America’s Ten Biggest Corporate Turnarounds

1. Altria

This cigarette company was broken into two pieces–Altria (NYSE: M)) and Phillip Morris (NYSE: PM). Altria markets brands such as Marlboro in the US. Phillip Morris does it overseas. Until 2003, the entire corporation was known as The Phillip Morris Companies. The firm had been under siege since 1999 when the Justice Department filed a lawsuit seeking $130 billion in damages. There were many suits against Phillip Morris by individuals who blamed health problems, or even deaths, on cigarettes. Many of these suits cited a cover up by the tobacco industry–an attempt to withhold data about the dangers of cigarette smoke. The suits threatened to swamp Altria and shareholders began to desert the company.

Altria made two critical decisions. It fought most of the suits, and waited out the litigation. It was a risky decision, but one that allowed it time to negotiate with the federal government. The company also diversified by taking a controlling interest in Kraft and a large stake in SABMiller. Altria used its extraordinary cash flow to diversify into businesses unrelated to tobacco and the risk of litigation. The company was also able to retain its impressive dividend. By the time Altria began to spin out Kraft and Phillip Morris, its stock had risen from $23 in 1999 to $76 in 2007.

2. Apple

Apple (NASDAQ: AAPL) may be the most improbable of the turnarounds. The company was co-founded by Steve Jobs in 1976. He was forced out and then returned to build one of the world’s great corporations.  Apple created one of the first PCs and for a time competed directly with IBM’s PC products which ran Microsoft  software. The most successful product that the company produced in its first decade was the Macintosh, launched in 1984. Sales were initially strong, but Apple mistakenly relied on software that was incompatible with PCs.

The Apple board decided that Jobs was not old enough or experienced enough to manage a company that was growing quickly. New CEO John Sculley, who was brought in from Pepsi, pushed Jobs out the door in 1985.  The products launched under Sculley were popular at first, particularly the Powerbook, one of the earliest portable PCs. Sculley decided to capitalize on the Mac’s success by launching a broad range of new products. The market’s appetite for such a large number of models did not exist. Apple’s large product line damaged customer retention. Apple also refused to release software that worked with Windows, which had become the dominant operating system. Sales dropped so sharply in the early 1990s that Apple went through a series of large layoffs and two CEOs.

In 1997, Apple’s board, now desperate, turned back to its  co-founder to salvage the flailing company. Jobs understood that Apple’s success could not be based on the niche market for the Mac. Apple launched the iMac in 1998 to reinvigorate the modest customer base for the computer. But, Jobs took a real risk when decided in 2000 to use the Apple brand to launch a portable multimedia player–the iPod. Apple had never produced a product even remotely like it. Jobs decision paid off. The iPod became one of the best-selling consumer electronics products in history.

3. Chrysler

Chrysler, America’s No.3 car company, has been at death’s door twice. Chrysler’s most recent brush with extinction was in 2008 when the company filed Chapter 11 with the support of the US government. Taxpayer aid kept Chrysler from being sold off in pieces. Chrysler still does not make money, but a recent restructuring has brought down what were once extraordinarily high plant and labor costs. The rescue of Chrysler that will remain in history books is the one engineered by Lee Iacocca.

Iacocca said he would not have taken over as CEO of Chrysler if he had known the extent of its problems. Chrysler was losing tens of millions of dollars because of recalls of the Dodge Aspen and Plymouth Volare. Iacocca made two critical decisions first to save Chrysler and then to make it prosperous. In 1979, he got Congress and the Administration to guarantee loans to the company. He then engineered one of the greatest product management feats in the history of American manufacturing. Chrysler launched the K-Car line and minivans which would become wildly popular over the next several years. The cars were small, fuel-efficient and well-made. In, 1983, Chrysler was able to pay back the loans it received with the governments help along with $350 million in interest.

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4. IBM

IBM  (NYSE: IBM) was one of the premier technology companies in the United States from the time that the firm’s founder was replaced by his son Tom Watson, Jr. in 1952. Government contracts and the company’s exploitation of early digital technology allowed IBM to enter the mainframe business with the 700 series of computer systems. The company became the premier provider of large computers and data systems for governments and multinational corporations. IBM’s R&D prowess allowed it to keep the position as the leading source of large computers for nearly three decades. Its employee base rose from 56,000 in 1955 to 270,000 in 1970.

Watson had a heart attack in 1971, and the CEOs who followed him took the company through a series of ill-advised moves for diversification. This included forays into the office copier and PC industries. IBM kept its lead in the market for mainframes, but it was reduced by competition from younger companies like Digital Equipment. IBM’s major product lines lost share, and its new businesses failed to generate significant sales. The company began to cut employees in the early 1990s to improve margins. John Akers, who became CEO in 1985, is widely considered to be the man who nearly ruined IBM. His strategy was to move down-market into businesses related to large computers and high-end software. But, the products for these customers were generally low-priced with low margins. IBM failed to stick to its success as a provider of the industry’s most well-built and expensive machines. IBM also failed dismally to keep up with the most rapidly growing areas of the tech market – PC operating systems dominated by Microsoft and computer chips, a market controlled by Intel. IBM became desperate enough to hire someone from outside the industry to turn the company around.

Louis Gertner, Jr. had run RJR Nabisco and had been in senior management at American Express (NYSE: AXP). Gerstner was also one of the few McKinsey and Company partners to leave the firm and successfully run several large companies. After joining IBM in 1993, Gerstner’s most critical decision was to re-commit IBM to the most successful product line in its history – mainframe computers. IBM still had the expertise to build the best machines on the market and to maintain them for customers. Mainframes had high margins and often multi-year support contracts. IBM’s board was tempted to sell off some of the company’s successful divisions to raise cash. Gerstner decided most of these businesses were necessary to give customers a single supplier of most of their enterprise technology needs. By the mid-1990s, IBM was highly profitable again.