it. You’ve just got to stop siphoning it off of my division and let me reinvest it in our business.”

Sarah and Jorge had been having discussions like this for the past few years, but he seemed more fired up and resolute than he ever had before.

“I won’t deny that the growth from the ventures has been impressive over the past five years, but given how things are going over there, that’s not going to continue,” said Jorge. “I want to be honest with you. I think your affinity for Jennifer — the fact that you see yourself in her — is hindering your judgment here.”

Sarah didn’t want to believe that, but she wasn’t ready to fully deny it either.

“But that’s not the point,” Jorge continued. “The point is the health of our business. You’ve got to stop strangling us. You claim that we’re not positioned to compete in new product categories, but you don’t give us the money we need to do that. You have to see how unfair that is.” The board had been harping on the fact that Eagle had no plans to enter the rapidly growing 3D printing market, and Jorge had been countering that if the peripherals division had any research budget, it could come up with a compelling product, given its deep experience with printers.

“Have you seen this quarter’s engagement results from the pulse survey?” he went on. “I’ve got a serious talent issue. Two of my best people left last week, and we’re fielding calls from customers who are considering other options. It’s time to stanch the bleeding.” She understood where Jorge was coming from. He and everyone else in peripherals felt unappreciated — like fallen stars. But she wouldn’t be forced into giving them more resources unless she was sure it was the right decision not just for his unit but for the company as whole.

“You know as well as I do that Eagle is done without peripherals,” Jorge told Sarah as she paid the bill. “You may be right that someday these ventures will land on a product that will be the revenue engine my unit is now. But that’s a long way off — and far from certain. You’ll never get there without a strong peripherals division. You know what we need.”