How Levi's Trashed a Great American Brand While Bob Haas pioneered benevolent management, his company came apart at the seams.
By Nina Munk Reporter Associate Jane Hodges

(FORTUNE Magazine) – When Robert Haas led the most recent LBO of Levi Strauss & Co. in 1996, he took one of the world's most successful brands and placed its entire future in the hands of four people: himself, an uncle, and two cousins. Other family shareholders had two choices: Cede all power to this group for 15 years, or cash out. Most stayed in. It seemed a good bet at the time. Haas was the guy who had saved the troubled family company back in 1984. He shut dozens of plants, jettisoned unpromising subsidiaries, expanded overseas, and refocused on Levi's core product. In 1985 he took Levi Strauss semiprivate in a limited LBO. Levi's stock climbed more than 100-fold, from $2.53 a share (adjusted for splits) to $265 a share. Haas was a hero.

A Harvard MBA who worked for the Peace Corps and McKinsey before joining Levi Strauss, Haas had been lionized in management circles and business journals (such as the very one you're reading) for applying his enlightened management practices to an old-line clothing manufacturer. Haas chafed at the idea of merely dressing the world in riveted denim; he was intent on showing that a company driven by social values could outperform a company hostage to profits alone.

While shareholder-driven companies like Coke and Gillette rushed into China, Haas pulled out--to protest human rights abuses. He sent sewing machine workers to off-sites to reprogram them from a mentality of piecework to one of teamwork. And shortly before the latest LBO, he began a massive reengineering project that was supposed to make Levi Strauss the most responsive apparel company in the industry, reducing the time it took to get jeans to stores from three weeks to 72 hours.

If the family shareholders had been paying careful attention to what was really going on at Levi's well before the '96 LBO, they might have bet differently. Sometime around 1990, a great brand began coming apart at the seams. Levi's market share among males ages 14 to 19 has since dropped in half, it hasn't had a successful new product in years, its advertising campaigns have been failures, its in-store presentations are embarrassing, and its manufacturing costs are bloated. The reengineering--with an $850 million budget--was a disaster. J.C. Penney, Levi's biggest customer, reports that last fall Levi's delivered its all-important back-to-school line--get ready--45 days late. Says Levi's Thomas Kasten, who led the reengineering: "I don't think we fully accomplished anything, to be honest."

Since 1997 the company has announced plans to shut 29 factories in North America and Europe and to eliminate 16,310 jobs. A month ago it said 1998 sales had dropped 13%, to just under $6 billion. FORTUNE estimates that since the '96 LBO--since Bob Haas became unaccountable to anyone but his three relatives--Levi Strauss' market value has shrunk from $14 billion to about $8 billion. By comparison, crosstown San Francisco rival Gap has grown from $7 billion to over $40 billion during the same period. "Bob is very smart," says a former Levi's executive. "But then the question is, 'What's he smart at? Is he smart at running an apparel company?' I think that's an open question."

Levi Strauss is a failed utopian management experiment. It's a story of what can happen when well-intentioned but misguided managers run a private company answering to no one. Above all, it's an epic tale of opportunity lost, of what might have been. Retailing people often compare Levi Strauss with Gap--not favorably. "Levi's has always had a lot of very technically oriented people who know how to make good, consistent product," says Howard Gross, CEO of Millers Outpost, a chain of 220 stores that sell Levi's. "But typically in apparel you have merchants, men like [Gap CEO] Mickey Drexler. I'm not sure Bob Haas has ever been trained to be a merchant. I'm not sure he's even been in a store, waiting on customers, talking to them so that he could hear them say, 'Why are the legs on those jeans so tight?'"

The criticism does not appear to bother Haas. "By personality and instinct, I am not the rock star CEO," says Haas, in an obvious reference to Drexler. "It's a fantasy to think that somebody in a corner office on the seventh floor in San Francisco can be all-seeing and all-knowing. It's crazy."

We're not writing an obituary for this 150-year-old company. Levi's is still one of the world's great brands, better known than Marlboro, Nike, or Microsoft. No one--not Tommy Hilfiger, not Lee, not Gap--comes close to it in jeans sales. And 75% of American men own a pair of Levi's Dockers khakis. Above all, Levi Strauss is a cash machine. As a privately held company, it does not divulge profits. But FORTUNE managed to get a look at its financials: Last year, on revenues of just under $6 billion, Levi Strauss produced $1.1 billion in cash flow. That's more than Tommy, Polo Ralph Lauren, Nautica, and Liz Claiborne--combined. More than Nike. More, by a pinch, than Gap.

It takes a long time to sink a great brand. "A big brand like Levi's is an aircraft carrier," remarks Steve Goldstein, who left the company last summer after a 20-year tenure, most recently as head of marketing for Levi's. "You can turn the engines off and the actual speed of the carrier will not slow perceptibly for a long time. With the Levi's brand we gradually dialed down our propeller speed and the carrier kept moving. People up on the deck said, 'We're still moving fast!' But those down in the engine room said, 'Whoa! We're going to be dead in the water!'"

For all his empathy toward the engine room, Haas is a man born to the bridge. Although he dressed casually for FORTUNE's photo shoot, Haas is not a casual man. Even his language is carefully in place. He speaks in paragraphs of elevated diction; an off-hand conversation can sound like a lecture. He's known for extraordinary (some say obsessive) attention to detail. Poring over press releases and in-house memos, he corrects split infinitives and misplaced modifiers. His handwriting is tiny and meticulous. He goes to bed at 9:30 P.M.

Haas envisions Levi Strauss as a company where a factory worker's voice is as likely to be heard as the CEO's. "He's not the sort of manager who says, 'Here's what you did wrong,'" explains Levi's former CFO George James. "Instead, he sits down, looks you in the eye, and asks, 'What do you think you did wrong?'" Because of his obvious sincerity, Levi's employees are fiercely loyal to him, although they don't always approve of his management style. "I love Bob to death, but he has a tendency to want to involve everybody in decision-making. He's compassionate to a fault," says Peter Thigpen, former president of Levi Strauss USA.

No matter how well-intentioned, group decision-making usually degenerates into endless meetings, task forces, memos, and e-mails. That's what happened at Levi Strauss. "Everything had to go into a corporate process, so nothing ever got resolved," says Robert Siegel, who left the company after 29 years to become CEO of Stride Rite in 1993. "Almost half my time was spent in meetings that were absolutely senseless." Clearly frustrated even now, Siegel adds, "If you asked [Levi's executives] for the time, they would build you a clock, and still not be able to tell you the time." In the olden days--when Levi's was synonymous with jeans--none of that really mattered. But now Levi's doesn't just compete with Lee and Gap and Calvin Klein. Now it has hundreds of competitors with names like JNCO, Mudd, Arizona, Fubu, LEI, Kikwear, Badge, Union Bay, Canyon River Blues, Bongo, Stussy, Menace, Faded Glory--names that Levi's executives may or may not have heard of.

It's worth noting that Bob Haas has excelled at everything he's ever done. He was president of his primary school student body, editor of his high-school yearbook, and valedictorian of his 1964 class at UC Berkeley, where he was elected to Phi Beta Kappa. The business world never much interested Haas: He majored in English and considered becoming a Chaucer scholar. Then he joined the Peace Corps, where he spent two years in the Ivory Coast. Still, after returning from Africa, Haas dutifully attended Harvard Business School, like his father before him. When he graduated in 1968, he became a management consultant at McKinsey & Co. Some San Franciscans joke that to understand what's gone wrong at Levi Strauss, all you need to know is that Bob Haas was in the Peace Corps and worked at McKinsey.

Haas joined Levi's in 1973 as an inventory management analyst. In 1984, at 42, he became the fifth-generation family member to run the company (his father, Walter A. Haas Jr., was CEO from 1958 to 1976). Bob Haas had big plans. He wanted to create a company with a social mission, a purpose larger than sewing together pieces of 14 1/2-ounce denim. "When I became CEO there was a cry: 'What are our values? What do we stand for as a company?' " he explains. "I said, let's fix the business issues first, but as soon as we have our business back on track we have to attend to our culture, because that's the glue that unites us, the beacon that guides our actions."

Levi Strauss has always believed in corporate philanthropy and social responsibility. When the firm went public in 1971, its offering prospectus made corporate history by warning that profits might be affected by a commitment to social programs. But Bob Haas wanted to go further--much further. In 1987 he developed the Levi Strauss Mission and Aspirations Statement, which promoted teamwork, trust, diversity, empowerment, etc., etc. Printed on recycled blue denim, the aspirations statement was hung on office walls, posted in factories, enclosed in Lucite paperweights, and laminated on wooden plaques. For most CEOs, that would have done it: State your mission, act accordingly, and expect your employees to do the same. Haas, however, had something to prove: that a company driven by social values could outperform one driven by profits.

He changed Levi's compensation plans so that one-third of executives' bonuses reflected their ability to manage "aspirationally." He assigned 80 task forces to make the company more "aspirational." The work-and-family task force sent a 25-page questionnaire to 17,000 employees. The global-sourcing task force spent nine months creating guidelines that would hold Levi's overseas contractors to the highest possible standards of labor practices. A diversity focus group organized off-site sessions that paired white, male managers with women and minorities to discuss racial and gender stereotypes.

By the early 1990s, Levi's employees were attending the company's "core curriculum," a three-part, ten-day course that covered leadership, diversity, and ethical decision-making. Joined by at least one senior manager, groups of 20 employees discussed their vulnerabilities, shared their deepest fears, even composed their obituaries. "It was all about personal disclosure and human connections," says Barry Posner, dean of Santa Clara University's business school, who helped implement the core curriculum. "It was about asking, 'How do I find meaning in the workplace?' It was about seeing that work is noble, that we're doing more than getting pants out the door."

Bob Haas had discovered his vocation. At one time he distributed AIDS leaflets outside the company cafeteria. He gave a long interview to the Harvard Business Review called "Values Make the Company." He delivered a keynote speech on business and ethics to the Conference Board. Levi's wasn't just a garment company committed to social responsibility. It was a politically correct organization that happened to be in the garment business. "The problem is some people thought the values were an end in themselves," says Levi's President Peter Jacobi, who recently announced his retirement. "You have some people who say, 'Our objective is to be the most enlightened work environment in the world.' And then you have others who say, 'Our objective is to make a lot of money.' The value-based people look at the commercial folks as heathens; the commercial people look at the values people as wusses getting in the way."

In hindsight, the wusses did get in the way. For even as Bob Haas pioneered utopian management, the business began to look threadbare. Despite its enlightened benevolence, Levi's clung to old ways of doing things. It stopped innovating. It ignored, or was oblivious to, the marketplace. The "principled reasoning approach" to decision-making taught in the core curriculum didn't help. "Unless you could convince everyone to agree with your idea, you didn't have the authority to make a decision," says former CFO George James. "That made it very difficult to be responsive."

Case in point: Dockers, launched by Levi's in 1986. Dockers khakis were an immediate success, hitting the market just as American men began replacing suits with more casual attire. But in 1993, Dockers missed one of the biggest trends in the khaki market: wrinkle-resistant pants. As other manufacturers began selling them, Dockers stayed put. Sales collapsed. That same year, Levi's reported its first decline in profits since 1988.

The denim market was changing too. Levi's 501s used to be the hot jeans. "But in '93, kids started telling us the legs were too narrow," says Gross of Millers Outpost. In response, Millers Outpost created its own line of jeans with legs as wide as 23 inches. Then J.C. Penney and Sears got into the act, making jeans with flared legs and boot cuts. Tommy Jeans splashed the Hilfiger logo all over its baggy pants. JNCO introduced jeans with 40-inch-wide legs and 17-inch-deep pockets. Through it all, Levi Strauss kept on pushing its basic jeans, with 16-inch-wide legs and 6-inch pockets. At the same time, kids were spending more and more money at specialty stores like Hot Topic and Pacific Sunwear and Gap, whereas Levi's sold almost exclusively to now-out-of-favor department stores. It wasn't that Levi's management didn't see the changes. "We told Levi's about extreme fits," says Gross. "We showed them our numbers. We told them what kids were asking for. They even attended some of our focus groups. But they didn't want to believe."

Or else they were distracted. In 1993, Levi Strauss embarked on something called the Customer Service Supply Chain initiative. Once again, what began as a well-intentioned project morphed into a monster. The stated goal of the initiative was to make Levi's more responsive to retailers. The company wanted to get new products to market in three months, down from 15 months, and to reduce the time needed to restock a pair of jeans from three weeks to 72 hours. Amazingly, no one seriously considered the possibility that getting a pair of jeans to stores in 72 hours might double or triple Levi's costs. "There was no cost boundary," says Tom Kasten, who headed the effort. "I mean, we talked a little about how it shouldn't cost more, but it really was an afterthought."

In June 1993, 200 of Levi's best people began designing a new supply chain. Many were vice presidents of important divisions, divisions that would now be without leaders. Others left work behind, forcing colleagues to do double duty. Joined by at least 100 Andersen consultants, the group took over the third floor of headquarters, soon covering the walls with vast organizational charts and maps. The place resembled a war room. The members of the Third Floor Brigade weren't just on a mission, they were, in their words, "creating a revolution." To convince skeptics at Levi's that this was serious stuff, they collected magazine cover stories on companies like IBM, GM, and Digital that were in turmoil because they had ignored their changing markets. Proselytizing, the Brigade blew up the covers, pasted them to poster boards, and carried them around the organization. "It created huge battle lines," says Jacobi, Levi's president. "There were Moonies and there were nonbelievers, and they avoided each other and said bad things about each other. But there was no way to get out of it. It was like quicksand."

The Customer Service Supply Chain initiative was no longer just about improving service to retail customers. It was about improving everything. Whole new categories of jobs were created. The Third Floor Brigade rewrote more than 600 job descriptions; all over the company people had to reapply for their positions. To help employees evaluate their aptitudes and handle the imminent changes, the Brigade put together a 145-page handbook called Individual Readiness for a Changing Environment. "Let yourself feel the loss, then let go and move on," it advised. "New ways should be viewed as neither right nor wrong, neither better nor worse, than the previous ones."

Levi's employees freaked out. Some who didn't get the jobs they had applied for, or re-applied for, broke down. Others simply quit. "It pushed me over the edge," says a former employee. The retailers--the people actually meant to benefit from all this--shook their heads in disbelief. "The reengineering changes had us confused as hell," says a buyer at one major Levi's account. "One minute there was no customer service, the next minute they'd overdo it." By the time Levi's board of directors put an end to the nonsense in late 1995, the reengineering team's budget had swollen by 70%, to $850 million. As for restocking basic product, J.C. Penney's standard is 20 days; Levi's average last year was 27 days.

How did this go on for so long? Simple. Haas has the power, and most family members seem content with the arrangement--despite the sagging value of their shares (which have declined by about 40% in three years), despite the fact that they get no dividends. "I've always looked on it as a long-term investment," says Robert Friedman, cousin to Bob Haas and a member of the Levi's board. Rumor has it some family members want out, or at the very least would like a new CEO. They won't get one. Other than the four men who control the votes, no one has any say in the company until 2011, when the shareholder agreement expires.

One family member who spoke to FORTUNE on the record is Richard Goldman, husband of Bob Haas' late aunt Rhoda Haas Goldman. In 1946, 4-year-old Bob Haas was the ring bearer at the Goldmans' wedding. Half a century later the Goldmans and Bob Haas were no longer speaking. Rhoda Goldman was the only member of the 12-person board who opposed the 1996 LBO. She and her husband didn't want to hand the company over to four people for the next 15 years. "It didn't make any sense to her or to me," Richard Goldman says. "As shareholders, we were surprised anyone would go along with it."

The disagreement wasn't just about control; like most squabbles, it was also about money. Levi's bankers at Morgan Stanley, valuing the shares at $189 each, said the firm was worth $10 billion. Bob Haas offered shareholders $250, a one-third premium. But the Goldmans' bankers at Robertson Stephens valued the stock at between $315 and $387. In response, Haas increased his offer to $265 a share, valuing the company at $14 billion. After a lengthy battle, the Goldman family decided to accept that offer, cashing out their 12.5% interest for $1.7 billion. They were lucky; if they had held on, their shares would now be worth about $950 million.

"One could argue that we overpaid, in light of subsequent events," says Bob Haas. "But I would much rather be restructuring and reinvigorating ourselves as a private company than trying to talk, not just to you, but to every security analyst and financial reporter in the world who wants to do yet another tedious story about our problems and offer gratuitous advice as to what went wrong and how to fix it. Those kinds of distractions get in the way of operating effectiveness."

Last year, Levi's redefined its utopian mission. The old one, which appeared in the preamble to the mission and aspirations statement, was: "To sustain responsible commercial success." The new one is simply, and ambiguously: "To be the casual apparel authority." So, once again, the company is in the midst of major organizational changes. It recently shifted to a brand-management structure long popular with consumer companies like Procter & Gamble and Sara Lee. So, once again, people are moving into new jobs, being given new titles. Because management now recognizes that one of Levi's problems was inbreeding, an urgent mandate is to fill one-third of all openings with outsiders. Headhunters have been directed to find a new president/COO from the outside. Already, Levi's has brought in as its new CFO William Chiasson, from Kraft Foods. Its new creative director for the U.S. youth market is Devon Burt, formerly of Nike.

Levi's finally understands what people in the fashion business have always known: Kids don't wear the same jeans as their parents. It recognizes that cool retailers won't be caught dead or alive stocking the same product as J.C. Penney. "The mistake we made was to make one brand for everyone--it ended up being nothing to anyone," says Robert Holloway, who heads Levi's U.S. youth market division. The company is now creating a portfolio of brands and sub-brands, each targeted at a different "tribe," in Levi's language. Some will be created in-house, others will be acquired from the outside.

Levi's big customers say they are cautiously optimistic about the new lines. But Levi's multibrand strategy is nothing more than what its competitors have done for years. Think of Gap, for example, with its high-end Banana Republic, its middle-of-the-road Gap, and its low-priced Old Navy. To reach the next level, to be a real player, Levi's has to become cool again. It must figure out how to appeal to a small, but hugely influential group of city dwellers who set fashion trends, a tribe Levi's calls "cultural creatives."

Late last year, in a bid to be culturally creative, Levi's furtively launched Red Line jeans, distributing them to just 25 cutting-edge shops, where they sell for $99. To position Red Line as far away from Levi's as possible, the unit's headquarters is in Venice, Calif. Nothing on Red Line jeans indicates that they have any relation to Levi's. The brand isn't mentioned on Levi's Website. So determined is Red Line to remain underground (i.e., cool) that its manager, Julia Hansen, refused to talk to FORTUNE, nor would she provide any product publicity shots.

Retailers report that Red Line is selling well. To Levi's, however, that's not really the point. It doesn't expect Red Line to have much impact on its bottom line; the idea is for the jeans to have a "halo effect," for the hipness associated with Red Line to somehow seep into Levi's other lines. The Dockers division is pursuing a similar strategy: To make its pants known as something other than the "uncool khaki" or the "fat man's khaki," it recently launched a hip line called K-1 Khakis. In Europe, there's a new Dockers line called Equipment for Legs, made of high-tech fabrics like Gore-Tex and targeted at the yuppie urban warrior.

It will be years before anyone knows if the new initiatives have worked. In the meantime, it seems reasonable to ask two basic questions: Would Levi Strauss be scrambling so desperately if it were a public company? And would Bob Haas still be CEO? Says Haas: "I wouldn't be CEO, because I wouldn't want to work in the company. It's that simple. My passion for this place is about doing the right thing for the enterprise, its people, the communities in which they operate, and making this a winning organization. My passion would be considerably diminished if I had to deal with the kinds of frivolous and nonproductive distractions that many of my peers at public companies have to deal with."

On Wednesday, June 12, 1996, a crowd of Levi Strauss employees gathered in San Francisco to hear a major announcement. Standing proudly before them, Bob Haas revealed a new incentive plan. With the company now fully in family hands, Haas could not offer employees stock options. Instead, he promised that if Levi's reached $7.6 billion in cumulative cash flow by 2001 (after three years, it's just $2.8 billion), every employee in the world, all 37,000 of them--from sewing machine operators in El Paso to salesmen in Barcelona--would receive a bonus worth one year's salary. Giddy employees cheered. Here was the latest confirmation that they were working for the world's most enlightened employer. Sincere notes of gratitude poured in to headquarters: "Bob, thanks for this great opportunity. Only 1,895 days to go! Many thanks, Estelle." And: "Bob, many thanks for your generous & exciting idea. What a great challenge to rise to, Paul T." And: "Bob, see you in 2001 for the big party! Kel."

One more thing: The party will be in utopia.