Simmons case

8 August 2016

Simmons should roll out the GGOL program in order to repair incongruence between the firm’s current culture and its strategy, as well as a misalignment between its present culture and CEO Charlie Eitel’s desired culture. The $7. 2 million price tag is a substantial investment in light of the company’s +5 times EBITDA leverage ratio and will face resistance from Fenway Partners, the private equity shop that bought Simmons in 1998. We have identified Eitel’s sources of power, as well as how he should leverage those to influence the employees and Fenway that this risky solution is in fact the ideal solution.

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Per Fenway, the company’s strategy is to increase portfolio value by aggressively implementing long-term growth strategies and developing customers and partners. Post-1978 management has a similar goal: reduce costs, improve performance/productivity and raise profits. Currently, the main task is to focus on Simmons’ historical roots of making mattresses (a manufacturing-based, labor-intensive process). Based on the congruence model, we find a disconnect between Simmons’ current culture and both its strategy and Eitel’s desired culture of empowerment, strong customer relationships and innovation.

There are also aspects of the tasks and people that don’t fit with the firm’s strategic goals, such as production processes that likely differ among plants since they don’t share newfound ways to improve efficiency with one another. In addition, Eitel has the self-assigned tasks of improving customer relationships and personal employee development. In terms of formal organization, Eitel recently altered the company’s structure by eliminating the General Manager position, in an attempt for the manufacturing plants to operate as “18 of one” rather than “one of 18.

” Also, employees and management have a vested interest in the company’s profits, though a formal ESOP, and since many people’s family members work there too, we infer that at least some hiring is done via referrals. However, there is no long-term vision, and the firm is described as “unstable. ” In addition to be unaware of a company vision, the people are generally not hard-working or collaborative. Managers tend to rule like dictators while “sergeants” patrol the plant floors, promoting an environment that is not conducive to innovation or personal growth.

As a result, the current culture (with the exception of the Janesville plant) is highlighted by low-morale employees who work hard only when the supervisor is watching and managers who motivate through intimidation, again producing an environment that fails to encourage innovation. Meanwhile, Eitel’s vision calls for an informal organization centered on teamwork, motivation, innovation, empowerment, honesty and individual development, which he outlines in the Code of Ethics, Leadership Vision and Workforce Vision, as well as in his addition of three core values (caring, empowering and supporting) to the CHOICES acronym.

In short, the current culture is incompatible with the strategy and desired culture, as workers’ motivation and collaboration is nonexistent. Such an environment doesn’t promote innovation, which is necessary to revive the old days of implementing operational excellence, fostering a family-like culture and expanding the Simmons portfolio. The benefits of culture alignment are evident in the examples of the Janesville and Charlotte plants. Janesville’s plant is family-like, collaborative, productive and successful; while the plant in Charlotte and the other plants are not as productive and exemplify the undesired culture described above.

As shown from the congruence analysis and the Janesville example, an investment to fix Simmons’ culture over several phases would greatly benefit the company’s future productivity and working environment. Based on the results of the GGOL program thus far and the success in Charlotte, it is evident that Simmons is on the right path in forming its desired culture. If Simmons does not invest in the GGOL program, there is a potential risk of the company becoming even more fractured.

Currently there are two ideal plants; management should not stop mid-stream and allow the remaining 16 to operate less than optimally. In order to employ this new program, Eitel must use his sources of power to convince Fenway that this solution is worth the $7. 2 million. His positional power source comes in the form of formal authority. He is the CEO who was chosen by Fenway (who actually had to convince him to leave his former post at Interface, Inc. ) specifically for his track record of 5 successful transformations.

His proven track record, work ethic and effort are personal forms of power that he can also leverage to persuade Fenway. When he took over as CEO at Simmons, he began making changes immediately. Eitel made a heavy gamble on a new mattress product, completely reorganized top management and spent $3. 8 million to fire 14 executives, and altered the organizational structure to promote the “18 of one” concept. He has a go-getter attitude and isn’t intimidated by the fear of failure; he came in with a plan and right away began to execute it.

We recommend two methods of influence for Eitel to use with Fenway: logical persuasion and common vision. Fenway is weighing the GGOL solution against its conventional approach, so the examples of Janesville’s success and Charlotte’s change will show Fenway, who generally based decisions on logic and reason, that a culture productivity and innovation is critical to building the company’s portfolio value. Using the common vision influence method may impact Fenway, but would be even more effective with Simmons’ employees.

As a leader, Eitel can use GGOL as well as meetings, speeches, etc. to build a sense of identity and pride in the company. It’s crucial, however, that he clearly explain how this program will advance the broader goals of the organization in order to ensure that everyone is on board. After winning support from Simmons’ employees and Fenway, Eitel can gradually roll out GGOL to the entire company and proceed with a transformation effort. His chance for a company-wide transformation is high, given the manner in which he led change in Charlotte.

In line with John P. Kotter’s eight transformation steps, Eitel began by creating a sense of urgency. After taking the reins at Simmons he immediately implemented changes that were consistent with a need to bring the firm’s environment back to one that stimulated innovation and focused on the customer, and he followed through with what he said he would do. He vowed to rebuild customer relationships and to build a company where people wanted to “get up and come to work in the morning. ” Subsequently he did just that.

In his first 90 days as CEO, Eitel visited the company’s top 25 accounts and all 18 plants, thereby instilling trust among the employees that he will “walk the talk. ” Next, post-organizational change, Eitel found himself with a guiding coalition that was somewhat self-selected. About two-thirds of management was gone within a year, thereby eliminating potential obstacles. Eitel then communicated his vision of a “company that other companies want to do business with” and where its employees looked forward to coming to work in the morning by walking the talk and in an unusually casual and direct approach to corporate employees.

In changing the organizational structure and eliminating intimidating leadership, Eitel took a step toward empowering employees by fostering an environment where people weren’t afraid to speak up. The successful turnaround of the Charlotte plant can be used in two ways: first as a short term win, and second as concrete proof that GGOL actually works. Provided he wins Fenway’s approval, Eitel’s plan is to instill changes in phases, which according to Kotter, is better than trying to do everything at once.

Though Eitel’s solution is ideal, it involves two key risks – a tough economy and a highly leveraged company. The economy is in a post-9/11 downturn, which means that better products due to innovation and/or lower prices due to productivity improvements might not be enough to win business in the short-term. Also, a 3-year cost of $7. 2 million would result in a 9-times-EBITDA transaction multiple that could prompt a decline in equity and enterprise value in excess of $63 million, according to CFO Bill Creekmuir.

Convincing quantitative-minded people such as private equity investors will be a challenge, but the Charlotte example carries a lot of weight and strengthens the credibility of a rather qualitative approach. We also point to a couple of case studies to show why an investment like GGOL can be worth the risk. First, Dermot Dunphy, CEO of Sealed Air in the 1980s, leveraged the company to think brink of disaster in an attempt to shock the company out of complacency and force employees to come up with new manufacturing techniques to improve productivity.

Given that Simmons’ employees participate in the ESOP program, a $7. 2 million investment when the company is already highly leveraged is likely to incentivize them to work harder and maximize their individual pieces of the pie. Prior management probably didn’t communicate this concept, but it’s certainly another way in which Eitel can empower his people and create a sense of urgency. Second, John Clendenin’s stint at Xerox is evidence that risk-taking is important.

Clendenin took on a lead role in an overlooked business unit (the MDC) and created a successful, global unit out of “stray cats and dogs” that had initially had little company-wide support for going multi-national. Eitel therefore has the benefit of external anecdotal evidence as well as the Charlotte success story on his side. Though he faces the challenges of interdependency on top management, employees and Fenway to get things done, as well as a diverse culture regarding management styles, Eitel has the necessary sources of power to influence those around him that the GGOL investment is a sound solution.

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