American express

NEW YORK UNIVERSITY LEONARD N. STERN SCHOOL OF BUSINESS

AMERICAN EXPRESS (B)
by Richard D. Freedman and Sharon Simon New York University, Stern School of Business May 1998

Introduction
American Express was founded in 1850 as a messenger service guaranteeing delivery of packages in New York State. In 1891, the company introduced Travelers Cheques to give customers a convenient alternativeto cashing money orders or lines of credit while traveling and later broadened its scope of services to include trip planning, reservations, and ticketing. Nearly 70 years later, in 1958, American Express entered the charge card business, positioning its card as a prestige product offering an alternative to using cash or personal checks for purchases. By 1977, when James D. Robinson III wasappointed CEO of the organization, it had grown to be a leading travel, financial services, and information provider, with American Express International Banking Corporation and Fireman’s Fund Insurance Companies, acquired in 1968, rounding out the corporate portfolio.1 Throughout the early 1980s, American Express’s CEO James Robinson attempted to achieve synergies by building a financial services giantthrough aggressive expansion and diversification. Dubbed the “financial supermarket strategy” by the press, the strategy resulted in some successful acquisitions. For example, the company acquired securities broker Shearson Loeb Rhodes in 1981, followed by investment manager The Boston Company and real estate syndicator Balcor. While some acquisition attempts failed, such as McGraw-Hill andPhiladelphia Life Insurance Company, several years of strong performance caused industry analysts and the press to praise the company’s supermarket strategy. By the late 1980s, however, the company began to show signs of trouble. The 1987 acquisition of E.F. Hutton burdened the company with heavy debt, and Shearson severely damaged its reputation after a series of setbacks including an embarrassinglylow bid to acquire RJR Nabisco from shareholders in 1988. American Express also lost hundreds of millions of dollars on Fireman’s Fund Insurance and a profitless investment in Trade Development Bank. Further, the company began to show significant market share erosion in its card business, from 23% in 1985 to a low of 11% in 1995.2 Cardmember attrition was rampant, and the number of merchantsaccepting American Express cards was down. Robinson, known for his hands-off management style over the company’s autonomous divisions, had neglected the card business, which traditionally had flourished in an environment in which cash and checks were the primary competition. While American Express largely ignored the business, rivals Visa and MasterCard were introducing competitive new products to sparkgrowth in this otherwise mature market sector. American Express’s culture at this time has been described as complacent, and managers did not consider the emerging competition to be a serious threat.3

American Express (B) American Express’s financial performance reflected the company’s distress. Earnings per share dropped from a high of $2.78 in 1986 to a low of $0.88 in 1992, and grossprofits fell from $10.1 billion in 1989 to $650 million in 1992. These threats led to the early retirement of Robinson and subsequent appointment of Harvey Golub as CEO in 1993.

A New Vision and Strategy
When Golub assumed the reigns of the organization, he found that the company was crippled by its attempts at diversification. In particular, the securities business was a drain on overall earningsand demanded an inordinate amount of management attention. Nowhere was the effect more pronounced, however, than in the company’s card business.4 Realizing a need for change, Golub established priorities that would guide the company through the next few years: First, to deal with the major business issues we faced to ensure survival--with a sense of urgency but with deliberation and purpose … we...