"What is our role in the world?"
That was the question Dean Scarborough began asking himself when he became CEO of Avery Dennison Corp. five years ago. Known best to consumers for its office products, the company's two largest businesses are as a supplier of pressure-sensitive materials and a provider of retail information products, which includes fabric labels and radio frequency identification (RFID) tags. The company's individual businesses had clear strategies and knew their customers well, but employees had a difficult time connecting to what Avery Dennison's overall strategy was. So he struggled with finding a unifying vision around which the company's employees could marshal their efforts. That's not an insignificant issue in a company with 30,000 employees operating in 60 countries. Avery Dennison, No. 138 on the IW U.S. 500, had sales of $6 billion in 2009.
In developing this vision statement, Scarborough had the advantage of knowing the company intimately. He joined Avery Dennison in 1983 and rose steadily through the ranks, becoming vice president and general manager of Fasson Roll North America in 1990 and then moving to the Netherlands in 1995 to lead Roll Materials Europe. Two years later, he returned to the United States to assume group vice president duties and then became president and chief operating officer in 2000.
Scarborough was first attracted to Avery because of a culture that encouraged initiative and was supportive of new ideas. But 22 years later when he assumed the reins of the company, he was faced with an old nemesis of many CEOs -- a stock price in the doldrums. He began taking a series of steps to fuel growth and improve operational efficiency. He also set out to shift the company's focus so that it was "more external."
Out of that work and more than a year of thought, Scarborough finally landed on a compelling vision. Rather than focus on what the company was making, he centered the message on how the company was adding value for customers -- helping them sell their products through packaging solutions that enhance their brands and through technologies such as RFID tags that provide enhanced intelligence to manufacturers and retailers.
To achieve growth, Scarborough knew when he became CEO in 2005 that he would have to shake up Avery Dennison's product mix. "I felt we did not have enough earnings growth in the existing portfolio," he recalls. "Office products was a declining business, which had great cash flow but there was a way for us to create shareholder value by creating a new business model with retail information services."
That meant pursuing RFID technology and its promise for bringing a new dimension to product tracking and retail information. "The emergence of a chip that costs a dime and allows you to get intelligence on a product and track it in multiple locations is an incredibly powerful concept," said Scarborough about RFID. "It is going to enable a lot of industries to drive to a level of efficiency that they have never thought possible before. This is not just item-level tracking for retail or getting baggage to move on airlines." As an example, he cites research the company is doing on tracking food spoilage without employing destructive testing. "There is all kinds of work going on now at a kind of micro level on how to track things much differently than before. That is what we mean by making the world more intelligent."
In 2007, the company completed its acquisition of Paxar Corp. for $1.34 billion, a move intended to bolster Avery Dennison's RFID technology offering, provide a bigger footprint in emerging markets and enhance its market profile in Europe.
Scarborough sought to enhance Avery Dennison's understanding of the markets it serves by hiring managers who had experience in those industries. "We knew we needed to bring in marketing capabilities," Scarborough explains. Scarborough reasoned that these new managers could be taught about Avery Dennison quickly, and then their fresh perspective and intimate knowledge of their assigned industries would help drive innovation.
A central part of Scarborough's plan to grow the company has been an intensified focus on its external customers. "That's the change I am really trying to drive. By external I don't mean our direct customers. The label printer is our direct customer. We have got to get to the end users because that is where the real innovation can occur." Scarborough says the drive has been to get employees talking with customers, understanding their needs and then bringing them solutions.
As an example of this new approach to the market, Scarborough cited the Roll Materials team's work with wine and spirits customers. "People who buy wine are purchasing more than a pleasant liquid -- they are acquiring a lifestyle, and the label is where that lifestyle can be expressed," he said. "Our segment marketers created an elegant wine label catalogue for vintners that positions wine as a luxury product and our labels as the symbol of that luxury." In the case of Mot et Chandon, Avery Dennison produced a "cravate" from pressure-sensitive labelstock and adhesives that keeps the foil securely around the curved bottleneck but does so without any wrinkles.
Recession Moves
Of course, all this came on the heels of the Paxar acquisition. "My timing couldn't have been worse. I bought at the top of the market, right before the worst retail recession in years," Scarborough admits, conceding that it has contributed to investor skepticism.
As the recession took hold, Avery Dennison quickly moved to minimize the economic impact. In late 2008, it started a restructuring that will generate $180 million in ongoing fixed cost reductions. The company also had its businesses concentrate on maximizing free cash flow. Notes Scarborough, "They overdelivered -- we grew free cash flow $100 million over 2008 to a record $465 million. As a result, we were able to reduce debt, protect our credit ratings and preserve our financial flexibility."
During this period, Avery Dennison also was extending its Enterprise Lean Sigma (ELS) process throughout its operations. Scarborough explained that ELS had its roots in the company's office products business, where it had been instrumental in reducing direct labor costs 56% and the cost of goods sold by more than $170 million. In the Roll Materials business, ELS helped reduce inventory levels in 2009 by $65 million, a 24% improvement over the previous year, and led to a 20% increase in inventory turns.
Scarborough said the word "enterprise" in the program emphasized to employees the "need to take a comprehensive view of the entire value stream to identify what"s truly valuable and what's not." He added that the key element of ELS was "the fact that the customer defines value and not us. The implication is that ELS is not a cost-reduction program. It's a value-creation system -- a tool for growth."
Scarborough told the Italian Trade Commission audience that ELS is providing Avery Dennison with three main benefits:
- An improvement in the basic elements of service -- reliability, timeliness and flexibility. For example, Avery's plant in Queretaro, Mexico, that prints and manufactures labels deployed ELS and doubled the efficiency of its core production facilities while cutting order lead times in half. That boosted service levels above 90% and convinced the plant"s largest customer to stay and increase business.
- Stimulating innovation by focusing on solving customers" problems. Retail Information Systems India, Scarborough notes, contributed to growth by creating a new heat transfer process that does multicolor work in less time and with less cost.
- An improvement in productivity, which increases gross margins and generates funds for growth investments.
While Scarborough is convinced the company is making the right moves to ensure long-term growth, he admits that the results have not yet produced the anticipated shareholder value. In betting on innovation, technology and a solutions-focused customer approach to help the company grow, Scarborough puts that growth in context. "We are not trying to be a high-growth company, but I think we can grow at higher rates than we have in the past," he says. I didn"t think we had the portfolio to be able to do that a few years ago. I think we have that now."
