THE PRACTISE OF TOP MANAGEMENT

PART FOUR

THE EFFECTS OF TRANSACTIONAL AND NURTURING PHILOSOPHIES

In the previous section, we contrasted two different philosophies of running businesses. We made the contrasts quite sharp, because we believe that, whilst there may be many variations of the two philosophies, there are only two basic choices available to managers - to develop a business using predominantly transactional means, or to build it from the 'inside', by concentrating primarily on investment in product, marketing, people and organisation. We did however comment that adopting a nurturing or 'Building' style allowed for the use of transactional strategies, whilst he opposite was not the case. To illustrate what we mean - BP made a massive transactional move when it acquired Amoco. It seems that this acquisition has been very successful, thus justifying a transactional strategy. But, what is seldom pointed out is that BP had previously concentrated on building a very strong organisational platform, with a distinctive high-performance culture for at least ten years before the acquisition. Dick Olver, a recently retired BP director, is convinced that the assimilation of Amoco would not have been successful were it not for the priority given to building a really strong and distinctive organisation, capable of absorbing another company efficiently.

So, what are the consequences of adopting the two philosophies?

We will start with Transactional Strategies.
In 1993, Robert Napier, who had recently been appointed CEO of Redland plc, a company that had grown rapidly through the 1980's and early 1990's through a stream of acquisitions, called a conference of senior managers from Redland's businesses across the world. The conference was convened at a critical time, as the company had just acquired Steetley plc, a major competitor, and Napier was aware that attempting to raise more money from the markets would be difficult before the benefits of the many acquisitions were demonstrated to the market. So, no more deals.

In his opening address, he asserted that the Steetley acquisition had marked Redland's coming of age, as it had moved into the top 50 British companies, with a market capitalisation that far exceeded its industry competitors. Redland, stated Napier, had "A great collection of assets across the world", dominant shares in many markets, its top management were widely respected where it mattered and the company enjoyed strong support from the financial community.

The assembled managers, most of whom were non-British and drawn from Redland's operations across the world, were asked to give the executive board feedback on what they thought of the company and what they saw as the priorities.

Napier and his corporate colleagues were shocked by the results.

The managers said:

• The executive was dominated by its desires to please the financial markets, resulting in inconsistency of strategy, stop-go (under) investment and buying and selling assets in an apparently random fashion.
• They did not trust top management to consider their interests when making decisions
• Top management were essentially financial in their skills and did not really understand the businesses they were in.
• Last, but not least, top managers were not really bonded with the organisation and were elitist and somewhat aloof.

It is to Robert Napier's credit that he understood and took seriously what his managers said and initiated extensive programmes aimed at building an organisation that could generate decent returns from the acquisitions. Unfortunately for Redland, it was too late. The consequences of ill-judged and over-priced acquisitions together with a weak organisation were too much to overcome. Performance deteriorated, investor support rapidly evaporated and Redland was acquired by a French company.

The point of this story? That it is typical of the effects of adopting transaction-led strategies.
Let us examine why. Strategies that are primarily transactional are based on the assumption that the value of a business lies in its assets.
'Assets' include market shares, intellectual property, physical property, financial assets and other tangibles that are capable of having a value placed on them. This makes people a rather dubious asset - their costs can be accurately measured, but their potentials cannot.

The primary means of increasing the value of an enterprise is to increase the value of its assets, and the most straightforward way of doing this is to buy and sell them. Companies, and there are many, that follow this philosophy will be very active in the M&A markets, will constantly shuffle and change their portfolio of businesses, and will tend to be impatient for results - thus frequently buying and disposing of senior people.
Well-executed transactional strategies will grow the value of enterprises over quite long periods, as the stories of Hanson Trust, Tyco, World Com, Redland and many, many others will tell.
Poorly conceived and badly executed transactional strategies can still draw enthusiastic support from investors, provided that the economic climate is bullish and companies have a convincing tale to tell. See Enron, Marconi and Invensys. The only real difference between well and badly executed transactional strategies is that the underlying results will become evident sooner.

But, in either case, companies that rely on predominantly transactional strategies will have the worm of their own destruction in their entrails. Understanding this fundamental fact may be helped by considering the case of one of Britain's most praised companies, Hanson Trust. Hanson was the darling of the financial markets and press. The deal-making abilities of Lords Hanson and White were legendary. Hanson bought and sold assets that were slackly managed and extracted the last vestiges of juice by stringent financial control. Acquisition followed acquisition and the share price soared. Only a few small voices commented that the performance of acquired businesses followed a pattern - profits and cash flow initially soared, but after a few years peaked and declined. The small and mainly ignored voices postulated that the reasons for decline were a lack of investment.

Hanson's fall from grace was quite sudden. The company was limited to the US and Britain, its approach to business was unacceptable in continental Europe - asset stripping was not popular there. Hanson obviously needed bigger and bigger acquisitions to hide the underperformance of those already made and the 'big one' was ICI, which was rightly postulated to be a rather slackly managed collection of very different businesses. So Hanson made a tilt at ICI and failed, at which point the worm in its entrails became apparent. The group made a weak attempt to persuade the world that it was committed to some 'core businesses', but hardly sounded convincing. So, Hanson broke itself up, and is now a medium-sized brick, concrete and aggregate company.

So, we would strongly maintain that whilst transaction-led strategies may result in the collection of very valuable assets, the underlying value of companies pursuing this route as their primary means of developing will inevitably decline over time.
The reason for this is glaringly obvious - assets are inert, inanimate collections of property. What gives companies life and long-term value is committed, skilful and purposeful human activity, pursued through a well-founded organisation. And this has to be built, developed and nurtured, it cannot simply be bought.

Nurturance and Business-Building

So we come to the other basic philosophy, that businesses will be strongest if they are built over relatively long timescales. The building process requires dedicated attention to developing an organisation that is designed for its particular purpose - that has quality business processes, an adaptive and distinctive culture, in which there is a close community of purpose between leaders and led. Business-building also requires a priority to be placed on investment to develop and maintain a strong product/service base and close relationships with customers. The essential difference between the two philosophies is that building starts from the inside, focuses on progressive investment in people product and customer service, and organisations that pursue such philosophies will resort to transactional methods as a secondary means of business development.

The problems with the building philosophy are that it requires patience and skilful, dedicated leadership and that most of the work of top managers is relatively invisible to outsiders, as it is concerned with internal and customer relationships. To those who prefer deals and other forms of exciting action, such a style is boring.

Badly executed, building strategies will result in over-conservative, relatively inflexible organisations that are insensitive to their external environments.

Well-executed building strategies have produced all of the capitalist world's greatest and most durable industrial, commercial and financial enterprises.
These companies will contain skills that are not replicable, unusual combinations of capability that will produce premium and increasing value for customers and eventually, shareholders.

Such companies do not need to fall victim to the processes of 'creative destruction' beloved of some capitalist theoreticians, they can live, adapt and grow over long periods of time.

These convictions are not just our foibles, serious research into the roots of business success by Porras and Collins, Lorsch and Donaldson, Mintzberg and the core competence promoters such as Hamel, Prahalad, Doz and Bartlett are well worth investigating.

So why are transactional strategies so attractive? Simply because they are:

• Exciting, producing many dramas played out by such larger than life characters as Philip Green, Lords Hanson and White, Jim Slater and the wonderfully named Al 'Chainsaw' Dunlap. Such people are worthy successors to maurading Vikings, with nicknames such as Skullsplitter, Bloodaxe and Hardrada (hard man).
• Quick and immediate. Most transactional dramas can be played out within the short attention spans of the financial press and impatient investors.
• Rewarding. Speculators, investment bankers and a whole industry depend upon high levels of transactional activity for their wealth, and managers have learned how to relate their rewards to creating quick 'shareholder value'.

Some would also comment that the financial markets and world of big business are male dominated, testosterone-rich environments, where personal competition and dominance are important behaviours.

On the other hand, as already stated, 'building' is invisible to outsiders, making cause and effect obscure to those who rely on the 'Numbers' for their understanding. It is also perpetual, not time-bound or related to artefacts such as financial years, fund managers quarterly figures and the like.

Last, but by no means least, business-building is relatively unrewarding for investment bankers and speculators, who are increasingly calling the shots.

To summarise:
There is strong evidence that the prevailing trends towards speculation and short-termism in the financial markets; and transactional strategies pursued by top managers, cause needless destruction of companies and industries.

Conversely, the pursuit of predominantly nurturing strategies, supplemented where appropriate by transactions that can be supported by strong organisations, are the origins of long-term value creation, provided that top management have the patience, and investors support them.

Proof of these assertions lies in the history of large companies in the US and Britain over the last 20 years. A rapid and rather cursory count of British companies will unearth the fact that at least 60 of the current top 200 have been in trouble of one sort or another as a result of pursuing transactional strategies, whilst many companies have simply disappeared and been forgotten.
Anyone remember the British and Commonwealth Group? It was once the darling of the City, but collapsed in a spectacular manner in the late 1980's, as the result of an excess of transactional activity.

In the US, it has been calculated that M&A activity destroyed over $1 trillion between 1995 and 2000 - more than the entire dot com madness!
The size of US industrial economy makes it far more capable than absorbing such stupidity than the UK, where company failure is often terminal, resulting in foreign takeover.