Bill Virgin: Regional firms grapple with diversifying or focusing on core strengths

Staff writerMay 4, 2014 

Two mainstays of the region’s industrial economy had coming-out parties of sorts in April for their new chief executives, each making their debuts in that job at annual shareholder meetings.

Doyle Simons and Ron Armstrong took different paths to arrive at their jobs. Simons is a former CEO (Temple Inland) who moved to the chief executive’s job at Weyerhaeuser from the board of directors. Armstrong, by contrast, has been with truck manufacturer Paccar for more than 20 years, coming to the company from an accounting firm.

Simons and Armstrong take on their newish jobs (their appointments were announced in 2013, although Armstrong’s official tenure began this past week) with somewhat different agendas. Armstrong takes over management of the company with his predecessor, Mark Pigott, still around as executive chairman; the Pigott family has been running Paccar for multiple generations. The company continues to churn out profits and (to the delight of shareholders, who were generous with applause at last week’s annual meeting) dividends. The unwritten (but perhaps spoken) message accompanying the handing over the keys to drive the truck might well have been, “Don’t screw this up.”

Simons, meanwhile, inherits a company that has managed to make some money despite operating in a recession in which the worst-hit sector — home construction — happens to be one in which Weyerhaeuser is at the epicenter. In an interview following the annual meeting in April, Simons suggested that his mission is not just to push continued improvement and efficiency in the company, but to do so with some degree of urgency.

But Armstrong and Simons have one significant commonality in their jobs as chief executive: They’re running companies that are very deliberately and strategically focusing on a core business, rather than chasing supposed opportunities in tangential or unrelated fields.

Contrast that with what’s going on with two prominent and regionally based companies just up the road — Microsoft and Amazon.

Microsoft has long been about more than operating systems and applications software. It makes a lot of money in the behind-the-scenes stuff that makes the Internet run. More conspicuously and less successfully, it has dabbled in devices (Zune) and online information services (Sidewalk).

Microsoft, too, has a newly minted CEO, Satya Nadella, and one of the prime questions about the new guy is whether he’ll continue the trend of diversifying into hardware such as tablet computers (Surface) and smartphones (the Nokia acquisition), content development or cloud services, or spin off some pieces of the company to concentrate on a few lines of business.

Amazon has been far more aggressive in a much shorter time frame at diversifying, not just in terms of the product lines it sells as an online retailer but as a seller of cloud services, devices (Kindle) and content. While some investors occasionally grumble at the margin erosion caused by all these ventures, Jeff Bezos hasn’t shown any interest in slowing down or reigning in Amazon’s constant addition of new lines of business.

Paccar isn’t in the lines of business it started with — rail cars and logging equipment — but once it morphed into a truck manufacturer with the acquisition of Kenworth in 1945 and Peterbilt in 1958, it never strayed far from its roots. The company dabbled in auto-parts retailing in the 1980s but sold off that business.

Weyerhaeuser, by contrast, ballooned from its beginnings as a timberland company, then a logger and sawmill operator, to a sprawling forest-products company that not only handled every activity from seedling to two-by-four but moved into businesses such as building houses with that lumber — not to mention stuff such as shortline railroads, marine shipping lines, an annuity company and a savings and loan.

Weyerhaeuser has spent the past two decades jettisoning not just the ancillary stuff but some closely related forest-products businesses such as most of its paper and containerboard operations and, more recently, its home-construction business.

Both Paccar and Weyerhaeuser have indicated a willingness to spend — as long as it’s within their core businesses. Paccar built an engine-manufacturing plant in Mississippi and a truck factory in Brazil. Weyerhaeuser bought 645,000 acres of Washington and Oregon timberlands last year, and Simons says the company is interested in acquisitions in all of its businesses — provided, of course, that they fit within the strategy of maintaining a focused forest products company.

Diversification has been out of vogue for years, but as the Amazon and Microsoft examples demonstrate, it’s still widely practiced. Diversification does provide some cushioning of swings within an industry, but it also disperses management attention, and being good at one type of business doesn’t guarantee success with another.

A concentrated focus on one line of business heightens exposure to the cycles within them (although Weyerhaeuser may have marginally reduced its vulnerability to housing by getting out of residential construction, and Paccar has been diversifying geographically). It also requires management to be intensely knowledgeable and adept at running that business, because if it goes south there’s nothing to fall back on.

Would either company suddenly reverse course and dive into new businesses? Unlikely. Being exceptionally good at growing trees and building trucks is no easy task, but it could prove easier and more rewarding than some of the alternatives, such as trying to figure out what bit of entertainment someone wants to watch next year, and what sort of device they’ll want to watch it on.

Bill Virgin is editor and publisher of Washington Manufacturing Alert and Pacific Northwest Rail News. He can be reached at bill.virgin@yahoo.com.

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