Adventure followed by course correction is an even more dramatic chapter in the corporate history of another mainstay of the Berkshire ship, Shaw Industries Group, Inc. Berkshire’s largest non-insurance business when acquired in 2000 and still among the top dozen, Shaw Industries is the world’s dominant carpet manufacturer. Its diversions into branding and retailing, however, induced it to refocus entirely and permanently on the rudimentary, basic, and modest task of being the world’s low-cost producer in its industry.
Shaw Industries was founded in 1971 by two brothers, Robert E. (“Bob”) Shaw and J. C. (“Bud”) Shaw.25 Their father, Julius (“Clarence”) Shaw, had run a small fabric dyeing business in their hometown of Dalton, Georgia, a carpet manufacturing mecca. Other family members would play various roles, including cousin Elbert (employee training), brother-in-law Julian McCamy (director), and Bud’s son Julius (from trainee to senior manager).
The business the brothers built differed entirely from the business their father had run. The latter’s firm was small and focused on a narrow slice of the carpet business; what the sons created was a vast vertically integrated carpet manufacturer. Unlike their father, who was an autocrat with a provincial business sense, the Shaw brothers led an entrepreneurial operation with a flatter organizational structure. The seismic shift in their business venture came in the late 1960s when Bud proposed that he and Bob acquire Philadelphia Carpet Company, a manufacturer founded in the nineteenth century.
The brothers acquired Philadelphia using borrowed funds that were secured in part by the company’s assets and in part with personal guarantees. (The deal was a prototype of the leveraged buyout that would soon become fashionable; the brothers’ personal guarantees were in the entrepreneurial tradition followed by such Berkshire builders as Ueltschi of FlightSafety and Santulli of NetJets.) Shortly after acquiring Philadelphia, Shaw Industries went public. It used proceeds to retire debt, a sign of thriftiness that would continue to characterize the business.
The Shaw brothers wanted to grow their business into something that would endure. This attitude of permanence contrasted with sentiments at peer companies in the carpet industry. Many sold for quick cash payoffs to conglomerates that expanded during the late 1960s and early 1970s. As one Shaw Industries executive explained: “It was our philosophy from very early on that we were going to build an institution that would survive us all.…From the very beginning ours was to build something that would last.”26
Businesses offering commodity-type products in highly competitive markets, like Shaw Industries, require an entrepreneurial approach that typical conglomerates cannot offer. Shaw’s nimbleness positioned it to capitalize on business shifts. For instance, in 1972, population growth in California along with high transportation costs prompted Shaw Industries to construct a new finishing plant there. It established a nationwide distribution system. Throughout the 1970s, Shaw Industries continued to expand its role as a service provider across the industry. For example, it began to process yarn increasingly used in making the shag rugs so popular during the period. In 1973, it entered the field of continuous dyeing by acquiring a company specializing in that process.
As Shaw Industries grew, its divisions were operated autonomously, using a decentralized management structure. Bob Shaw came to see this as a net cost, however. For example, by the late 1970s, Shaw Industries had two broad lines of business, one overseen by Bob, the other by Bud. In Bob’s carpet finishing line, the company helped carpet makers; in Bud’s carpet making line, they competed with those very customers. To solve these problems, Bob reorganized. He assumed full managerial responsibilities across all segments and streamlined reporting chains vertically; Bud became chairman. Although there was a sacrifice in autonomy among division heads, the vertical integration of the units reduced overall costs.
Cost reduction became the company’s mantra, reflecting the realities of the carpet industry. There was no consumer franchise and no brand loyalty. But a competitive advantage—a moat—could be established by becoming the low-cost producer of carpets. In a bold example, in 1982 Shaw Industries formed a trucking subsidiary. Until then, all carpet makers used the same carriers for distribution. Every company’s delivery was the same. No company could compete on delivery service because no one controlled it. Shaw Industries created a strategic advantage over its competitors by establishing its own transportation system.
Shaw’s delivery service got better—and that of its competitors worse. Why? Because Shaw’s relatively larger size meant that it was the “filler” for the industry on the common carriers. When Shaw’s orders were removed from those of others in its region, trucks had to make more stops to fill each load, which consumed both time and money. The payoff amplified: the trucking subsidiary was so efficient that Shaw’s distribution centers could maintain lower inventory levels while still delivering product, which saved considerable costs. When Shaw Industries persuaded its retail customers that they could reduce inventory while still providing full customer services, they saved as well.