<\/p>\n
Few large,<\/strong>\u00a0established companies anywhere in the world effectively reinvent themselves overnight. But Minneapolis-based Pentair did just that. A decade ago, the company sold its core power-tools businesses\u201442 percent of group sales\u2014and reinvested the proceeds in Wicor Industries, the water-systems subsidiary of Wisconsin Energy. In March 2012, Pentair made another big bet, roughly doubling its size to $8 billion by acquiring Tyco International\u2019s flow-control business. Randall Hogan, chairman and chief executive officer and the man who led the transition, talked recently with McKinsey\u2019s Rik Kirkland about strategy, capital reallocation, the importance of getting the board\u2019s buy-in, and the vital art of thinking \u201cright to left.\u201d<\/p>\n The\u00a0Quarterly<\/em>:<\/strong>\u00a0How do you approach strategy?<\/p>\n Randall Hogan:<\/strong>\u00a0Before joining Pentair, in 1998, I had worked for GE and United Technologies. Both companies were in a lot of different and seemingly unrelated businesses, but the experience taught me that successful conglomerates exist because they\u2019re good at moving capital, talent, and processes around. United Technologies, in particular, brought substantive operating discipline\u2014using the Toyota Motor production system, for example\u2014to its assets. That just threw a switch inside me; here, I thought, is a powerful way of running a diverse company. And it shaped my view that there had to be something more to Pentair than just a holding company\u2014a set of common principles and common beliefs, for instance.<\/p>\n The\u00a0Quarterly<\/em>:<\/strong>\u00a0Was it a difficult decision to exit power tools?<\/p>\n Randall Hogan:<\/strong>\u00a0The power-tools group was our largest business when I became CEO, in 2001, but I don\u2019t think the board was surprised when I told them I thought it had the dimmest prospects. We didn\u2019t control our own destiny. Lowe\u2019s and Home Depot, the retail outlets which stocked our professional niche tools and helped drive growth in the 1990s, accounted for 55 percent of sales, and we were dependent upon them. Water, on the other hand, was looking interesting to a lot of people; its growth prospects were strong, its M&A potential was bright, and its industry dynamics\u2014channel power, innovation, pricing fundamentals\u2014seemed attractive. It was clear that we had to reduce our dependence on power tools and double down on at least one of our other businesses, maybe both.<\/p>\n The\u00a0Quarterly<\/em>:<\/strong>\u00a0So, was the timing of the water acquisition a coincidence?<\/p>\n Randall Hogan:<\/strong>\u00a0The purpose of the CEO, the leader of the company, is to create a brighter future. And that\u2019s why I often talk about thinking \u201cright to left.\u201d Left is where you are now. The right-hand point is the goal\u2014in our case, not just getting out of power tools but developing a water strategy. Even before we sold power tools and bought Wicor Industries, we were identifying interesting spaces and people in the water sector and making a number of small acquisitions. Our focus wasn\u2019t just on the sale, it was on the buy\u2014with the commitment and understanding that we would do the sell. In February 2004, we announced the purchase of Wicor, and then we had an auction to sell the power-tools business. It was hairy at times, but for a net difference of $75 million, the result was that we upgraded our entire portfolio, the stock price jumped, and as investors saw the promise of it, we were rewarded with a better multiple.<\/p>\n The\u00a0Quarterly<\/em>:<\/strong>\u00a0How did the board react to the change of direction?<\/p>\n Randall Hogan:<\/strong>\u00a0It was very important that the board was in on the discussions early\u2014they were fully aligned on the \u201cright point\u201d of our strategy. I\u2019m sure that this was easier to do 10 or 15 years ago than it is today, when many boards are a bit more focused on governance. Yet engaging in strategy and resource allocation is really where boards can help the most to create value. That said, plenty of people in the know at the time argued that our move was too radical. They pointed out that all our power-tools know-how was irrelevant to the water business and that there was a lot about the water business that we didn\u2019t know. The role of the CEO is not to let those little voices carry the day. Listen to them, by all means, and understand them, but keep that point to the right in mind. And stick to it.<\/p>\n The\u00a0Quarterly<\/em>:<\/strong>\u00a0Does the end goal of strategy have to be fully baked?<\/p>\n Randall Hogan:<\/strong>\u00a0It\u2019s really best to think of it as a destination with an infinite number of ways to get there. We knew we had to get out of power tools but initially we had no idea how. Most companies, in my experience, don\u2019t have a destination; they just want to keep doing what they\u2019re already doing, at an incremental pace.<\/p>\n The\u00a0Quarterly<\/em>:<\/strong>\u00a0Was the financial crisis of 2007\u201308 a big test of nerve?<\/p>\n Randall Hogan:<\/strong>\u00a0We actually got hit earlier than that, in 2006, because the water business we built was 50 percent residential and we had deliberately stayed small in municipal, where the margins are low. Between 2006 and 2008, Wall Street told us we were the dumbest people in the world. It was quite an education. The board wasn\u2019t always easy when things were going badly: miss a few quarters and you\u2019re going to hear about it. But luckily, I had enough of a relationship with them that we drew together a little tighter, and they stuck with us. Even then, we were still focused on that right-hand point\u2014what is the long game?<\/p>\n The\u00a0Quarterly<\/em>:<\/strong>\u00a0What prompted the Tyco deal?<\/p>\n Randall Hogan:<\/strong>\u00a0We had taken the actions to get us through the financial crisis, but after that the target was to become a $10 billion company. We knew that we had to be bigger to control our own destiny. And the opportunity was there in what we call the \u201cnew\u2013new world,\u201d four billion middle-class people demanding energy, water, and food.<\/p>\n We first identified Tyco\u2019s flow-control business in 2009 as a way to gain scale, diversify beyond residential consumers, and gain greater global coverage. We had no idea if it would ever be an option, but the point of thinking right to left is to imagine where you\u2019d like the company to be, and then to be open to the opportunities as they present themselves. You create the future you imagine.<\/p>\n When Tyco decided to spin off its flow-control business, they recognized that it needed some common operating disciplines and that we already had a corporate office we could leverage. Secondly, we had a strategic road map of how the businesses would fit together. Thanks to those operating disciplines, we\u2019ve been able to extract the necessary synergies to pay the bills. It was what we call a \u201cGoldilocks\u201d deal\u2014the combination and price were just right.<\/p>\n The\u00a0Quarterly<\/em>:<\/strong>\u00a0How do you routinely allocate capital to the best businesses?<\/p>\n Randall Hogan:<\/strong>\u00a0Rarely do the business units have the altitude or the amplitude to think big. So it\u2019s the job of the corporate center to say what\u2019s next.<\/p>\n But the decisions on nurturing and pruning do happen inside the business units, and we try to encourage a dialogue around that. In the old days, we used to call the capital-allocation model \u201cfirst pig to the trough,\u201d and the biggest pig usually won. I\u2019m not sure we\u2019re totally weaned off that, but the process now starts with the 33 platforms we\u2019ve identified across Pentair\u2014platforms with a little p that could be anything from a $600 million product line to just an idea. We take a look at all the opportunities. Some are cash cows, and some need more resources put into them.<\/p>\n What we\u2019re trying to do is to turn what\u2019s been predominantly a budgeting process into a more strategic allocation of capital. My big focus right now is getting the business culturally ready for that. We have seven global business units run by really talented people who all want to run their own show. My challenge is to encourage the notion that they are part of Pentair, as opposed to running a Pentair division. In organizations, there is always deep inertia, a reluctance to change things. You have to introduce energy in a radical way to change the corporate gyro.<\/p>\n The\u00a0Quarterly<\/em>:<\/strong>\u00a0How have you tried to change people\u2019s thinking?<\/p>\n Randall Hogan:<\/strong>\u00a0We\u2019ve set questions at the outset of the planning process, listened to their ideas, provided feedback, and attempted to get them to think more nonlinearly\u2014challenging them about markets that are not growing or ones where there is a clear mismatch of resources. How do you run a market with 25 percent of your sales but only 15 percent of your sales people? We\u2019re not saying, \u201cDo it.\u201d We\u2019re saying, \u201cHow would you do the thought exercise?\u201d They may be big in the United States and Western Europe, but the opportunities are in Indonesia and Brazil.<\/p>\n For five years, I\u2019ve been saying we need more talent in the fast-growth markets and our best talent against our best opportunities. At our global leadership meeting, one or two global business units sent 30 people, but only one of them came from Asia, despite the region\u2019s representing 50 percent of their opportunities for growth. That doesn\u2019t make sense.<\/p>\n