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Strategies and styles revisited: ‘Strategic control’—is it tenable?
54
Long Range Planning. Vol. 26, No. 5, pp. 54 to 61, 1993 Printed in Great Britain
Strategies and Styles Revisited: ‘Strategic Control’ is it Tenable? Michael
Goold,
Andrew
Campbell
arzd Kathleen
Developments in the companies described in Strategies and Styles in 1987 are updated to 1992, and the management styles framework is reviewed in the light of these experiences. Conclusions concerning the strengths and weaknesses of the Strategic Control style are reviewed, and fresh light is cast on the diversity of portfolios that it can manage effectively. The difficulty of changing style, except in a crisis, is confirmed. An earlier article in the October issue of Long Range Planning reviewed the Strategic Planning and Financial Control styles
In an article entitled Stv&qqics und Styles Revisited: Strategic Planning and Financial Control in October’s Long Range Planning (26:5, 4%60), WC: revisited the companies that Michael Goold and Andrew Campbell classified as following a Strategic Planning or Financial Control style in their 1987 book, Strategies and Styles. By updating the experiences of these we were able to test the management companies, style framework for Strategies and Styles, and to draw conclusions about the effectiveness of the Strategic Planning and Financial Control styles in different circumstances. The purpose of this article is to cxaminc the five Strategic Control companies from Strategies and Styles in a similar fashion, and to reflect upon the experiences of the 16 Strategies and Styles companies as a whole.’
Strategic
Control
Companies
Strategic Control companies combine some of the characteristics of the other two management styles. responsibility to profitSuch companies give responsible business unit managers and cmphasizc tight financial controls. But they arc also involved in business unit planning, with the ccntrc reviewing
Michael Goold and Andrew Fellows of Ashridge Strategic an Associate of the Centre.
Campbell are Founding Directors and Management Centre. Kathleen Luchs is
Luchs
and challenging business unit stratcgics and aiming to assess strategic as well as financial performance. The Strategic Control companies Goold and Camporiginally rcsearched~Impcria1, Plessey, bell Vickers, ICI, and Courtaulds-all had well devclopcd planning processes as well as strong financial controls. Each of thcsc companies had adopted a Strategic Control approach to their businesses in the late 1970s or early l%Ws, moving from a Centralized or a Holding Company style. The change to Strategic Control meant that, for previously centralized companics such as Courtaulds and Plessey, more responsibility was pushed down to the business units and there were efforts to improve strategic thinking at this level. In the other companies, which had more of a Holding Company approach, the shift to Strategic Control meant that the corporate ccntre exercised more control and influence over what had been highly independent divisions.’ The Strategic Control style appealed to most of these companies because it appeared to offer a way of managing a highly diverse portfolio of businesses. Rcsponsibility was pushed down to the business units, but the ccntrc retained overall control through the mechanisms of strategic planning and control. The Strategic Control emphasis on strong financial controls contributed to cost-cutting and also to decisions to exit from unprofitable businesses in these companies in the early 198Os, leading to impressive performance improvcmcnts. On avcrage, the profitability ratios (RoCE, ROE, RoS) of the Strategic Control companies improved far more than those for Financial Control or Strategic Planning companics bctwccn 1981 and 1985.’ But the Strategic Control companics still faced considerable challenges in the mid-1980s. Their overall perforniancc had improved, but on absolute measures of profitability they lagged behind the Strategic Planning and Financial Control groups of cornpanics. The key issue for these companies has been to cnsurc that their Strategic Control style continues to add value to their businesses.
Strategies
and Styles Revisited:
In the event, the later 1980s and early 1990s have not been easy years for the Strategic Control companies. Two of the companies, Imperial and Plessey, were taken over during the 1980s. The others-Courtaulds, ICI and Vickers-have faced the threat of takeover, and have moved to re-focus their portfolios substantially. Courtaulds has demergcd its chemicals and textiles businesses and ICI has demerged bulk chemicals from its pharmaceuticals, agrochemicals and specialist chemicals businesses. Vickers resisted a call to dcmerge Rolls Royce during the late 198Os, but the luxury car market has been hard hit by the recession in the early 199Os, and Vickers is now considering a range of options for the future of Rolls Royce. These developments have led us to reconsider the viability of the Strategic Control style. We have concluded that the style is tenable and can be successful, but that it is not, as suggested in Strategies and Styles, a good solution for companies faced with the problem of managing a diverse portfolio of businesses which do not share common strategic characteristics.
Takeovers:
Imperial
and Plessey
In Strategies and Styles, it was noted that while the Strategic Control style had helped Imperial’s busincsses in improving their margins and encouraged them to develop sound strategies, by the mid-1980s there were tensions within the company. Many of the businesses were more confident of their strategies and saw the planning process as bureaucratic rather than helpful. At the same time, the ccntrc appeared to focus increasingly on shorter-term financial objectives. A proposed merger with United Biscuits was challenged by some analysts as primarily a defensive move rather than a coherent strategy, and a counter-bid for the company from Hanson was successful. Hanson gained control of Imperial in 1986, following a takeover battle with United Biscuits. It has disposed of Imperial’s food, beer and restaurant businesses. Most of these businesses have been bought by companies with similar core businesses; thus Trusthouse Forte bought Imperial’s hotels, Elders bought the Courage brewing business, United Biscuits acquired Ross Young’s frozen foods. Hanson paid A2.5 billion for Imperial and has recovered A2.34 billion through disposing of all but Imperial Tobacco and Seven Seas health products.’ Plessey, too, found itself in a precarious position in the mid-1980s, with an unwelcome bid from GEC in 1985. Plessey held onto its independence when the Monopolies and Mergers Commission ruled against the takeover, but this reprieve did not overcome Plessey’s vulnerability. Strategies und Styles argued that Plessey’s commitment to decentralization was not well suited to coping with the competitive Pressures it faced as telecoms became an increasingly global business, and strong financial controls appeared to be encouraging some of Plessey’s
‘Strategic
Control’-is
it Tenable?
55
businesses to focus on shorter-term performance to the detriment of longer-term strategic objcctivcs.’ The threat from GEC, however, helped provide the impetus for Plessey to tackle its problems. Most telecommunications business notably, Plesscy’s -accounting for almost half of the group’s salcswas merged with that of GEC in 1988 through the joint venture GPT. This alliance aimed to create a company with enough scale to compete effectively in world markets. Plcsscy also made a series of acquisitions, including North American defense companies, Ferranti’s microchip business and Hoskyns, a computer service group. Sir John Clark articulated an overall strategy for the company: Plcsscy would build a portfolio of businesses which had complementary and increasingly interdependent technologies.” The strategy defined by Clark hinged on close co-ordination across interrelated divisions-a substantial change for Plessey’s hitherto autonomous divisions. While some commentators concluded that Plcssey was unlikely to succeed in its new strategy, others argued that Plessey was indeed committed to such changes, noting that the company was, ‘moving away from its system of running %()-odd businesses in a very devolved manner to one that will establish greater corporate cohcrencc’.’ But before the new strategy and style had had time to be tested, GEC and Sicmcns launched a joint bid for Plcsscy. Plcssey countered by joining a consortium which considered bidding for and breaking up GEC, but this effort collapsed and GEC/Siemcns gained control of Plessey for A2 billion in 1989. Since the takeover, Plessey’s busincsscs have largely been divided among Siemens and GEC, although the telecommunications business GPT is jointly owned by the two companies.’ Imperial’s proposed mcrgcr with United Biscuits and Plessey’s joint venture in tclccommunications and its efforts to make its portfolio more coherent represented major initiatives to deal with the strategic problems they faced, but, in both cases, occurred too late to stave off takeover. The other Strategic Control companics-Vickcrs, ICI, and Courtaulds-have avoided takeovers, but each of these companies has had to undertake major portfolio re-focusing in order to build on the achievements of the early 1980s.
Portfolio
Re-Focus:
Vickers
Vickers has continued to re-focus its portfolio over the last five years, with Sir David Plastow aiming to provide more coherence to the group. The company sold its office furniture business in 1988, but it was the sale of Howson-Algraphy in 1989 that had the biggest impact on the portfolio. The printing plates business was one of Vickers’ largest and most profitable, but it was also confronting increasing competition from its larger and more international competitor, Du Pont. Vickcrs concluded that
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shareholder value was best served by selling business to IIu Pont, and Sir David Plastow identified the sale as his most successful deal.”
the has
Vickcrs used the cash from this deal to acquire Ross Cathcrall, a superalloys manufacturer; Cosworth, an auto engine specialist; and Riva, an Italian luxury powerboat maker. These acquisitions reinforced Vickcrs’ focus on specialist cngincering, with nonmilitary businesses balancing its traditional dcfencc strengths. Vickcrs has also identified some opportunities for co-operation across its divisions, citing the potential for Riva to benefit from Rolls Royce’s marketing cxpcrtisc and encouraging the exchange of technical expertise across divisions.‘” These initiatives still seem tentative, but certainly Vickcrs’ more focused portfolio should make it casicr to pursue such opportunities. The question of Rolls Royce, however, has bccomc increasingly critical to Vickers’ future. Rolls Royce was the most profitable part of Vickcrs in the mid198Os, but there wcrc also doubts about whether the famous car maker could continue to prosper within Vickcrs. The group did not have other automotive interests, and although it idcntificd opportunities to exploit Rolls Royce’s marketing and cngincering expertise in its other divisions, the benefits Rolls Royce gained by Vickcrs’ ownership were less clear. The logic applied to Howson-Algraphy-that the business was worth more to another owner than it was within Vickcrs-seemed to some observers to apply equally to Rolls Royce, and Vickers came under pressure to sell the business. In the late 1%Os, Sir Ron Bricrlcy, with a 20 per cent stake in Vickers, called for the dcmcrgcr of Rolls Royce. Sir David Plastow strongly defended Vickcrs’ ownership of Rolls Royce, citing not only the business’s high profitability but also its fit within Vickers’ portfolio. Bricrlcy’s motion for a demcrgcr was defeated in 1990 at the sharcholdcrs meeting, and Brierlcy sold off his stake in Vickers in early 1991. This proved to be a hollow victory for Vickers. With the recession, sales of luxury cars dropped dramatically, and losses at Rolls Royce have had a severe impact on Vickcrs’ performance, plunging the company into losses in 1991. Thcrc has been stringent cost-cutting at Rolls Royce, and the workforcc has been rcduccd by more than half, but these measures have not been enough to compensate for the lack of sales. These events have undermined Vickcrs’ confidcncc that Rolls Royce does fit well
1993 within its portfolio-but also limited the options available to Vickcrs in resolving this issue. While Vickers has had talks with other car manufacturers, no agreement has been rcachcd. In April 1992, at his last shareholders’ meeting before retirement, Sir David Plastow reassured shareholders that Vickers was continuing to cxplorc all options regarding Rolls Royce, but at present it continued to have more long-term value as part of Vickers.” Rolls Royce’s future, however, looks increasingly bleak. In September 1992, Vickers announced that dcvelopment work on new models would bc postponed indefinitely.” Vickers’ efforts to build a more coherent portfolio, and to find ways of exploiting expertise across its businesses, have thus been overshadowed by its problems with Rolls Royce. In 1991, Vickcrs had a prc-tax loss of Al2.4m. Although Vickcrs’ pcrformance improved substantially from 1986-1991, compared with the period covered by Strate$es and Srylcs, the company’s future seems uncomfortably dependent on whcthcr it can find a buyer or partner for Rolls Royce.
Demeyers: Cowtaulds and ICI Courtaulds, under Sir Christopher Hogg’s leadership, has been able to capitalize on the strengths of its Strategic Control style. In the early 198Os, the emphasis on tight controls and rationalization led to improved performance, and most managers also belicvcd that the company’s strategic decisionmaking process had improved.‘” The very success of these efforts, though, raised other issues. As strategic compctcncc at the business lcvcl improved, the contribution of the centre and the planning process potentially became less important. At the same time, the demands on the centre were increasing as Courtaulds moved into new areas. In the later 198Os, the company aimed to reduce its exposure to cyclical commodity businesses and incrcasc its participation in growing niche markets. It divcstcd its dissolving pulp business and made a series of acquisitions, including Porter Paints in the U.S., and specialist film companies Martin Processing and Gila River Products also in the U.S. These businesses provided Courtaulds with better opportunities for growth, but they also increased the group’s diversity and therefore made the role of the centrc more complcx.‘i In 1989 Courtaulds ting the company’s
announced its demcrgcr, splitchemicals and textiles businesses.
Total Returns to Shareholders
1981-85 1986-92
Figure
1. Vickcrs:
financial
RoCE 14% 16%
performance
ROE 14% 15%
Vickers 34% 6%
(averages)‘.’
Engineering General Sector 20% 12%
FTA AllShare Index 25% 16%
Strategies
and Styles
Revisited:
While its Strategic Control style had been effective in coping with Courtaulds’ diversity in the early 1980s when the critical issues were improving performance and strategic competence within the businesses, Courtaulds had reached a level of diversity that was increasingly difficult to manage. Courtaulds’ board had been considering a demerger since 1985. The company argued that as the textiles and chemical businesses had different key success factors and different customers, markets and technologies, there was no logic in keeping the businesses together.lh Sipko Huismans, now the CEO of the new Courtaulds, has explained that the old Courtaulds had become too complex: ‘It was a board meeting in 1989 which showed how ridiculous it had become. On the table was a proposal from the textiles people to buy a French lace company-and to buy a California aerospace from coatings business.“’ The demerger was widely applauded in the City at the time, and has benefited both businesses. Sipko Huismans has espoused a strategy for the new Courtaulds based on building up its high-margin, international speciality materials businesses and exploiting its new cellulose fibre, Tencel. The portfolio has been further rationalized, with Courtaulds restructuring its acrylic fibre business, selling off its polyethylene films business and exiting from carbon fibres. The company has performed well through the recession, raising pre-tax profits by eight per cent in 1991/92. Courtaulds Textiles has been affected by lower consumer demand because of the recession and the weak dollar, but CEO Martin Taylor also reported a slight rise in pm-tax profits for the first half of 1992. The share prices of both have substantially outperformed the companies FTA-All Share Index since the demerger. ICI has faced challenges similar to those at Courtaulds: finding more effective ways of managing a very diverse portfolio. Under Sir John HarveyJones’ leadership in the early 198Os, ICI underwent a remarkable turnaround in financial performance. Throughout the decade, ICI refocused its portfolio, getting out of peripheral businesses such as its oil and
Courtaulds:
financial
performance
‘Strategic
1981-85 1986-92
Courtaulds
Textiles:
ROE 14% 28%
financial
we had quite an exercise in the 1990 budget meetings. We said that we would accept the divisional managers’ budgets for 1990, but said that we would agree only if the business units were sure of achieving targets. We thought that their beliefin getting higher prices and volumes was not achievable.” As the world economy slowed down, many of ICI’s businesses missed their targets. ICI did not have the resources to fund all its businesses’ ambitious strategies and, in late 1990, the company announced cuts in its planned capital spending. ICI’s predicament was caused in part by the recession. But it also led to a reappraisal of the composition of ICI’s portfolio and the relationship between the centrc and the businesses. Sir Denys Henderson, following a corporate review in 1990, announced a restructuring programme to tackle both ICI’s weak performance and its managcmcnt problems. Henderson re-confirmed ICI’s strategy of focusing on higher value added businesses, but declared that ICI would be more selective in its growth strategies, only funding busincsscs with strong positions in global markets. Headquarters would review all businesses more closely, and business heads were to be held more strictly
(averages)
Courtaulds 39% 29%
1991-92
Figure
2
ROE 14%
Chemicals Sector 29% 17%
to Shareholders Textiles Sector 33% 19%
FTA AllShare Index 25% 16%
performance
Courtaulds Textiles 60%
57
At the same time, ICI’s commitment to grow its businesses led to problems. Divisional managers felt encouraged to grow and invest, but, according to ICI’s Finance Director, by 1989 a gulf had developed between the views of the divisions and those of the centre :
Total Returns
RoCE 16%
it Tenable?
and entering new higher growth gas interests, businesses, especially in speciality chemicals and materials. In 1986, ICI combined its bulk chemicals businesses into the Chemicals and Polymers group, and there was speculation that ICI would eventually get out of commodity chemicals altogcthcr, focusing on its higher growth businesses. ICI, however, did not move in this direction. Some analysts have argued that the strong performance of its basic chemicals businesses during the late 1980s encouraged ICI to put off decisions about the overall direction of the group.”
Total Returns
RoCE 17% 26%
Control’-is
to Shareholders
Textiles Sector 43%
FTA AllShare Index 21%
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Range
Planning
Vol.
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accountable for meeting strategic and financial objectives. Henderson also acknowledged that ties between the divisional heads and the ccntre needed to bc strengthened, to ensure that ICI’s executive team was fully informed about the divisional plans and that the business heads were aware of corporatclevel objectives and initiatives. He created a corporate level Perf‘ormancc and Policy committee, to include himself, main board directors and the business heads who would meet for quarterly revicws.z”
been under severe threat over the last three years and has substantially undcrperformcd. These results must raise questions about the underlying viability of the Strategic Control style, and whether it is a style that can add long-term value. The problems of the Strategic Control companies, however, seem to stem more from the composition of their portfolios than from the nature of the style itself. Plessey’s portfolio probably required a Strategic Planning style, and its Strategic Control style inhibited the strategies needed by its businesses. In the other companies, it has been less a problem of basic portfolio mismatch, and more an issue of excessive diversity.
Henderson thus moved towards a more ‘hands on’ Strategic Control style, with the ccntre taking a greater role in deciding which strategic initiatives to fund and imposing tighter controls on the busincsscs. The restructuring programme assumed an added urgency when Hanson took a 2.8 per cent stake in ICI in May 1771. ICI’s restructuring has reduced its workforce by 14,000. The company has closed down its loss-making fertilizer business, exited from advanced plastics, and agreed to sell its fibre business to 11~1 Pont for L250 million and 11~1 Pont’s acrylics business.
Companies with a Strategic Control style aim to add value to their businesses by balancing strategic and financial controls. The experiences of the Strategic Control companies show how difficult this is when a company’s portfolio is very diverse and its busincsscs face different strategic issues. If the ccntrc finds it hard to feel fully informed and on top of the strategies of its disparate businesses, there is a risk that it will come to focus too exclusively on shorter term financial targets, as happened at Imperial in the mid-1780s. Or, as occurred at ICI in the late 178Os, the strategies of the divisions and the views of the ccntrc may diverge too far. In either case, the ccntrc’s contribution to its businesses can be undermined.
Hanson sold its stake in ICI in May 1772, removing for the time being the threat ofa bid. But in July, ICI nevertheless announced the next stage of its rcstructuring: it would demerge, splitting bulk chemicals from its drugs and agrochcmicals businesses. The rationale was that the separate companies could more effectively address the different strategic issues facing them: the bulk chemicals businesses needed to restructure, while the pharmaceuticals, seeds, and speciality businesses need to grow to become more globally competitive.” ICI has thus reached the same conclusion as Courtaulds: to continue to add value to its businesses, it must limit its diversity.
The conclusions reached by Courtaulds and ICI were that they could not effectively add value to all of their businesses within a single corporate entity: hence the dcmergers. The demands of undcrstanding and management placed upon a Strategic Control corporate centrc that is attempting to parent a variety of different sorts of businesses seem too great. To add value with a Strategic Control style, it appears necessary that the businesses in the group share common strategic characteristics. Thus new Courtaulds can do a bcttcr job of adding value to its chemical businesses because it does not also have to worry about a quite different group of textile businesses.
Over the last six years, ICI’s financial ratios have improved compared with the period covered by Strntqies and Styles. However, the company’s profits dropped in 1770 and again in 1771, and analysts predict a further fall in 1772 after weak results in the first part ofthc year. Average returns to shareholders from 1786 to 1772 were below average for the chemical sector.
This is an important finding concerning the Stratcgic Control style, and its implications need to be examined carefully. It gives the lit to the belief, prevalent in many multi-business groups, that Strategic Control is a style that allow the ccntre to cope well with high diversity. The old idea that a
Since 1785, two of the five original Strategic Control companies (Imperial and Plcssey) have been taken over. Two more (Courtaulds and ICI) have demcrgcd. The remaining company, Vickers, has
ICI:
financial
performance
1773
(averages) Total Returns
1981-85 1986-92
Figure
3
RoCE 13% 18%
ROE 10% 15%
ICI 31% 14%
to Shareholders
Chemicals Sector 29% 17%
FTA AllShare Index 25% 16%
Strategies
and Styles Revisited:
with different folios?
decentralized structure, coupled with a modern budgetary and planning system, could allow a competent corporate management team to add value to almost any business fails to stand up. In reality, Strategic Control is a style that requires the corporate team to have a good feel, ideally grounded in personal experience, for all the businesses in the group. Many of the classic errors of corporate strategy have been made by Strategic Control companies that overlooked this requirement and believed that they could handle more diversity than was possible.
Aside from conclusions concerning the effectiveness of each style, what general conclusions emerge from the experience of the Strategies and Styles companies since 1987? In particular, how has recession tempered our understanding of the different styles? What can we learn about the ability of companies to change their styles? And how should companies
Cadbury Lex STC
Schweppes
SP SP SP
UB Courtaulds ICI Imperial Plessey Vickers BTR Ferranti GEC Hanson Tarmac
Figure
4. Changes
SP SC SC SC SC SC FC FC FC FC FC
in management
style
styles
it Tenable?
attempt
to build
59 their
port-
Changing Styles In Strategies and Styles it was argued that companies change their management styles seldom and with considerable difficulty. Exhibit 4 summarizes the style changes that have occurred since 1986. Ten companies out of sixteen maintained their style with no basic change. Of the six companies that changed style, four were reacting to a manifest crisis, and five made the move in association with a new chief executive and top management team. These observations seem to confirm that companics very rarely
General Conclusions
Style in 1986 SP SP
Control’-is
The Impact of Recession Strategies and Styles focused on the period 1981-85, during an upturn in the economy. Since 1990, the recession has affected all the companies in the study, although its impact has differed across industries and sectors. One of the consequences of the recession has been to force many of the companies to fact up to portfolio or performance problems which were more easily overlooked in buoyant economic times. Thus, the Strategic Control companies have aimed to limit their diversity, and several of the Strategic Planning companies have addressed long-standing problems of poor performance in parts of their portfolios. The recession has also brought about an increased divergence in performance between companies with sound corporate strategies that align their portfolios and their management styles, such as BTR, Hanson, Cadbury Schweppes, and Courtaulds, and companies which fail to match their portfolios with their styles or which fall into the classic pitfalls associated with each style. In this sense, the recession has simply sharpened the evidence that the effectiveness and the portfolio compatibility of a company’s management style is an important determinant of its success.
But the experiences of Courtaulds, ICI and Vickers do not suggest that a focus on a single business or industry is necessary to add value with a Strategic Control style. Both new Courtaulds and Courtaulds Textiles have within them many different businesses, as do the new ICI and Zeneca. The same could be said of Vickers’ specialist engineering businesses, even after its exits from office furniture and printing plates and, perhaps, from Rolls Royce. The need is not for a single business or even a closely related set of core businesses. It is for a group of businesses whose strategic characteristics are sufficiently homogeneous that the centre can have a good feel and understanding for each of them.*’
Company BOC BP
‘Strategic
Style changes since 1986 SC
Comments Move towards SC accelerated New CEO in 1989
by Project
1990.
new CEO after financial
crisis
FC
Move 1985 Move
to FC with towards
SC reinforced
ST? -
Move
towards
SP begun
SC -
Move
to SC after
SC
Move to SC after financial new CEO
SC -
by new
CEO in 1990
after GEC bid in 1986
ISC crisis,
under
in
new CEO
crisis in 1992
under
Long
Range
Planning
Vol.
26
December
introduce major change in management style, cxccpt as a result of a crisis or a change in top managcmcnt. There is very littlc cvidcncc that incumbent managcmcnts can bring about such changes as part of the regular managcmcnt process. It is necessary to rccognizc that management styles rcflcct deeply ingrained beliefs, biases and skills of the senior corporate managers, which change only slowly, if at all. Of the changes in style that occurred, four out of six involved a move towards Strategic Control. Given the portfolio and performance problems that the original Strategic Control companies have faced, it is intcrcsting that this style appears to have gained adherents. For companies moving away from Strategic Planning or Financial Control styles towards Strategic Control, it is essential that the style is chosen for positive reasons, and in the light of the requirements for making it a success, rather than as a compromise between the poles of Strategic Planning and Financial Control. Building the Portfolio The importance of building a portfolio of businesses that fits with a company’s management style emerges strongly from the cxpcricncc of the 16 companies during rcccnt years.‘” We have seen the difficulties faced by Financial Control companics that attempted to manage businesses which were unsuited to their style. Financial Control companies need to concentrate on businesses with relatively short term decisions, stable markets and mature technologies. Financial Control companies can add real value to a portfolio with many different businesses provided they share these features. WC have also obscrvcd that Strategic Planning companies encounter problems as they move outside those businesses that arc well understood and familiar to the corporate centre. A focus 011 one or two core business areas seems necessary for succcssful Strategic Planning companies. Finally, the tribulations of the Strategic Control companies have, as argued in this article, led us to conclude that Strategic Control companics need to bc cautious about their ability to manage a strategically diverse portfolio of businesses. The Strategic Control style works best for portfolios of businesses that have similar sorts of key success factors and face similar sorts of strategic issues.
1993 (4)
Simon Holberton, Still limbering Times, 18 Sept. (1991).
(5)
Strategies
(6)
Acquisitions (1988).
(7)
McKlnsey backs March (1989).
(8)
Charles Leadbeater, 3 July (1990).
(9)
Chairman’s statement at Vickers’ AGM, 23 April 1992; My best deal-Sir David Plastow, chairman of Vickers, Management Today, Feb., p. 112 (1991).
and Styles,
up for the big one,
pp. 105-l
06.
as part of a long-term
Plessey
valuables,
goal, Financial
against
A marriage
Financial
takeover,
Financial
of convenience,
Management
Times, 7 Sept
Financial
Vickers’ (1991).
(11)
Chairman’s
(12)
Devin Done, Rolls-Royce Times, 26127 September
(13)
See appendix 2 for the definition of the profitability ratios and returns to shareholders. ProfitabIlity ratios from Datastream; Returns to Shareholders from Risk Measurement Service (LBS).
(14)
Strategies
(15)
Profile (1988).
(16)
Tom Lloyd, A Divorce Made 23-29, pp. 22-25 (1990).
(17)
Margareta Pagano, expects much from (1992).
at Vtckers’
and Sty/es,
AGM,
June,
23 April
pp.
Times,
(IO)
statement
Today,
Times,
(1992).
drops plans for new model, (1992).
pp. 102-l
of Sir Christopher
48-51
Financial
03.
Hogg,
Sunday
in Heaven,
Telegraph,
Financial
21 Aug.
Week/y,
March
Two years after demerging Courtaulds the future, Sunday Telegraph, 22 March
(18)
Reshaping
(19)
Simon Holberton, In anticipation Times, 30 November (1990).
ICI, Economist,
(20)
Chnstopher Lorenz, The trick is to make even the bad times good, Financial Times, 4 March (1991); Malcolm Brown, Sir Denys Henderson-The nucleus of ICI, Management Today, April (1991).
(21)
Tony Jackson, Parts are greater than the whole, Financial 31 July (1992); Asunder, Economist, 1 August (1992).
(22)
This idea is explored further in Michael Goold and Andrew Campbell, Corporate Strategy and Parenting Skills, Ashridge Strategic Management Centre Working Paper, 1992. See also Michael Goold, Andrew Campbell and Marcus Alexander, Parenting Advantage, (forthcommg).
(23)
For a review of the Financial Control and Strategic Planning companies, see Michael Goold. Andrew Campbell and Kathleen Luchs, Strategies and Styles Revisited: Strategic Planning, Financial Control, long Range Planning, 26 (5) pp. 49-60 (1993).
(24)
Michael Goold Basil Blackwell,
Appendix
28 Apnl
and Andrew (1987).
(1990). of
a downturn,
Campbell,
Strategies
1. The strategies
Financial
Times,
and Sty/es,
and styles
framework In Strutqies Andrew
References (1)
how
Appendix 1 summarizes the basic management from Strategies and Styles.
(2)
Strategies
and Sty/es,
pp. 108-I
(3)
Strategies
and Sty/es,
p. 310.
09.
stylesframework
und Styles, Campbell
corporate
centres Research
companies.” processes
of
Campbell
to identify
of diversity, thcsc
published
prcscntcd
diffcrcnt
16 and
add into
major
value the
U.K.
different
to examine
strategic
in 1987,
Michael
a framework in
large,
managcmcnt
companies approaches the strengths
management
Goold
and
for understanding
styles.
divcrsifled styles
led
Goold
and and
to the management and
weaknesses
of
Strategies
and
Styles
Goold and Campbell identified three main styles: Strategic Planning, Financial Control and Strategic Control. Strategic Planning companies focus on a few core businesses with the centre actively participating in formulating strategies with the business units, aiming to help the businesses make better strategic decisions, and often initiating strategic thrusts among interrelated businesses. Financial Control companies, on the other hand, mainly delegate strategic decisions to profrtresponsible business unit managers, and the ccntre’s role is to agree and monitor demanding, short-term financial targets for the businesses. Strategic Control companies also have a strong commitment to decentralization and emphasize control against demanding targets for their businesses, but in addition they tend to have extensive strategic planning systems and processes, through which the centrc seeks to add value by reviewing, challenging and monitoring business level strategies. Goold and Campbell concluded that each style has strengths and weaknesses and that each could add value, but in different ways and to different types of businesses. A corporate centre adds value most easily when its style fits the conditions facing the businesses.
Revisited:
‘Strategic
Appendix
Control’-is
it Tenable?
61
2.
The financial ratios have been taken from Datastream, using the standard Datastream definitions. The charts arc based on simple averages of the yearly financial ratios and returns to shareholders. Return on Shareholders Equity (ROE) Datastrcam 701 Earned Equity
Capital
and Reserves
for Ordinary - Total
Return on Capital Employed 707 Total Total
Capital -Total
Total
Interest
Employed
Returns
Intangibles
(RoCE)
+ I’re-tax
+ Borrowings
Intangibles
Item
- Future
+ Deferred
Datastream
Tax
Item
Profit Repayable
Incomc
within
1 year
Tax Benefits
to Shareholders plus dividends
Share price appreciation These
have
(London
been
Business
taken
from
School).
Risk
Measurement
Service
Long Range Planning. Vol. 26, No. 5, pp. 54 to 61, 1993 Printed in Great Britain
Strategies and Styles Revisited: ‘Strategic Control’ is it Tenable? Michael
Goold,
Andrew
Campbell
arzd Kathleen
Developments in the companies described in Strategies and Styles in 1987 are updated to 1992, and the management styles framework is reviewed in the light of these experiences. Conclusions concerning the strengths and weaknesses of the Strategic Control style are reviewed, and fresh light is cast on the diversity of portfolios that it can manage effectively. The difficulty of changing style, except in a crisis, is confirmed. An earlier article in the October issue of Long Range Planning reviewed the Strategic Planning and Financial Control styles
In an article entitled Stv&qqics und Styles Revisited: Strategic Planning and Financial Control in October’s Long Range Planning (26:5, 4%60), WC: revisited the companies that Michael Goold and Andrew Campbell classified as following a Strategic Planning or Financial Control style in their 1987 book, Strategies and Styles. By updating the experiences of these we were able to test the management companies, style framework for Strategies and Styles, and to draw conclusions about the effectiveness of the Strategic Planning and Financial Control styles in different circumstances. The purpose of this article is to cxaminc the five Strategic Control companies from Strategies and Styles in a similar fashion, and to reflect upon the experiences of the 16 Strategies and Styles companies as a whole.’
Strategic
Control
Companies
Strategic Control companies combine some of the characteristics of the other two management styles. responsibility to profitSuch companies give responsible business unit managers and cmphasizc tight financial controls. But they arc also involved in business unit planning, with the ccntrc reviewing
Michael Goold and Andrew Fellows of Ashridge Strategic an Associate of the Centre.
Campbell are Founding Directors and Management Centre. Kathleen Luchs is
Luchs
and challenging business unit stratcgics and aiming to assess strategic as well as financial performance. The Strategic Control companies Goold and Camporiginally rcsearched~Impcria1, Plessey, bell Vickers, ICI, and Courtaulds-all had well devclopcd planning processes as well as strong financial controls. Each of thcsc companies had adopted a Strategic Control approach to their businesses in the late 1970s or early l%Ws, moving from a Centralized or a Holding Company style. The change to Strategic Control meant that, for previously centralized companics such as Courtaulds and Plessey, more responsibility was pushed down to the business units and there were efforts to improve strategic thinking at this level. In the other companies, which had more of a Holding Company approach, the shift to Strategic Control meant that the corporate ccntre exercised more control and influence over what had been highly independent divisions.’ The Strategic Control style appealed to most of these companies because it appeared to offer a way of managing a highly diverse portfolio of businesses. Rcsponsibility was pushed down to the business units, but the ccntrc retained overall control through the mechanisms of strategic planning and control. The Strategic Control emphasis on strong financial controls contributed to cost-cutting and also to decisions to exit from unprofitable businesses in these companies in the early 198Os, leading to impressive performance improvcmcnts. On avcrage, the profitability ratios (RoCE, ROE, RoS) of the Strategic Control companies improved far more than those for Financial Control or Strategic Planning companics bctwccn 1981 and 1985.’ But the Strategic Control companics still faced considerable challenges in the mid-1980s. Their overall perforniancc had improved, but on absolute measures of profitability they lagged behind the Strategic Planning and Financial Control groups of cornpanics. The key issue for these companies has been to cnsurc that their Strategic Control style continues to add value to their businesses.
Strategies
and Styles Revisited:
In the event, the later 1980s and early 1990s have not been easy years for the Strategic Control companies. Two of the companies, Imperial and Plessey, were taken over during the 1980s. The others-Courtaulds, ICI and Vickers-have faced the threat of takeover, and have moved to re-focus their portfolios substantially. Courtaulds has demergcd its chemicals and textiles businesses and ICI has demerged bulk chemicals from its pharmaceuticals, agrochemicals and specialist chemicals businesses. Vickers resisted a call to dcmerge Rolls Royce during the late 198Os, but the luxury car market has been hard hit by the recession in the early 199Os, and Vickers is now considering a range of options for the future of Rolls Royce. These developments have led us to reconsider the viability of the Strategic Control style. We have concluded that the style is tenable and can be successful, but that it is not, as suggested in Strategies and Styles, a good solution for companies faced with the problem of managing a diverse portfolio of businesses which do not share common strategic characteristics.
Takeovers:
Imperial
and Plessey
In Strategies and Styles, it was noted that while the Strategic Control style had helped Imperial’s busincsses in improving their margins and encouraged them to develop sound strategies, by the mid-1980s there were tensions within the company. Many of the businesses were more confident of their strategies and saw the planning process as bureaucratic rather than helpful. At the same time, the ccntrc appeared to focus increasingly on shorter-term financial objectives. A proposed merger with United Biscuits was challenged by some analysts as primarily a defensive move rather than a coherent strategy, and a counter-bid for the company from Hanson was successful. Hanson gained control of Imperial in 1986, following a takeover battle with United Biscuits. It has disposed of Imperial’s food, beer and restaurant businesses. Most of these businesses have been bought by companies with similar core businesses; thus Trusthouse Forte bought Imperial’s hotels, Elders bought the Courage brewing business, United Biscuits acquired Ross Young’s frozen foods. Hanson paid A2.5 billion for Imperial and has recovered A2.34 billion through disposing of all but Imperial Tobacco and Seven Seas health products.’ Plessey, too, found itself in a precarious position in the mid-1980s, with an unwelcome bid from GEC in 1985. Plessey held onto its independence when the Monopolies and Mergers Commission ruled against the takeover, but this reprieve did not overcome Plessey’s vulnerability. Strategies und Styles argued that Plessey’s commitment to decentralization was not well suited to coping with the competitive Pressures it faced as telecoms became an increasingly global business, and strong financial controls appeared to be encouraging some of Plessey’s
‘Strategic
Control’-is
it Tenable?
55
businesses to focus on shorter-term performance to the detriment of longer-term strategic objcctivcs.’ The threat from GEC, however, helped provide the impetus for Plessey to tackle its problems. Most telecommunications business notably, Plesscy’s -accounting for almost half of the group’s salcswas merged with that of GEC in 1988 through the joint venture GPT. This alliance aimed to create a company with enough scale to compete effectively in world markets. Plcsscy also made a series of acquisitions, including North American defense companies, Ferranti’s microchip business and Hoskyns, a computer service group. Sir John Clark articulated an overall strategy for the company: Plcsscy would build a portfolio of businesses which had complementary and increasingly interdependent technologies.” The strategy defined by Clark hinged on close co-ordination across interrelated divisions-a substantial change for Plessey’s hitherto autonomous divisions. While some commentators concluded that Plcssey was unlikely to succeed in its new strategy, others argued that Plessey was indeed committed to such changes, noting that the company was, ‘moving away from its system of running %()-odd businesses in a very devolved manner to one that will establish greater corporate cohcrencc’.’ But before the new strategy and style had had time to be tested, GEC and Sicmcns launched a joint bid for Plcsscy. Plcssey countered by joining a consortium which considered bidding for and breaking up GEC, but this effort collapsed and GEC/Siemcns gained control of Plessey for A2 billion in 1989. Since the takeover, Plessey’s busincsscs have largely been divided among Siemens and GEC, although the telecommunications business GPT is jointly owned by the two companies.’ Imperial’s proposed mcrgcr with United Biscuits and Plessey’s joint venture in tclccommunications and its efforts to make its portfolio more coherent represented major initiatives to deal with the strategic problems they faced, but, in both cases, occurred too late to stave off takeover. The other Strategic Control companics-Vickcrs, ICI, and Courtaulds-have avoided takeovers, but each of these companies has had to undertake major portfolio re-focusing in order to build on the achievements of the early 1980s.
Portfolio
Re-Focus:
Vickers
Vickers has continued to re-focus its portfolio over the last five years, with Sir David Plastow aiming to provide more coherence to the group. The company sold its office furniture business in 1988, but it was the sale of Howson-Algraphy in 1989 that had the biggest impact on the portfolio. The printing plates business was one of Vickers’ largest and most profitable, but it was also confronting increasing competition from its larger and more international competitor, Du Pont. Vickcrs concluded that
56
Long
Range
Planning
Vol.
26
December
shareholder value was best served by selling business to IIu Pont, and Sir David Plastow identified the sale as his most successful deal.”
the has
Vickcrs used the cash from this deal to acquire Ross Cathcrall, a superalloys manufacturer; Cosworth, an auto engine specialist; and Riva, an Italian luxury powerboat maker. These acquisitions reinforced Vickcrs’ focus on specialist cngincering, with nonmilitary businesses balancing its traditional dcfencc strengths. Vickcrs has also identified some opportunities for co-operation across its divisions, citing the potential for Riva to benefit from Rolls Royce’s marketing cxpcrtisc and encouraging the exchange of technical expertise across divisions.‘” These initiatives still seem tentative, but certainly Vickcrs’ more focused portfolio should make it casicr to pursue such opportunities. The question of Rolls Royce, however, has bccomc increasingly critical to Vickers’ future. Rolls Royce was the most profitable part of Vickcrs in the mid198Os, but there wcrc also doubts about whether the famous car maker could continue to prosper within Vickcrs. The group did not have other automotive interests, and although it idcntificd opportunities to exploit Rolls Royce’s marketing and cngincering expertise in its other divisions, the benefits Rolls Royce gained by Vickcrs’ ownership were less clear. The logic applied to Howson-Algraphy-that the business was worth more to another owner than it was within Vickcrs-seemed to some observers to apply equally to Rolls Royce, and Vickers came under pressure to sell the business. In the late 1%Os, Sir Ron Bricrlcy, with a 20 per cent stake in Vickers, called for the dcmcrgcr of Rolls Royce. Sir David Plastow strongly defended Vickcrs’ ownership of Rolls Royce, citing not only the business’s high profitability but also its fit within Vickers’ portfolio. Bricrlcy’s motion for a demcrgcr was defeated in 1990 at the sharcholdcrs meeting, and Brierlcy sold off his stake in Vickers in early 1991. This proved to be a hollow victory for Vickers. With the recession, sales of luxury cars dropped dramatically, and losses at Rolls Royce have had a severe impact on Vickcrs’ performance, plunging the company into losses in 1991. Thcrc has been stringent cost-cutting at Rolls Royce, and the workforcc has been rcduccd by more than half, but these measures have not been enough to compensate for the lack of sales. These events have undermined Vickcrs’ confidcncc that Rolls Royce does fit well
1993 within its portfolio-but also limited the options available to Vickcrs in resolving this issue. While Vickers has had talks with other car manufacturers, no agreement has been rcachcd. In April 1992, at his last shareholders’ meeting before retirement, Sir David Plastow reassured shareholders that Vickers was continuing to cxplorc all options regarding Rolls Royce, but at present it continued to have more long-term value as part of Vickers.” Rolls Royce’s future, however, looks increasingly bleak. In September 1992, Vickers announced that dcvelopment work on new models would bc postponed indefinitely.” Vickers’ efforts to build a more coherent portfolio, and to find ways of exploiting expertise across its businesses, have thus been overshadowed by its problems with Rolls Royce. In 1991, Vickcrs had a prc-tax loss of Al2.4m. Although Vickcrs’ pcrformance improved substantially from 1986-1991, compared with the period covered by Strate$es and Srylcs, the company’s future seems uncomfortably dependent on whcthcr it can find a buyer or partner for Rolls Royce.
Demeyers: Cowtaulds and ICI Courtaulds, under Sir Christopher Hogg’s leadership, has been able to capitalize on the strengths of its Strategic Control style. In the early 198Os, the emphasis on tight controls and rationalization led to improved performance, and most managers also belicvcd that the company’s strategic decisionmaking process had improved.‘” The very success of these efforts, though, raised other issues. As strategic compctcncc at the business lcvcl improved, the contribution of the centre and the planning process potentially became less important. At the same time, the demands on the centre were increasing as Courtaulds moved into new areas. In the later 198Os, the company aimed to reduce its exposure to cyclical commodity businesses and incrcasc its participation in growing niche markets. It divcstcd its dissolving pulp business and made a series of acquisitions, including Porter Paints in the U.S., and specialist film companies Martin Processing and Gila River Products also in the U.S. These businesses provided Courtaulds with better opportunities for growth, but they also increased the group’s diversity and therefore made the role of the centrc more complcx.‘i In 1989 Courtaulds ting the company’s
announced its demcrgcr, splitchemicals and textiles businesses.
Total Returns to Shareholders
1981-85 1986-92
Figure
1. Vickcrs:
financial
RoCE 14% 16%
performance
ROE 14% 15%
Vickers 34% 6%
(averages)‘.’
Engineering General Sector 20% 12%
FTA AllShare Index 25% 16%
Strategies
and Styles
Revisited:
While its Strategic Control style had been effective in coping with Courtaulds’ diversity in the early 1980s when the critical issues were improving performance and strategic competence within the businesses, Courtaulds had reached a level of diversity that was increasingly difficult to manage. Courtaulds’ board had been considering a demerger since 1985. The company argued that as the textiles and chemical businesses had different key success factors and different customers, markets and technologies, there was no logic in keeping the businesses together.lh Sipko Huismans, now the CEO of the new Courtaulds, has explained that the old Courtaulds had become too complex: ‘It was a board meeting in 1989 which showed how ridiculous it had become. On the table was a proposal from the textiles people to buy a French lace company-and to buy a California aerospace from coatings business.“’ The demerger was widely applauded in the City at the time, and has benefited both businesses. Sipko Huismans has espoused a strategy for the new Courtaulds based on building up its high-margin, international speciality materials businesses and exploiting its new cellulose fibre, Tencel. The portfolio has been further rationalized, with Courtaulds restructuring its acrylic fibre business, selling off its polyethylene films business and exiting from carbon fibres. The company has performed well through the recession, raising pre-tax profits by eight per cent in 1991/92. Courtaulds Textiles has been affected by lower consumer demand because of the recession and the weak dollar, but CEO Martin Taylor also reported a slight rise in pm-tax profits for the first half of 1992. The share prices of both have substantially outperformed the companies FTA-All Share Index since the demerger. ICI has faced challenges similar to those at Courtaulds: finding more effective ways of managing a very diverse portfolio. Under Sir John HarveyJones’ leadership in the early 198Os, ICI underwent a remarkable turnaround in financial performance. Throughout the decade, ICI refocused its portfolio, getting out of peripheral businesses such as its oil and
Courtaulds:
financial
performance
‘Strategic
1981-85 1986-92
Courtaulds
Textiles:
ROE 14% 28%
financial
we had quite an exercise in the 1990 budget meetings. We said that we would accept the divisional managers’ budgets for 1990, but said that we would agree only if the business units were sure of achieving targets. We thought that their beliefin getting higher prices and volumes was not achievable.” As the world economy slowed down, many of ICI’s businesses missed their targets. ICI did not have the resources to fund all its businesses’ ambitious strategies and, in late 1990, the company announced cuts in its planned capital spending. ICI’s predicament was caused in part by the recession. But it also led to a reappraisal of the composition of ICI’s portfolio and the relationship between the centrc and the businesses. Sir Denys Henderson, following a corporate review in 1990, announced a restructuring programme to tackle both ICI’s weak performance and its managcmcnt problems. Henderson re-confirmed ICI’s strategy of focusing on higher value added businesses, but declared that ICI would be more selective in its growth strategies, only funding busincsscs with strong positions in global markets. Headquarters would review all businesses more closely, and business heads were to be held more strictly
(averages)
Courtaulds 39% 29%
1991-92
Figure
2
ROE 14%
Chemicals Sector 29% 17%
to Shareholders Textiles Sector 33% 19%
FTA AllShare Index 25% 16%
performance
Courtaulds Textiles 60%
57
At the same time, ICI’s commitment to grow its businesses led to problems. Divisional managers felt encouraged to grow and invest, but, according to ICI’s Finance Director, by 1989 a gulf had developed between the views of the divisions and those of the centre :
Total Returns
RoCE 16%
it Tenable?
and entering new higher growth gas interests, businesses, especially in speciality chemicals and materials. In 1986, ICI combined its bulk chemicals businesses into the Chemicals and Polymers group, and there was speculation that ICI would eventually get out of commodity chemicals altogcthcr, focusing on its higher growth businesses. ICI, however, did not move in this direction. Some analysts have argued that the strong performance of its basic chemicals businesses during the late 1980s encouraged ICI to put off decisions about the overall direction of the group.”
Total Returns
RoCE 17% 26%
Control’-is
to Shareholders
Textiles Sector 43%
FTA AllShare Index 21%
58
Long
Range
Planning
Vol.
26
December
accountable for meeting strategic and financial objectives. Henderson also acknowledged that ties between the divisional heads and the ccntre needed to bc strengthened, to ensure that ICI’s executive team was fully informed about the divisional plans and that the business heads were aware of corporatclevel objectives and initiatives. He created a corporate level Perf‘ormancc and Policy committee, to include himself, main board directors and the business heads who would meet for quarterly revicws.z”
been under severe threat over the last three years and has substantially undcrperformcd. These results must raise questions about the underlying viability of the Strategic Control style, and whether it is a style that can add long-term value. The problems of the Strategic Control companies, however, seem to stem more from the composition of their portfolios than from the nature of the style itself. Plessey’s portfolio probably required a Strategic Planning style, and its Strategic Control style inhibited the strategies needed by its businesses. In the other companies, it has been less a problem of basic portfolio mismatch, and more an issue of excessive diversity.
Henderson thus moved towards a more ‘hands on’ Strategic Control style, with the ccntre taking a greater role in deciding which strategic initiatives to fund and imposing tighter controls on the busincsscs. The restructuring programme assumed an added urgency when Hanson took a 2.8 per cent stake in ICI in May 1771. ICI’s restructuring has reduced its workforce by 14,000. The company has closed down its loss-making fertilizer business, exited from advanced plastics, and agreed to sell its fibre business to 11~1 Pont for L250 million and 11~1 Pont’s acrylics business.
Companies with a Strategic Control style aim to add value to their businesses by balancing strategic and financial controls. The experiences of the Strategic Control companies show how difficult this is when a company’s portfolio is very diverse and its busincsscs face different strategic issues. If the ccntrc finds it hard to feel fully informed and on top of the strategies of its disparate businesses, there is a risk that it will come to focus too exclusively on shorter term financial targets, as happened at Imperial in the mid-1780s. Or, as occurred at ICI in the late 178Os, the strategies of the divisions and the views of the ccntrc may diverge too far. In either case, the ccntrc’s contribution to its businesses can be undermined.
Hanson sold its stake in ICI in May 1772, removing for the time being the threat ofa bid. But in July, ICI nevertheless announced the next stage of its rcstructuring: it would demerge, splitting bulk chemicals from its drugs and agrochcmicals businesses. The rationale was that the separate companies could more effectively address the different strategic issues facing them: the bulk chemicals businesses needed to restructure, while the pharmaceuticals, seeds, and speciality businesses need to grow to become more globally competitive.” ICI has thus reached the same conclusion as Courtaulds: to continue to add value to its businesses, it must limit its diversity.
The conclusions reached by Courtaulds and ICI were that they could not effectively add value to all of their businesses within a single corporate entity: hence the dcmergers. The demands of undcrstanding and management placed upon a Strategic Control corporate centrc that is attempting to parent a variety of different sorts of businesses seem too great. To add value with a Strategic Control style, it appears necessary that the businesses in the group share common strategic characteristics. Thus new Courtaulds can do a bcttcr job of adding value to its chemical businesses because it does not also have to worry about a quite different group of textile businesses.
Over the last six years, ICI’s financial ratios have improved compared with the period covered by Strntqies and Styles. However, the company’s profits dropped in 1770 and again in 1771, and analysts predict a further fall in 1772 after weak results in the first part ofthc year. Average returns to shareholders from 1786 to 1772 were below average for the chemical sector.
This is an important finding concerning the Stratcgic Control style, and its implications need to be examined carefully. It gives the lit to the belief, prevalent in many multi-business groups, that Strategic Control is a style that allow the ccntre to cope well with high diversity. The old idea that a
Since 1785, two of the five original Strategic Control companies (Imperial and Plcssey) have been taken over. Two more (Courtaulds and ICI) have demcrgcd. The remaining company, Vickers, has
ICI:
financial
performance
1773
(averages) Total Returns
1981-85 1986-92
Figure
3
RoCE 13% 18%
ROE 10% 15%
ICI 31% 14%
to Shareholders
Chemicals Sector 29% 17%
FTA AllShare Index 25% 16%
Strategies
and Styles Revisited:
with different folios?
decentralized structure, coupled with a modern budgetary and planning system, could allow a competent corporate management team to add value to almost any business fails to stand up. In reality, Strategic Control is a style that requires the corporate team to have a good feel, ideally grounded in personal experience, for all the businesses in the group. Many of the classic errors of corporate strategy have been made by Strategic Control companies that overlooked this requirement and believed that they could handle more diversity than was possible.
Aside from conclusions concerning the effectiveness of each style, what general conclusions emerge from the experience of the Strategies and Styles companies since 1987? In particular, how has recession tempered our understanding of the different styles? What can we learn about the ability of companies to change their styles? And how should companies
Cadbury Lex STC
Schweppes
SP SP SP
UB Courtaulds ICI Imperial Plessey Vickers BTR Ferranti GEC Hanson Tarmac
Figure
4. Changes
SP SC SC SC SC SC FC FC FC FC FC
in management
style
styles
it Tenable?
attempt
to build
59 their
port-
Changing Styles In Strategies and Styles it was argued that companies change their management styles seldom and with considerable difficulty. Exhibit 4 summarizes the style changes that have occurred since 1986. Ten companies out of sixteen maintained their style with no basic change. Of the six companies that changed style, four were reacting to a manifest crisis, and five made the move in association with a new chief executive and top management team. These observations seem to confirm that companics very rarely
General Conclusions
Style in 1986 SP SP
Control’-is
The Impact of Recession Strategies and Styles focused on the period 1981-85, during an upturn in the economy. Since 1990, the recession has affected all the companies in the study, although its impact has differed across industries and sectors. One of the consequences of the recession has been to force many of the companies to fact up to portfolio or performance problems which were more easily overlooked in buoyant economic times. Thus, the Strategic Control companies have aimed to limit their diversity, and several of the Strategic Planning companies have addressed long-standing problems of poor performance in parts of their portfolios. The recession has also brought about an increased divergence in performance between companies with sound corporate strategies that align their portfolios and their management styles, such as BTR, Hanson, Cadbury Schweppes, and Courtaulds, and companies which fail to match their portfolios with their styles or which fall into the classic pitfalls associated with each style. In this sense, the recession has simply sharpened the evidence that the effectiveness and the portfolio compatibility of a company’s management style is an important determinant of its success.
But the experiences of Courtaulds, ICI and Vickers do not suggest that a focus on a single business or industry is necessary to add value with a Strategic Control style. Both new Courtaulds and Courtaulds Textiles have within them many different businesses, as do the new ICI and Zeneca. The same could be said of Vickers’ specialist engineering businesses, even after its exits from office furniture and printing plates and, perhaps, from Rolls Royce. The need is not for a single business or even a closely related set of core businesses. It is for a group of businesses whose strategic characteristics are sufficiently homogeneous that the centre can have a good feel and understanding for each of them.*’
Company BOC BP
‘Strategic
Style changes since 1986 SC
Comments Move towards SC accelerated New CEO in 1989
by Project
1990.
new CEO after financial
crisis
FC
Move 1985 Move
to FC with towards
SC reinforced
ST? -
Move
towards
SP begun
SC -
Move
to SC after
SC
Move to SC after financial new CEO
SC -
by new
CEO in 1990
after GEC bid in 1986
ISC crisis,
under
in
new CEO
crisis in 1992
under
Long
Range
Planning
Vol.
26
December
introduce major change in management style, cxccpt as a result of a crisis or a change in top managcmcnt. There is very littlc cvidcncc that incumbent managcmcnts can bring about such changes as part of the regular managcmcnt process. It is necessary to rccognizc that management styles rcflcct deeply ingrained beliefs, biases and skills of the senior corporate managers, which change only slowly, if at all. Of the changes in style that occurred, four out of six involved a move towards Strategic Control. Given the portfolio and performance problems that the original Strategic Control companies have faced, it is intcrcsting that this style appears to have gained adherents. For companies moving away from Strategic Planning or Financial Control styles towards Strategic Control, it is essential that the style is chosen for positive reasons, and in the light of the requirements for making it a success, rather than as a compromise between the poles of Strategic Planning and Financial Control. Building the Portfolio The importance of building a portfolio of businesses that fits with a company’s management style emerges strongly from the cxpcricncc of the 16 companies during rcccnt years.‘” We have seen the difficulties faced by Financial Control companics that attempted to manage businesses which were unsuited to their style. Financial Control companies need to concentrate on businesses with relatively short term decisions, stable markets and mature technologies. Financial Control companies can add real value to a portfolio with many different businesses provided they share these features. WC have also obscrvcd that Strategic Planning companies encounter problems as they move outside those businesses that arc well understood and familiar to the corporate centre. A focus 011 one or two core business areas seems necessary for succcssful Strategic Planning companies. Finally, the tribulations of the Strategic Control companies have, as argued in this article, led us to conclude that Strategic Control companics need to bc cautious about their ability to manage a strategically diverse portfolio of businesses. The Strategic Control style works best for portfolios of businesses that have similar sorts of key success factors and face similar sorts of strategic issues.
1993 (4)
Simon Holberton, Still limbering Times, 18 Sept. (1991).
(5)
Strategies
(6)
Acquisitions (1988).
(7)
McKlnsey backs March (1989).
(8)
Charles Leadbeater, 3 July (1990).
(9)
Chairman’s statement at Vickers’ AGM, 23 April 1992; My best deal-Sir David Plastow, chairman of Vickers, Management Today, Feb., p. 112 (1991).
and Styles,
up for the big one,
pp. 105-l
06.
as part of a long-term
Plessey
valuables,
goal, Financial
against
A marriage
Financial
takeover,
Financial
of convenience,
Management
Times, 7 Sept
Financial
Vickers’ (1991).
(11)
Chairman’s
(12)
Devin Done, Rolls-Royce Times, 26127 September
(13)
See appendix 2 for the definition of the profitability ratios and returns to shareholders. ProfitabIlity ratios from Datastream; Returns to Shareholders from Risk Measurement Service (LBS).
(14)
Strategies
(15)
Profile (1988).
(16)
Tom Lloyd, A Divorce Made 23-29, pp. 22-25 (1990).
(17)
Margareta Pagano, expects much from (1992).
at Vtckers’
and Sty/es,
AGM,
June,
23 April
pp.
Times,
(IO)
statement
Today,
Times,
(1992).
drops plans for new model, (1992).
pp. 102-l
of Sir Christopher
48-51
Financial
03.
Hogg,
Sunday
in Heaven,
Telegraph,
Financial
21 Aug.
Week/y,
March
Two years after demerging Courtaulds the future, Sunday Telegraph, 22 March
(18)
Reshaping
(19)
Simon Holberton, In anticipation Times, 30 November (1990).
ICI, Economist,
(20)
Chnstopher Lorenz, The trick is to make even the bad times good, Financial Times, 4 March (1991); Malcolm Brown, Sir Denys Henderson-The nucleus of ICI, Management Today, April (1991).
(21)
Tony Jackson, Parts are greater than the whole, Financial 31 July (1992); Asunder, Economist, 1 August (1992).
(22)
This idea is explored further in Michael Goold and Andrew Campbell, Corporate Strategy and Parenting Skills, Ashridge Strategic Management Centre Working Paper, 1992. See also Michael Goold, Andrew Campbell and Marcus Alexander, Parenting Advantage, (forthcommg).
(23)
For a review of the Financial Control and Strategic Planning companies, see Michael Goold. Andrew Campbell and Kathleen Luchs, Strategies and Styles Revisited: Strategic Planning, Financial Control, long Range Planning, 26 (5) pp. 49-60 (1993).
(24)
Michael Goold Basil Blackwell,
Appendix
28 Apnl
and Andrew (1987).
(1990). of
a downturn,
Campbell,
Strategies
1. The strategies
Financial
Times,
and Sty/es,
and styles
framework In Strutqies Andrew
References (1)
how
Appendix 1 summarizes the basic management from Strategies and Styles.
(2)
Strategies
and Sty/es,
pp. 108-I
(3)
Strategies
and Sty/es,
p. 310.
09.
stylesframework
und Styles, Campbell
corporate
centres Research
companies.” processes
of
Campbell
to identify
of diversity, thcsc
published
prcscntcd
diffcrcnt
16 and
add into
major
value the
U.K.
different
to examine
strategic
in 1987,
Michael
a framework in
large,
managcmcnt
companies approaches the strengths
management
Goold
and
for understanding
styles.
divcrsifled styles
led
Goold
and and
to the management and
weaknesses
of
Strategies
and
Styles
Goold and Campbell identified three main styles: Strategic Planning, Financial Control and Strategic Control. Strategic Planning companies focus on a few core businesses with the centre actively participating in formulating strategies with the business units, aiming to help the businesses make better strategic decisions, and often initiating strategic thrusts among interrelated businesses. Financial Control companies, on the other hand, mainly delegate strategic decisions to profrtresponsible business unit managers, and the ccntre’s role is to agree and monitor demanding, short-term financial targets for the businesses. Strategic Control companies also have a strong commitment to decentralization and emphasize control against demanding targets for their businesses, but in addition they tend to have extensive strategic planning systems and processes, through which the centrc seeks to add value by reviewing, challenging and monitoring business level strategies. Goold and Campbell concluded that each style has strengths and weaknesses and that each could add value, but in different ways and to different types of businesses. A corporate centre adds value most easily when its style fits the conditions facing the businesses.
Revisited:
‘Strategic
Appendix
Control’-is
it Tenable?
61
2.
The financial ratios have been taken from Datastream, using the standard Datastream definitions. The charts arc based on simple averages of the yearly financial ratios and returns to shareholders. Return on Shareholders Equity (ROE) Datastrcam 701 Earned Equity
Capital
and Reserves
for Ordinary - Total
Return on Capital Employed 707 Total Total
Capital -Total
Total
Interest
Employed
Returns
Intangibles
(RoCE)
+ I’re-tax
+ Borrowings
Intangibles
Item
- Future
+ Deferred
Datastream
Tax
Item
Profit Repayable
Incomc
within
1 year
Tax Benefits
to Shareholders plus dividends
Share price appreciation These
have
(London
been
Business
taken
from
School).
Risk
Measurement
Service