Forces on all sides have severely buffeted the corporate real estate world in the last five years. On the one side, the executives who serve the real estate needs of the U.S.'s major corporations have been expected to play a significant role in the game of global business competition that has resulted in restructuring on a grand scale throughout Corporate America. And, on the other side, corporate real estate executives have had towith the national real estate recession.
The battle continues, certainly, and there have been casualties, in the form of downsized company real estate departments and displaced executives, but there have also been victories. Meeting the restructuring challenge, for example, were industry organizations such as the International Council of Corporate Real Estate Executives (NACORE), West Palm Beach, Fla., and the Industrial Development Research Council (IDRC), Atlanta, which have both devoted conferences, surveys and studies to the trend, most notably the Corporate Real Estate 2000 study sponsored by IDRC that confronted the reasons why major corporations were changing the ways they handled their businesses and, therefore, their real estate. The study explained that corporations, to be competitive, must concentrate on their core businesses. to contract out, or outsource, most ancillary functions, which can include real estate.
The real estate recession ordinarily might have been a boon to the people who lease space for Fortune 500 companies, but for the fact that many of these companies were downsizing, trimming staff and selling off certain businesses and functions, and consequently needing less space. The corporate real estate executives often found, and are finding, themselves in the unwelcome role of sublessor, having to peddle their excess space in an already glutted office market.
As the restructuring trend continued, more attention started to be paid to ways to measure success. "Benchmarking," by comparing one's work to that of companies in the same field, became in short order an important tool for the corporate real estate executive to use to measure and demonstrate his effectiveness to corporate top management.
Such internal measurements were a major focus of the 1995 Heitman Corporate Real Estate Symposium, an annual event for invited corporate real estate executives sponsored by Chicago-based Heitman Properties Ltd., a subsidiary of Heitman Financial, which is part of United Asset Management Co., Boston. National Real Estate Investor for the fifth year was invited to cover the prestigious event on an exclusive basis.
"This year's program reflected what we believe is a new era in corporate real estate," said David Latvaaho, president and national director of leasing for Heitman Properties Ltd. "More CEOs and shareholders are recognizing importance of an effective real estate department and its contribution to the financial health of the corporation."
Often combined with this more intense focus on the bottom line is the need to address significant corporate and market trends that are changing the face of the corporate real estate department, according to Latvaaho.
"Now in addition to dealing with the effects of corporate downsizing on their own departments, real estate executives are developing the knowledge and skills required to confront the companywide effects, from disposition of unneeded space to outsourcing services once performed in-house," he said. "They're learning new ways to deliver real estate services, and must now focus on communicating those benefits to senior management."
A highlight of the gathering featured real estate representatives of USG Corp., AT&T, Ameritech, and American Express Financial Corp. relating their companies' benchmarking strategies to fellow guests from Philips Electronics, WMX Technologies, IBM, Steelcase Inc., Kraft General Foods, Northern Telecom Ltd., E.I. DuPont de Nemours Co., Chubb & Son Inc., Asea Brown Boveri Inc., Motorola Inc., Northern Trust Co., Argonaut Realty/General Motors, Baxter Healthcare Corp., Honeywell Inc., CNA Insurance Co., General Electric Co., Chicago Title & Trust Co., Pacific Bell, Bank of America and OTE.
USG: Crisis sparks creative change
To illustrate how a corporate real estate department can help increase shareholder value, Richard H. Fleming, senior vice president and chief financial officer, and Jack Brophy, director of real estate administration, with USG Corp., Chicago, told the USG story - that of a conservative company with no debt from 1921 to 1965 that came through a takeover crisis in 1988 and a resulting recapitalization only to hit a financial crisis in 1990 due to the recession and the worsening housing market.
The crisis management techniques the company adopted over the next 2 1/2 years served the company well, Fleming indicated, and became an agent of change that led the company to recovery and, Ultimately, success. USG underwent a cultural as well as a financial restructuring, adopting a team approach to management and moving to diversify its funding base and lower its cost of capital. (In an interesting aside, the company had to temporarily stop its 401 (k) plan because its employees, who already owned about one-quarter, of the company through stock purchases for the 401(k), kept buying USG's devalued stock. Following the restructuring, the company resumed the pension plan.)
USG's property department, said Brophy, was challenged "to demonstrate direct and measurable value" to the company. "We decided to look at everything; there were no sacred cows." He, with Fleming's blessing, decided to restructure the property department and change its role.
Accomplishing more with fewer resources was a goal. "We needed to rightsize the organization, by determining the correct human capital that would be needed," he said. Consequently, Brophy's department experienced a 65% reduction, from 14 to five people. Brophy said the remaining people needed some retraining because of changes in their responsibilities brought about by the downsizing and by outsourcing many real estate functions, which was regarded as better, faster and cheaper than performing them in-house.
In addition, the role of the department was energized from reactive to proactive, which demanded enhanced communication skills and formats. Such tools are necessary, Brophy said, because "our changing global environment is information-driven."
The proactivity served USG well. Looking to maximize the value of its real estate, the property department decided to sell some of its timberlands that were flooded for part of the year. Brophy hired a land management consultant, with the result that he was able to sell the land at a profit. In another transaction, a sale/leaseback of a non-investment-grade property brought $18 million, which was "a good price in a depressed market," Brophy said. The lender? Not a traditional bank or insurance company, but Fidelity Mutual Funds, a financially creative move on the USG executive's part.
Currently, USG is implementing a property tax program managed by Arthur Andersen. Thus far, the company has realized $7.5 million in benefits from the outsourcing assignment, Brophy said. And, for the future, USG is actively reviewing all of its leases as part of an aggressive lease cost reduction program.
In summary, Fleming and Brophy agreed that, a strong team-member relationship among the interrelating components of a company - operations, financial and legal - that can impact its property department is essential to the shared goal of increasing shareholder value.
AT&T-. Applying best practices
Two AT&T executives told the other real estate managers of the corporate giant's study of its real estate practices. Stephen M. Brazzell, real estate development director with AT&T, Basking Ridge, N.J., who is responsible for the planning, leasing, purchase and sale of the company's real estate, said that AT&T contracted with McKinsey Consulting in 1992 to review and recommend improvements to the company's real estate function. The consultant's recommendations included a functional reorganization of AT&T's real estate department and the application of commercial best practices to its procedures and transactions. McKinsey predicted that implementation of its recommendations could provide a $500 million savings during the next three years, 1993 to 1996, to AT&T's total annual real estate operating costs of $3.5 billion.
As a result of the consultant's study, AT&T adopted a modified real estate commercial model, which included the following recommendations:
* Provide real estate services at costs equal to or below the commercial analog, or compared to what other Fortune 500 companies would charge;
* Realign structures to support best practices processes;
* Push financial accountability as low in the organization as possible;
* Separate those functions where economies of scale exist, the marketplace is more efficient or the function is not considered a cost/core capability;
* Streamline the daily management responsibility.
John C. Peace, district manager of real estate disposition and administrator of AT&T's joint venture buildings, also based in Basking Ridge, is responsible for the disposition of a $300 million portfolio of manufacturing buildings, training centers, data centers, raw land and R&D space. Peace said that after AT&T's companywide restructuring, its surplus properties were put into a pool of properties for disposition or use by the real estate department's "clients," which are the corporation's business units.
"We want to be sure to sell our services internally," Peace noted. "We think that's important."
He then went through a seven-step property disposition process AT&T uses: asset management, strategic review and planning, business plan, preparation to market, marketing phase, negotiation and closing.
"We've disposed of 14 million sq. ft. to date, which is less than 10% of the properties owned by AT&T," Peace said.
Ameritech: "Breakthrough Leadership"
As a result of its chairman and CEO's initiative in September 1991, dubbed "Breakthrough Leadership", Ameritech, the Midwestern "Baby Bell," was charged with bringing about real and lasting change within the corporation, including its real estate department. "Ameritech Real Estate was asked to take a clean sheet of paper approach and redesign the real estate service delivery function as if there were no current constraints or guidelines," according to Gary W. Schreck, general manager of real estate with Ameritech Services Inc., Chicago.
As a result, he said, Ameritech Real Estate completely redesigned the way it provides services to its internal clients. The biggest change involved the creation of alliance partnerships with a select group of multifunctional service providers. Over a one-year period, relationships were developed with LaSalle Partners/Johnson Controls for property management; Equis for transactions; Stein/CRSS (ASC) for design, construction and project management; and Environments for master planning.
Schreck said Ameritech wanted its partner relationships to be long-term and open book, to have high commitments, be focused on "value-drivers," be capable of sharing information and willing to share the mutual risk. As examples of "value-drivers", Schreck said Ameritech was trying to achieve a space usage figure of 200 sq. ft. per person and was measuring how many BTUs per square foot were used. As to sharing information, he said he was starting to see some of the alliance partners get together, and as to mutual risk he said there were some base fees but the company also wanted its alliance partners to share in the upside or the downside, i.e., risk-based performance.
The property management alliance, Schreck said, has initiated service improvement/cost reduction strategies. Johnson Controls, he said, has the property management function down to five contracts. The alliance is also implementing a key financial and service tracking program using BOMA (Building Owners and Managers Association) figures for comparison.
The design and construction partnership is implementing project and cost accounting software, Schreck said. It is also developing standards for space, buildout and contracts, and developing a volume purchasing/discounting program from direct suppliers.
The services alliance is implementing lease tracking and administration systems; a large/small sealed bid asset disposition strategy; and a garage/warehouse consolidation disposition strategy. The partner, Equis, performs lease audits for Ameritech.
The strategic/master planning alliance is developing key city strategies, Schreck said, for Ameritech's real estate needs. It is also developing alternative office techniques and has developed a desk-level information data base for the companies' top 100 administrative office buildings, that is an interactive data base for communication between departments to handle personnel moves.
Their main concerns, Schreck said, are with performance tracking, in the areas of cost reduction and containment an measuring value added
Because the Ameritech real estate executives anticipated significant savings to be achieved with the alliance partnership plan, Schreck said that in retrospect he thinks they perhaps should have gone more slowly into the alliance partnerships, such as on a trial basis at first. "Our eyes were big," he said. "We saw big dollars to be saved."
Nevertheless, things have gone so well that Ameritech's new CFO would like to use the real estate department's experience as a model for the rest of the company, Schreck related.
The most important bit of advice Schreck could give to a company getting into alliance partnerships, he said, was to "focus, focus, focus." He said they had taken too broad an approach for results to come as clean and fast as they would have liked.
He said he would like to see the alliance partners act more with an owner's perspective. Now, he said, they have a tendency to approach Ameritech for decisions, rather than making decisions themselves and then sharing them with Schreck, at which time, he said, "we would agree, or we would not agree, but we would hash those things out."
By the same token, some Ameritech business unit heads haven't come to terms with having to share information with the alliance partners, Schreck acknowledged, saying they still tend to feel that it is proprietary, only to be shared with other Ameritech officials.
David Latvaaho asked the guests if they could give examples of their company initiating either domestic or global strategic alliances and to comment on their value.
Christine Garvey, executive vice president with Bank of America, responded: "Our major initiative at Bank of America Corporate Real Estate to positively affect the bottom-line is through strategic alliances with our vendors. By taking advantage of these alliances, both domestic and global, we can reduce costs through contract consolidations and leveraging vendor expertise. We are also leveraging our buying power by increasing purchase volume with fewer vendors. Another benefit of this type of outsourcing is the bank shares risks through guaranteed costs. From a compliance point of view, working with fewer, large companies allows us to increase controls and command greater attention from senior vendor management. This should allow us to improve our compliance and audit results. The cost savings are projected to run in the millions."
Brophy of USG Corp. said: "We are in the process of outsourcing and setting up a domestic strategic alliance network in 1995. It is our hope that this new approach will prove to bebetter, cheaper, faster' in completing our real estate projects than the more traditional approach. It will mean that company property managers will need to be better managers."
At many companies, "the emphasis is shifting subtly from cost reduction to growth strategies and repositioning in certain markets," according to William T. Agnello, vice president of real estate and the workplace with Sun Microsystems Inc. Agnello and robert Gilbert, vice president of real estate with American Express Financial Corp. (formerly IDS), spoke on how to measure the corporate real estate executive's performance of working effectively within the corporation, or how to get "plugged in" to senior management.
Agnello said he recommends taking a cross-functional view of the business. When he joined Sun Microsystems, he studied the firm's competitive environment and found the company needed to move into "enterprise computing," which would mean Sun's service divisions would grow dramatically. "You can help to drive competitive strategies," he told the Heitman guests.
Other aspects in the development of a competitive model, Agnello said, include ways of looking at the physical infrastructure in terms of productivity of the workplace, ways of looking at new financial concepts, and also human resource and compensation strategies that the corporate real estate executive think would benefit the company.
"The day has come for us to start measuring productivity," Agnello observed "in spite of the fact that no one in the academic community really knows how to do it very well. If we don't believe we can save our way to prosperity, then productivity gains and market pinetration and growth are essential to competitive success." All of these ideas, he said, "help us to engage the business at the business level."
Agnello also recommended the performance of financial benchmarking and networking with mentors, such as the vice presidents and heads of the operating business units that use his department's services. Such networking produces ideas to help the corporate real estate personnel do their jobs better and formulate competitive strategies to get and keep assignments from the business units.
"Eventually, of course, you've got to deliver on the goods, execute deals, design space and sell things," he said. "But these other things are what will get you involved with your company."
Gilbert asked the Heitman participant who among them reported to their company's CEO (seven indicated they did), or to the CFO (13 said yes), or to the general counsel or general services (several said they did). Schreck and Brophy, for example, report to their respective CFOs.
Because of the need to consult with the company's various executives, "we created a real estate advisory group made up of three or four of top management including the INT person, the HR, the CFO and general counsel and we meet about once a month, for no longer than 60 minutes," Gilbert said. An agenda is sent out beforehand, he said. One topic is discussed at each meeting, such as workstation standards or American Express Financial's 500,000 sq. ft. lease renewal at Heitman's IDS Center in Minneapolis in late 1993.
"We talk about the leases, about the strategic plan, and what we're going to do in the year 2000 and 2010, and are we going to build or lease," Gilbert said. "Are we going to have 80 sq. ft. per person or 85? And how do you measure that? Does it include expansion space? Does it include the cafeteria?" If two of the members of the advisory group can't make the meeting, Gilbert said goes to see them.
"How do you get empowered, in the corporation?" Gilbert asked the other guests.
Harry Stein of General Electric advocated a proactive corporate real estate stance in relating to top management. "You can be empowered if you feel you are," he said. "You have as much authority as you take. You can try new ideas until someone tells you to stop."
"Empowerment has been an overused word in the last few years," believes William D. "Bill" Salava of CNA Insurance Co. "It's really trust that your earn through consistent leadership, decision-making and service delivery."
Alan Alterman of Philips Electronics volunteered that he had saved one business unit of Philips $2 million over the term of the lease by "putting some simple space standards together and cutting down the office lease by 10,000 sq. ft." The division CFO was so pleased at the value added, Alterman said, he told them that he wanted the real estate department to handle all of his division's future space needs.
Companywide, Alterman said, Philips embarked on a program for continuous improvement that included its real estate activities. Called Operation Centurion, the program identified areas where improvement was needed and would have an impact to the bottom line. More than 3.1 sq. ft. was identified as surplus to the company's occupancy requirements. "Currently, approximately 2.25 million sq. ft. of this space is either under contract for sale or in negotiation for disposition within the next six months," he said.
And Ed Carr of Steelcase Inc. pointed out: "We're all basically in a service field and you have to serve your customer and understand your customer. You have to learn the business of every staff unit and every business unit almost as well as they know it. And you're going to have to pick and choose your opportunities where you can show them your hidden value to their operation. Because they are measured on the bottom line, you have to show them your core competency can replace a competency they don't need anymore, and then add value."
To gain access to senior management, "I think for us the key is really speaking the language," said AT&T's Brazzell. "You have to frame your issues and your objectives in language they will identify with. For us, that was financial language. When you get up to a senior level, the only thing that will really have any meaning to them is value translated into dollars or into earnings per share impacts. For us that translates into services. At the end of the day, it's `what can you do to help me improve my business performance?'
"What we've found is that you get a whole lot more attention by showing the financial impact and you achieve a lot more progress," Brazzell said. "If you want to be viewed as an equal part of the management team, then they've got to see you as an equal partner in shareholder success.
Growing through alliances
In his presentation, business consultant Thomas L. Doorley III, senior partner of Braxton Associates, pointed out that 14 revenue growth drives value and, while downsizing is a significant fact of life, at some point, you can't downsize any more if you're going to create value for your shareholders." From 1980 to 1990, Doorley said, the fastest growing 100 companies in the Fortune 500 created over $200 billion in value for their shareholders. The 100 slowest growing companies, he said, detracted about $50 billion.
"What we've found is that growth companies do some things differently from non-growth companies," he said.Alliances, while risky, actually work. Companies that form significant alliances generate return that are about 50% higher than companies that don't. But, on the other hand, the risk is about 50% higher as well."
He cited Emerson Electric as an "alliance master," whose CEO, Chuck Knight, has used a combination of 75 alliances, joint ventures and acquisitions over the last five or six years to strengthen its industry position. "Otherwise, the company's actual revenues would be declining about 10% a year," Doorley said.
"One of the key growth engines for this company is the forming, the doing and the maximizing of the value of alliances, he said.
Nevertheless, "alliances are risky," the consultant noted, "and failure should be anticipated." He urged the attendees to realize the difference between logic and process when formulating an alliance partnership or analyzing its failure. Logic may tell you how and why to do the "right" alliance, he said, but process will demontrate the way to do the alliance "right."
He advised the attendees to always start forming their alliances "from the inside out. If your CEO gets `deal fever,' you don't have any choice but to take him out and shoot him."
Doorley provided eight "Golden Rules" for building better process: * planing * trust * conflict anticipation * clear leadership * flexibility * accommodation * technology transfer * leveraging partner's strengths
He also stressed that companies shouldn't minimize the importance of comparing and contrasting their respective corporate cultures when contemplating forming an alliance. Doorley's firm uses a "Culture Print Dimension"of 32 elements to track this critical outward sign of what may cause an alliance to work or to fail.
Creating global strategic alliances
Asked by moderator Richard Kateley, executive vice president, Heitman Financial Ltd., if they had responsibility for overseas real estate, about half of the symposium attendees indicated that they did.
"The global strategic alliance concept is one we're all working at in the service provider industry," said Clive Mendelow, president of Binswanger Advisory Group, part of the international Chesterton/Binswanger alliance. "It's a very difficult, hands-on, time-consuming process," Mendelow said, "and you have to be willing to travel.
"It's been said that global real estate is 'the last big goldmine on the corporate balance sheet,' he went on, "which puts a lot of pressure on the corporate real estate group" because of resulting unrealistic CEO expectations. In reality, Mendelow said, how much of a goldmine it is is a function of how much support the corporate real estate department gets from top management, right from the start.
From a concentration on what he called "the dynamic duo" of outsourcing and downsizing, corporations are now increasingly focusing onprocess", Mendelow said, because "with strategic alliance partners, it's vitally important to focus on how we do business with our clients."
Mendelow ticked off five corporate visions that may be the goals of a corporation:
* to enhance business process and effiency;
* to reduce overall costs globally;
* to optimize physical assets -and investments;
* to focus on core competencies, known as the true value drivers; and
* to have corporate real estate guide vs. control
As corporations re-engineer to concentrate on their core competencies, what then is corporate real estate's role, for example, in this global function? "I submit to you that corporate real estate is guiding, not controlling, the relationships between its business units and service partners," Mendelow said.
"Real estate isn't going to make business decisions," he said, "we're going to provide information with which managers will make good business decisions."
A lot of it is a common-sense approach, he believes. "How can we create more profitability and become more efficient and serve the corporation as it moves along in its process?" Mendelow said.
In the new world of international business alliances, some of the issues and problems are "turf" battles, the culture gap, local allegiances, team building and setting fees, he noted. Global alliance partners need not only real estate skills, Mendelow said, but also interpersonal, managerial and universal (politics, philosophy, economics and communication) skills.
The solutions, he said, include the drive from the top, the essential "people triad," trust building ("a function of having done it"), central control, showing tangible benefits and very close management. "This global process requires an enormous amount of energy and an enormous amount of management," he said.
Mendelow referred to Prof. Jeffrey Sachs, the Galen Stone Professor of International Trade at Harvard University, whose thesis is that we are entering the age of world capitalism and that it is distinguished by deep integration of a lawbased, rule-bound global economy characterized by institutional harmony within and among national trading systems. This deep integration has spread in the last 10 years from the United States and Western Europe to China, India, Latin America, Eastern Europe and the former Soviet Union and parts of East Asia and Africa. "The question is," he said, "can this system be maintained?
"I suggest to you that our role today as change agents is more vital and important than ever," Mendelow concluded.
Chicago-based developer Eugene Golub, chairman of Golub & Co., has been busy for the past five years deeply integrating into the business life of such Eastern European cities as Warsaw, Budapest and St. Petersburg. And why? Partly for the profits - an American developer in those Old World cities can achieve rents of from $35 to $80 a sq. ft. - and partly for the sheer joy of doing deals, especially in such a historic context. "It's adventurous and exciting," he said. "I have found for myself and for our business a wonderful new enthusiasm," he confessed, having entered the market with a pioneering spirit.
Although the "barriers to entry" are greater than he had anticipated, Golub now is providing U.S.-quality space in markets where it isn't currently available.
His first such venture, the Warsaw Corporate Center, a 100,000 sq. ft., $18 million office project in Warsaw, Poland, was developed in partnership with a stateowned company on a 99-year ground lease site. Using a Polish contractor, the 100% leased building was completed in 14 months. Average net rents will be $40 a sq. ft. for leases of three to 10 years.
Noted Golub, "This was an exciting project and I was happy to be involved because it allowed us to add value - economically and socially - to the Warsaw business environment."
In St. Petersburg, Russia, Golub is developing Nevskii 25 with a Russian partner and the European Bank for Reconstruction and Development. Originally built in 1729, the 100,000 sq. ft. building is undergoing a historic renovation. Projected rents are $45 to $60 a sq. ft.
In Moscow, Golub is in the pre-development stage for the 300,000 sq. ft., $60 million Moscow Business Center, which will rent for about $80 a sq. ft. a year, he said.
There are plenty of Western-style tenants to occupy space of this quality," Golub said. "The difference in these markets is identifying land, getting through the bureaucracy of zoning and permitting, and identifying capital sources."
Asset Management Milestone
Symposium sponsor Heitman Properties Ltd. can thank its parent firm Heitman Financial Ltd. for providing the security to its corporate tenants that only comes from solid institutional ownership. By virtue of its milestone merger in October '94 with JMB Institutional Realty Advisors and JMB Property Management Co., Heitman Financial is now extremely well-positioned to take an advantage of what is perhaps the biggest trend currently under way in commercial real estate - the re-entry of pension fund investment mopney into the market.
"There is a significant flow of capital from the pension fund world into real estate," observed Heitman Financial chairman and chief executive officer Norman Perlmutter, who briefed is corporate real estate executive guests on the acquisition, which creates what is reportedly the world's largest manager of institutional real estate assets, with nearly $12 billion in assets.
"Our portfolio includes about 40 million sq. ft. of office space, 60 million sq.ft. of retail, 30 million sq.ft. of industrial and 34,000 apartment units. "We are looking at acquiring assets of close to $2 billion this year," he said.
Included in the acquisition was PRA Securities, which invests pension fund assets in publicly traded REITs. "Pension funds are using REIT investments to help fill out blanks in their real estate asset allocations," Perlmutter said, "not to replace direct investment. I think PRA will soon grow into a billion-dollar REIT asset manager for pension funds.
"The best investment opportunity at the moment maybe in the office market," Perlmutter believes, " and also strong is apartments. Most of the pension funds seem to be fairly well invested in retail, but the sector is still strong for investment opportunites, particularly at the regional mall level."
Perlmutter credited Heitman president Eric Mayer and chief financial officer Roger Smith with overseeing the merger.
Christie Hefner Kept Re-engineering of Playboy All in the Family
Christie Hefner is the first to tell you - she chose her parents right.
But inheriting the family business, while welcome, also carried with it the weight of responsibility and the burden of creativity. To wit, how to broaden the appeal of the family business and, even more, how to re-energize it to take advantage of the business opportunities of the '90s and the next century.
Hefner, now chairman of the board and chief executive officer of Playbor Enterprises Inc., found her answers in a major recapitalization of the company and in shrewd assessments of Playboy's licensing, marketing and new venture opportunities, both domestically and internationally. The necessity to downsize twice also helped the company's success, but at some personal and corporate cost, she believes. Hefner told her company's story as Heitman's special guest speaker.
It is now 40 years, Christie Hefner said, from when Hugh Hefner started Playboy magazine, "a publication that shaped and mirrored the changes of a generation."
When Christie, who joined the company almost 20 yesrs ago, realized she would stay and lead it one day, she realized that the magazine had an opportunity to combine the separate interests of traditional men's and women's magazines - an opportunity born of necessity.
"If Playboy couldn't become a magazine that was acceptable to many women, it would die," Hefner believes. Along with a program of content redirection, Hefner turned Playboy's circulation distribution around, from newstand sales in the '60s to an 80% home subscription base today.
"That was an important way of moving the magazine along," she said. "It gave us a position from which we could take the Playboy brand into products for men and women together such as programming for TV."
After broadening the product's appeal, Hefner started looking at overseas opportunities. Playboy "thinks global and acts local" by seeking out partners overseas to recreate the magazine in other countries with the same quality and format as the original but with content reflecting the local cultures. "Today we have 18 different editions," she said.
As a mid-sized company, strategic alliances help to leverage Playboy's growth, Hefner said. "The key in making those things work is the trickiest thing to do, which is choose your partners well," she said.
"We've tried to evolve to multinational, multimedia relationships," Hefner said. "We've also moved from being a passive licensing company to a more active brand-management company, including taking equity positions in overseas businesses," she said.
"There is no cookie-cutter for doing business overseas," she said. "In some countries we've found the best way to get in is with small partners who are entrepreneurial." In Russia Hefner's partner is a small company headed by a woman who set up the first functioning periodical distribution system in Russia and used it to launch a daily newspaper, the Russian version of Cosmopolitan and, next Playboy.
A few years ago, Hefner had to beg the cable, software and phone companies to carry her product. "They're now coming to our door asking if they can have the rights to carry our content."
The people at the top of the food chain now are those who own copyrights and intellectual properties, she said. "Finding out what your leveragible asset is was for us really key," Hefner said. "We have 800 hours of television programming, 8 million photographs 5,000 original pieces of art and hundreds of thousands of pages of original text. All of those are basically assets we write off when we air them or we product them in the magazine, but they're invaluable."
Hefner said her recapitalization of Playboy Enterprises is "one of the things I've done in the six years I've been CEO that I'm most proud of.
The company had gone public in 1971 with the family retaining 70% of the stock. Because the family desired to maintain control, Playboy did not take advantage of being public but had all of the costs and burdens of being a public company.
"When I became CEO the conventional wisdom was that we should take the company private," Hefner said. "I believed passionately that if we did that we were committing to a strategy of death."
Instead they created a non-voting class of stock and did a reverse split on the original stock. The non-voting stock was then distributed on a three-to-one basis to the existing shareholder base.
"As a result of having done that, last spring we were able to do the first equity offering that the company had done in 20-some years and for the first time started to bring institutional investors and new capital into the company," Hefner said.
Hefner didn't escape downsizing. "When the reregulation of cable changed our rate of growth last year, we couldn't continue to invest at the same level and produce profits. To retain the investments we felt we needed to make in some new business ventures, we decided to eliminate 10% of the jobs in the company."
Apart from it being hard to do personally, she said, "it's really hard to make the people left feel that you are still committed to motivation, morale and empowerment.
"I don't have an easy answer," she concluded. "I do think that at the end of the day the fundamental asset of a company like mine is its human capital, not its financial capital."
Asked about Playboy's real estate needs, Hefner said that the company leases rather than owns its space and is looking at international, adult-oriented gaming, particularly in Europe, Latin America and the Far East.
An internal study revealed the company's business in 200 will be three times as large in both revenues and profits from overseas as it is today, a result of the globalization of the entertainment business, America's No. 1 export.
Playboy stands to benefit from this, she said, pointing out that, according to Ad Age, the Playboy symbol is the world's second most recognizable brand, after Coca-Cola. Smiled Hefner, "For us, the best is yet to come."