Herman Miller's Leap of Faith

Of all the despairing images published when the New Economy went belly up, the one that most pierced the hearts of the hardworking folks at Herman Miller was a photo in the Houston Chronicle on December 3, 2001. It showed two newly pink-slipped Enron workers hauling the detritus of their offices to their cars. Their mode of conveyance? A pair of Aeron chairs.

During the dotcom heyday, any executive worth his stock options had one of the iconic, biomorphic, ergonomically engineered chairs. The Museum of Modern Art acquired one for its permanent collection. The Industrial Designers Society of America named it one of the "Designs of the Decade" for the 1990s. Malcolm Gladwell lionized them in Blink. Designed by Bill Stumpf and Don Chadwick in 1994, the Aeron chair was one of the Michigan-based furniture maker's most popular products. Internet companies ordered them by the truckload. In late 2000, the company was taking orders for 20,000 to 30,000 per week.

A year later, the chairs were going for a fraction of their $700 price on eBay and in liquidation sales. But that was hardly Herman Miller's only problem. The office-furniture industry and corporate America's economic well-being are as closely entwined as Thelma and Louise. And with telecom tanking, financial services tightening, and tech companies hitting the skids, Herman Miller joined them in going off a cliff. "We had a two- or three-year period where business dropped 45%; that was like an industry heart attack," says Michael Volkema, chairman of Herman Miller's board, who was the company's CEO at the time. "In 1995, when I took over, sales were under $1 billion. By 2000, they were $2.2 billion. By 2003, they were down to $1.3 billion. One night I went to bed a genius and woke up the town idiot. It was not a happy time to be in leadership."

In the face of what was shaping up to be a long-term siege--and losses of $56 million--Volkema and his team did what many in their shoes do: They took their lumps, with painful layoffs and cutbacks. But at the same time, they did something much more unusual for a rapidly shrinking company: They positioned it for a brighter future with tens of millions in R&D investment--much of it mighty speculative. Choosing to invest in what were essentially blue-sky ideas just when the company was downsizing the workforce and closing plants wasn't an easy sell. Try telling a factory worker that his job is being eliminated so you can fund something that may--or may not--pay off five years down the road. "Barely one out of 1,000 companies would do what they did," says Harvard Business School professor Clayton Christensen, author of The Innovator's Dilemma. "It was a daring bet in terms of increasing spending for the sake of tomorrow while you're cutting back to survive today."

Volkema and his team felt compelled to take that risk because they believed Herman Miller faced something much more serious than the industry's typical temporary downturn: With shrinking margins and the rise of Chinese furniture makers, they believed, they were confronting a permanently changed landscape. "We were concerned that, in the future, volatility in this business would increase, not decrease," says Brian Walker, now the company's president and CEO. "I told people, 'I don't know if I can explain this economically and in detail right now, but I believe that long term, if we are going to re-create ourselves again, we have to place some bets that are out of the ordinary,' " he says.

Five years after wrenching decisions that led to laying off nearly 38% of the company's workforce, scrapping several promising businesses, and shedding more than a million square feet of prime real estate, those bets are paying off. At this year's NeoCon, the business's annual June lovefest, Herman Miller will unveil the fruits of its R&D investments, introducing more products than at any time in its history. Among them: two complete "systems furniture" products (that's industry speak for cubicles and such), a groundbreaking LED lamp developed with Yves Behar, an environmentally friendly executive chair, a reintroduction of the George Nelson swag-leg collection, a stool to accompany the Aeron chair, and the second generation of its sound-muffling system. And that's not all. Several highly unconventional products are waiting in the wings for later in the year, the outcome of the projects begun deep in the company's slough of despond. In late March, Herman Miller, which is the third largest in its industry after Steelcase and HNI Corp., announced its ninth consecutive quarter of year-over-year sales growth, with sales up 11% over the previous year's tally and orders up 16% over the same time period. In 2005, the company posted net earnings of $68 million--triple 2003's--on sales of $1.5 billion.

In his first five years as CEO, Volkema more than doubled sales. Then they collapsed. "One night I went to bed a genius and woke up the town idiot," he says.

"Leadership is about doing the right thing, not the easy thing," says Volkema. "And although part of the right thing was reconfiguring the business for the current market opportunity, the other right thing was ensuring that when we got to the far shoreline, we had a future."