The business of life Chapter 21 – troubles mount

Gregg’s main management control system was a bi-monthly pan-European meeting of all the general managers from most of the 16 countries we operated in, plus those running our factories.  Seated in some vast hotel room in Geneva we would have to make our individual presentations of progress against our national budgets whilst being quizzed by Gregg and his large head office entourage.  There we sat for three whole days whilst the circus played out.  On one occasion (when Gregg was not suffering an attack of post prandial narcolepsy) I followed the German factory manager’s presentation with my own.  A key factor in an adverse variance to my budget so far that year was a very large exchange loss against the budget rate (set by head office) of the pound against the DM.  Gregg leapt into action, “Whaddayamean ya lost money?  Where’s it gone?” he roared, “Get the German guy back up here with his P & L, I wanna find it!”  Over half an hour was wasted whilst Peter, my German colleague and I were forced to submit our accounts to ever closer scrutiny whilst Gregg played hunt the profit that he felt sure would counter my exchange loss.  Gregg was convinced that someone was making money out of my budget variance and wasn’t placated when I finally offered the explanation that it had merely disappeared into the English Channel.

By around 1990 the situation across Europe was not improving and theUK’s performance was suffering too.  To provide an illustration; when I joined the company the average price we were achieving in the UK for a single fluorescent tube (we sold millions of these non-differentiated products) was in excess of one pound.  Ten years later I was averaging just £0.32 for each as a result of the extreme competition between the small number of manufacturers.  With common (and limited) suppliers of glass, basic metal, rare phosphors and gases across the industry, almost the only way you could drive the cost down was by finding ways to increase the speed of the automated production lines.  The result of this was that every hour you produced more product at a theoretically lower price but only if the additional production could be sold.  Unfortunately, the total market wasn’t increasing fast enough to counter the falling prices and the increased output, so the vicious cycle went on.  Efforts had shifted in my time with the business towards development of a stream of new products from all of the major manufacturers (driven also by the goal of energy savings) but the vicious cycle of downward pricing soon took over as they became commodities.  I kept a graph in my office that plotted the average price per unit sold against market share.  When I dropped the price our share rose and when I raised price it fell.  It was a perfect correlation.  I was getting beaten up on a regular basis for not raising my price in theUK.  But when I did, unit volumes dropped and the factories became starved of demand.

The business was already global with 90% of our UK production exported to the rest of the world and 85% of the ranges sold in the UK being imported from our overseas factories.  Whilst our UK production facilities were new and efficient, many of the overseas facilities we had to rely upon were old, unproductive and located in European countries with impossible labour laws and highly difficult unions.  Slowly and inexorably, our profits in the UK declined as I had to suffer far higher prices on our imports when the pound declined.  I found myself under increasing attack for failing to overcome this structural problem.  It seemed that little was being done at a European level to really counter this critical issue.  Despite my resistance to product strategies that made no sense, I always worked extremely closely with the European management and had very good relationships.  The only exceptions were a small number of Gregg’s direct team who seemed to follow his style of never discussing but only attacking.

One decision from head office illustrates the poor decision making going on at the time (exacerbated by the law of unintended consequences).  During this period of falling margins across Europe, a decision was announced that the transfer prices from our Belgium factory were to rise significantly for the next year onwards.  I never got to the bottom of what I felt were the underlying reasons for this move but I suspected it was simply to bolster manufacturing profits.  It was announced at the time that no country would be penalised for this increase as the effect would be taken into account in the budgeting process (in other words the lower margins that flowed would be ‘forgiven’ for that year).  However, the ‘forgiveness’ disappeared over time and countries, still under margin pressure, inevitably started to de-emphasise this particular product line.  In this way countries improved their margin percentages.  The Belgium factory certainly gained higher unit margins as a result but on declining volumes.  Some years later I managed to get to the bottom of this situation (as we shall see) and the reality was even more astounding.

The issue of pricing became more and more to the fore at every meeting.  Coming under attack yet again at one of the large European meetings, I put up a slide of my graph, which plotted market share against price.  I made the comment that one could either have increased market share and volume or increased prices and lower share and volumes.  Given the dynamics of the market nothing else was possible with non-differentiated commodity products.  Gregg responded with one of his usual eruptions saying that other countries were making more effort and running better marketing programmes (Sal, my Italian counterpart, had just given details of his latest sophisticated promotion – offering T shirts and beach towels).  Finally, he said he would close the UK operation if I couldn’t improve performance.  Throwing caution to the wind I turned to Swaanen, who was VP Manufacturing and the most influential of Gregg’s team, and asked him if he could afford to lose the production volume from the second largest market we had in Europe, “Of course not!” he growled back.  I turned to Gregg and asked him what he wanted to do.  I may have won that battle but I knew by then that I wasn’t winning the war.

I was becoming rapidly more disillusioned.  The company had spent a fortune on a business education for me that had been simply superb, providing cutting edge theory and technique, direct from the mouths of some of the best academic brains across the US.  The problem was that our senior management in Europe, whilst happy to tick boxes that said that bright people were getting the right training, simply didn’t understand what we were being taught.  Worse, they didn’t wish to know what we had been taught and constantly demonstrated that they wished to keep doing what they had always done (probably in the hope that it might yet produce a different result).  It was clear that there was a profound lack of real business acumen and strategic skill in our European headquarters.  My cynicism grew.

Some months later I received the news that the US company president was to make a UK visit.  I was required to meet him in London and make a presentation on the UK business.  Realising that I was probably being set up for a good kicking, I set about a robust analysis of the situation facing the entire light source industry.  A few years earlier Michael Porter, a Harvard professor, had published the first of a number of what became seminal works on strategy.  As a result of my US business education I was very familiar with Porter’s theories and decided to use these to analyse our industry.  What emerged was an indisputable picture of a global industry that was doomed to low profitability unless (and until) savage consolidation and production rationalisation took place.  Unless our ultimate parent company (now Verizon) was prepared to invest heavily in acquisition and new and fewer production facilities across the globe, we would continue to suffer declining margins.

On the day of my meeting the US president sat quietly, paid close attention and asked pertinent questions as my presentation unfolded.  Something had either prevented Gregg’s appearance or, deciding that he would leave me to my own downfall, had sent Louis our VP of marketing in his place.  Louis turned puce and kept attempting to move me onto what I was going to do to meet the UK budget that year.  At the end of the meeting, the big man thanked me warmly for the presentation and asked me to send him my full analysis.  My name inEurope was lower than low from then on and I subsequently learnt that I was being accused of ‘intellectual arrogance’ and ‘executive burnout’.

Did I know what I was talking about?  Had I been doing all that could be done?  I hold to this day, that by this stage, I had a better grasp of the market dynamics across Europe than anyone else.  Either that was the case or, much worse, others knew and wished to ignore the situation long enough to get their retirement package.  I had also succeeded in substantial market share growth and repositioned the image of the UK company.  Nevertheless, I had a weak spot and events found me out.  I had taken my eye off an important ball and it was to cost me dearly.

Image courtesy of Pacific Exchange Rate Service (© 2012 by Prof. Werner Antweiler,University of British Columbia,Vancouver BC,Canada.)

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