"In Choosing the Right Management Model, Firms Seesaw Between Product and Place One System Is Based on What a Company Makes, the Other on Where It Operates."

By JOANN S. LUBLIN
Staff Reporter of THE WALL STREET JOURNAL

Last year, Robert A. Lutz, chairman and chief executive of Exide Corp., launched a master plan to help turn around the money-losing battery maker and solve a thorny business problem.

Exide's structure -- built around 10 separate country organizations -- was encouraging its managers in Europe to undercut one another's prices. They were "driven to maximize their own results -- even if it was at the price of their next-door neighbor, who also was Exide," says Mr. Lutz. "The guys were poking each other in the eye.''

So, Mr. Lutz spent about a year and $8 million crafting a new structure for the $2.4 billion company. In place of the geographical fiefs, he formed global business units to manage the company's various product lines, such as car batteries and industrial batteries for high-tech gear.

But that gave rise to new problems. Half of Exide's top European managers resigned. And when Exide made an important acquisition, it worried that a top executive it wanted to keep would be miffed if his turf got swallowed up by one of the new units. Soon, Mr. Lutz was tinkering with Exide's structure again, tilting the organizational seesaw back toward the geography plan.

Dawning Realization

As companies grow more global, they keep running into the same basic management dilemma that bedeviled Mr. Lutz: Is it more efficient to organize by product line or organize by geography? NCR Corp., Ford Motor Co., Procter & Gamble Co. and several others have spent fortunes transforming themselves from one to the other. But taken too far, each model can cause its own headaches.

In the product model, businesses can reap efficiencies by standardizing manufacturing, introducing products around the world faster, coordinating prices better and eliminating overlapping plants. Yet, companies typically find that tilting too far away from a geographic model slows their local decision-making, reduces their pricing flexibility and can impair their ability to tailor products to the needs of specific customers.

Under "Ford 2000,'' the No. 2 U.S. car maker's most sweeping management redesign to date, Ford sought to forge its functional departments -- such as new-car development -- and its geographical fiefs into a single global automotive operation, pursuing the product-based model. A Ford spokesman says the reorganization, begun in early 1995, saved $5 billion during the first three years, primarily through swifter product development and the adoption of world-wide manufacturing standards.

Lost Ground

However, it cost Ford some of the ground it had gained in Europe. By January 2000, the company's European market share had slipped to 8.8% from 13% five years earlier. Between 1996 and 1999, four different executives oversaw its European operations.

Early last year, Ford shuffled senior management again, restoring some of its regional executives' lost authority. They gained more power to decide what kinds of cars and trucks to make and how to market them. Ford called the partial retreat a "refinement'' of Ford 2000.

Exide Unit Pleads Guilty to Fraud Charges Stemming From Role as DieHard Supplier (March 26)

P&G's "Organization 2005" plan replaced separate country organizations with global business units tied to product categories, such as paper goods, feminine protection and beauty care. The 1999 realignment sought to bolster sales and globalize the maker of Tide laundry detergent, Pampers diapers and Crest toothpaste.

Unanticipated Results

But P&G's switch failed to anticipate the tremendous upheaval involved as thousands of employees shifted into new jobs. More than half of the company's executives were assigned to new roles. The company transferred about 1,000 European staffers to Geneva, causing an influx sudden enough to push up residential rents in the staid Swiss city. The company's goal of cutting 15,000 jobs world-wide, or 13% of P&G's work force, over six years also alarmed many employees.

European managers complained to some of P&G's ex-chairmen, who remained close to company directors. Such middle-management griping -- on top of unexpectedly weak earnings -- helped trigger the abrupt departure of CEO Durk I. Jager last June after just 17 months in the top job. Like Ford, P&G has since partly reinstated its geographic focus, hoping to get closer to customers.

Shortly after his arrival at Exide in December 1998, the outspoken Mr. Lutz, a former Chrysler Corp. president, became convinced that the company's geographical focus no longer made sense. Exide, the world's biggest producer of automotive and industrial batteries, was facing mounting losses, a depressed share price and a heavy debt burden. It also faced allegations in the U.S. that it had sold many used auto batteries as new ones. (In late March, an Exide unit pleaded guilty to separate criminal charges involving the sale of defective batteries and agreed to pay a $27.5 million fine.)

Exide's once-booming European business missed profit targets for the fiscal year ended March 31, 1999, and U.S. losses widened. Exide's European country managers blamed falling prices. Competitors and clients blamed Exide. "They said, 'Your country managers are exporting into each other's countries,' " recalls Mr. Lutz. "The prices we had to meet were our own.''

Many of those executives had headed local businesses that Exide had acquired, and they could earn sizable bonuses for hitting local profit goals. They "acted like barons," says Mark Stevenson, the company's managing director for Britain.

So, to a degree, did Mr. Stevenson. He once clashed with German colleagues over batteries that the British unit sold in Austria for 10% to 15% less than what Germany Exide charged there. He felt his prices fairly reflected the market.

Seeking to build consensus for an organizational overhaul, Mr. Lutz held five management retreats between June 1999 and January 2000. "Where does our future lie?" Mr. Lutz asked 30 senior executives assembled for the first retreat at a downtown Madrid hotel. "Does it lie in country management? Or in global business units?"

At first, Albrecht Leuschner, then head of Exide's six-factory German operation, doubted Exide needed to shift to the business-unit model, organizing by product lines. "My region was in good shape,'' he says. "I was afraid we would destroy structure and that would damage the [German] business.''

Resolving Dilemmas

Between retreats, managers working in teams were assigned to grapple with various Exide dilemmas, using existing and alternative organizational models. In assessing Asian expansion strategies, one team realized that Exide's geographic focus encouraged construction, even though "it was not profitable for [Exide] to keep putting plants up,'' says Judith Glaser, a New York consultant who helped run the retreats.

The teams reported their findings during the first two days of their third retreat, held in September in a castle-like hotel in the hills near Florence, Italy. The tentative consensus: Only a product-line structure could cure Exide's ills.

On the last morning of the three-day retreat, the executives arranged their chairs in a semicircle around Mr. Lutz and hotly debated the proposed management structure for more than two hours. Finally, Mr. Lutz stood and announced, "We don't have 100% consensus yet. ... But I'm going to make a decision, and we are going to go to a global business unit structure.'' Santiago Ramirez, then in charge of 1,500 executives and about 8,500 rank-and-file production and sales workers as head of Exide's European operations, "looked disappointed,'' Ms. Glaser recalls.

Several Ramirez lieutenants made sour faces.

"Why don't you give it a try?" Mr. Lutz says he asked the frowning Eduardo Garnica, Exide's managing director for Spain.

"No, I'm out of here,'' Mr. Garnica replied, according to Mr. Lutz.

Mr. Garnica couldn't be reached for comment. Nor could Mr. Ramirez, who left the company six weeks after it implemented its reorganization.

Other country managers got even more upset during their December 1999 retreat. In a windowless room of an Amelia Island, Fla., resort, Mr. Lutz displayed tentative organizational charts for the global business units.

The charts distressed Giovani Mele, a managing director for Italy. At dinner that evening, Ms. Glaser noticed him huddled with two equally morose-looking European associates. "Being a country manager is my life,'' Ms. Glaser recalls Mr. Mele telling her in a choked voice. "It's something I've worked for my whole life. I don't see how I'll have a role going forward.''

Mr. Mele also dreaded the personal sacrifice that the reorganization would require. Exide moved him to Frankfurt, where he presently makes less money than before. "They said, 'this or nothing,' '' he says. His family refuses to leave its home in Naples.

Exide, which is based in Princeton, N.J., initially formed six global business units primarily around its product lines. Most of its remaining country managers were demoted to the post of local coordinator. A few gained power. Dr. Leuschner, for instance, took charge of the global network-power business unit, which makes standby industrial batteries for phone systems, computers and the like.

A Six-Week Tenure

But the new structure didn't last long. "For six weeks," Dr. Leuschner recalls, "I was emperor of the world." In May 2000, however, Exide agreed to buy international battery maker GNB Technologies Inc. for about $368 million in stock and cash. The deal offered a chance to regain a significant and profitable presence in the North American industrial-battery market that it had abandoned more than a decade earlier.

Mr. Lutz feared that Mitchell Bregman, the well-regarded president of GNB's industrial-battery division, might bolt once Exide folded his operation into the newly created global business units. So, just before both sides signed the accord, the Exide leader corralled Mr. Bregman at the company's Chicago law firm and assured him a significant role in the combined operation. "If we had been rigid about our organizational framework, we would have broken up GNB,'' says Mr. Lutz, whose offices are in Ann Arbor, Mich. Instead, Mr. Lutz tilted the structural seesaw back somewhat toward a geographic model by letting Mr. Bregman keep control of the North American industrial-battery business.

Initially, the move triggered a turf battle. Last summer, Mr. Bregman and Dr. Leuschner, his soon-to-be colleague, clashed over who should run China for Exide. Mr. Bregman, whose company's revenue in China had recently doubled and exceeded Exide's there, wanted to form and direct a Chinese subsidiary. Because China represented his unit's fastest-growing market, Dr. Leuschner lobbied to form a local joint venture there under his command.

Mr. Bregman says he finally gave in under pressure from Exide President Craig Mulhauser. In return, Mr. Bregman was put in charge of South American operations while keeping Korea, Japan and Taiwan.

'Industrial Bad Guys'

These days, Mr. Bregman says he gets along well with his European counterparts, Dr. Leuschner and Neil Bright, who directs Exide's motive power global business unit, which makes batteries for forklifts, electric vehicles, submarines and other equipment. The trio confer face-to-face once a month and show such a fierce esprit de corps that Mr. Lutz nicknamed them "the industrial bad guys.''

There are other signs of progress from Exide's latest approach: blending the geography and product-line models. As a result of its partially restored geographic focus, Exide still employs separate industrial-battery sales forces on both sides of the Atlantic. But in recent months, the teams have begun making joint pitches to global customers, such as Ford. And Exide has just signed a three-year agreement with Emerson to be the St. Louis-based company's primary world-wide supplier of certain large lead-acid batteries. Mr. Lutz believes the deal never would have happened under the company's old structure.

Exide's operating results started to recover in the second half of the fiscal year ended March 31, reversing first-half operating losses. For the fiscal fourth quarter, Exide posted income from operations of $500,000, or two cents a diluted share, though a large nonrecurring charge left it with a net loss for the period of $144.7 million. That compares with a year-earlier loss from operations of $1 million and a year-earlier net loss of $127.3 million, after a nonrecurring charge. Operating profit for its industrial segment more than doubled during the quarter. Exide attributed the improvement to the GNB acquisition and strong growth in its network power and motive power businesses.

The reorganization "is definitely working far better than what we had,'' Mr. Lutz insists. Yet no one views it as a permanent solution. And Mr. Lutz vows to seesaw again if conditions warrant.

"Come back a year from now and we will look different,'' says Mr. Mulhauser, his second-in-command. Indeed, Exide is exploring ways to combine the separate operations run by Dr. Leuschner, Mr. Bright and Mr. Bregman. "We were searching for the Holy Grail. But there isn't one.''