Blue Circle bears the burden of a one-product image. The perceptive will notice new products - and a new philosophy.
It must sometimes be difficult having a name associated with one product - particularly when that product is as drab as cement. For 70 years Blue Circle and cement have, at least in British minds, been virtually synonymous, an association fostered by both its ubiquity - it has traditionally taken around half of the domestic market, far ahead of its two lesser rivals - and a strong, memorable brand. In a business where the output of one company is almost indistinguishable from another, the clean lines and sharp colours of Blue Circle's logo - a simple blue ring against a bright yellow background - have helped to enliven its grey product and bestow upon its parent an enviable corporate identity. It is a motif - bold and ageless - of which a design consultant might feel rightly proud.
Yet the geometry of Blue Circle Industries (BCI), formerly the Associated Portland Cement Manufacturers, is now quite different from the days when the brand was first adopted to bind together the products of a disparate group of affiliated companies. Within the circle, another form has taken shape, a still-evolving figure whose final dimensions are far from certain. It is the other, newer Blue Circle, a pan-European business that makes gas boilers and steel-panel radiators, ceramic basins and showers, electric pumps and thermostats, which challenges preconceptions. It has grown to such an extent that in the past full financial year it contributed £60.2 million to group operating profits - as opposed to £24.3 million from the UK cement division. For the first time in BCI's history, group turnover from home products exceeded that from the once-dominant area of cement, concrete and aggregates.
This might have alarmed Blue Circle's turn-of-the-century founders, but does not unduly worry Keith Orrell-Jones, its recently appointed group managing director. 'I'm not unhappy with it,' he says measuredly. 'I don't have a goal that says we must have a certain percentage of our business on one side or the other.' He prefers the advantages of a flexible approach: 'In that way we can play tunes on our growth to suit the particular stage of the cycle that we are in, either geographically or in terms of our products.'
It makes sense. For the past few years, opportunities for growth in UK building materials have been few; the only tunes doleful ones. When the late-'80s property boom fell flat, the market for building materials swiftly followed, entering a four-year cyclical slide from which it is only now emerging. Unsurprisingly, cement - used extensively in the early stages of construction - was one of the first areas to be hit. UK sales plummeted from a 1989 high of 18.6 million tonnes to 12.8 million tonnes just four years later. Over the same period, revenues at Blue Circle Cement(BCC), BCI's UK cement division, fell by more than 30%.
Though a 30% fall would be bad in any business, it's particularly so in cement manufacture, a volume-sensitive, capital-intensive operation in which any drop in sales has a disproportionately severe effect on profits. 'You have very high fixed costs,' explains Orrell-Jones. 'And if you operate below full capacity for very long it starts to have a huge impact on profitability' (in BCC's case, down 80% in four years). Faced with such grim economics, Blue Circle stated its aim of running its plants at full capacity and commissioned a study into the likely UK demand for cement over the next 10 years.
On the basis of its findings, which suggested that the market was unlikely to return to its 1989 peak before the end of the decade, BCC initiated a £58 million rationalisation programme in the autumn of 1992, cutting domestic capacity by 15% - from 7.9 to 6.7 million tonnes - and shedding 20% of its workforce. Any future demand in excess of capacity was to be met by imports from Aalborg Portland, a Danish company in which BCI has a 50% stake. 'We don't think our responsibility is always to have the capacity available to satisfy demand from domestic production,' says Orrell-Jones. 'We think our responsibility is to give our shareholders a good return throughout the business cycle.' The City welcomed the news and marked Blue Circle's shares up accordingly.
For Orrell-Jones, then only a month in the top job, it was a bold though inauspicious debut; for the increasingly hard-pressed Blue Circle it was just the latest step in the slow, steady process of structural change that had started a decade earlier. In the years since the war the three dominant UK cement producers - Blue Circle, Rugby and Tunnel, now the Swedish-owned Castle Cement - had been able to rely on an expanding domestic market, and when on occasion times were hard at home, on operations in the rapidly developing economies of the former Commonwealth, where most plants could be depended upon to provide a constant income. The combined result was a 30-year period of almost uninterrupted growth.
Then, in the late-'70s, the market changed. Demand from the increasingly mature domestic economy started to flatten, made worse by the long-term neglect of infrastructural investment. At the same time, demand from BCI's traditional export markets - the emergent nations of Africa and the Middle East, many of which were starting to develop there own cement industries - began to wane. Lean times became leaner still with the emergence of cement traders which, aided by technological advances in bulk transportation and their considerable purchasing power, established terminals at British ports and provided a ready conduit for competitively priced exports.
Blue Circle, however, along with most of its competitors, still carried on in the assumption of prosperity. Ian McKenzie, chief executive of BCC, explains: 'Because there had been that continuous growth the culture and key skills of the company were focused accordingly - on building new plants and making sure that such plants operated fully to capacity all the time.' It was a habit further ingrained by the existence of the Common Price Agreement (CPA), a 1934 cartel that, through legal assent, had persisted into the deregulated markets of the 1980s. Under the agreement, a price was established for the supply of cement to every point in the UK, irrespective of its source or the size of the order. Prices were fixed by an industry committee to which producers would annually submit details of their costs, the profit margins they required to make a return on their investment and the price they were seeking. Understandably there was little incentive to reduce costs. In turn the producers grew perilously sluggish. Their vulnerability was further heightened by the industry's flat structure. Unlike its counterparts other countries, the industry had eschewed vertical integration, fearing that a move downstream into readymix concrete would upset its existing customers. Yet with the cement market of the 1980s becoming more world competitive, the UK industry, with high costs, high prices and, perhaps most critically, no guaranteed buyer for its product, found itself dangerously exposed. Increasingly its customers had the option to look elsewhere.
It was not aided by the simple fact of British geography. Cement travels relatively cheaply by water yet, once on land, the high cost of freight as a proportion of the selling price renders long-distance haulage uneconomic. Yet Britain's extensive coastline, with numerous ports and swift access to concentrated markets, disturbed the industry's conventional economics and encouraged importers from low-cost countries to take advantage of the price differential. Add to this the existence of heavily subsidised cement production in countries such as Greece and the already uneven ground tilted yet further.
Faced with the potential erosion of its home market, BCC belatedly set about improving efficiency and reducing costs. One of the first measures, introduced in 1984, was to change the working practices at its 14 UK plants. Rigid craft demarcation was replaced by a system of 'integrated working', where process workers were re-trained in areas outside their existing skills. The effect, when combined with a programme of plant modernisation, was to cut the workforce by half. At the same time the management structure was completely overhauled. Two previously self-contained divisions - production and sales - were replaced by a single, regional system. Plants became profit centres and production and sales were brought together under one roof.
Inevitably, BCC came to question the continued existence of the cement cartel. 'We were well aware that it was an anachronism,' reflects McKenzie, 'and that if we didn't end it voluntarily, sooner or later somebody else would.' And so, in 1987, on Blue Circle's initiative the CPA was abandoned. 'There was a clear concern that, in moving away from a period of over 50 years in which we had not had price competition, things could go badly awry,' says McKenzie. In the event, the fears were unfounded. Almost immediately, the construction market began to boom and the pressure on prices that there might otherwise have been was neatly averted.
At around the same time, David Poole, the then managing director, began to scrutinise Blue Circle's overseas operations. Since 1912, when it established subsidiaries in Canada, Mexico and South Africa, Blue Circle had gradually expanded overseas, setting up plants in most corners of the former Commonwealth. Though almost uniformly successful, most were purely minority holdings and, as such, provided neither management control or high cash return. Poole set about redrawing the map, selling out of Brazil, Canada, Australia, New Zealand and Mexico in the space of a few years at the tail of the '80s (a policy pursued into the next decade with the sale of its 42% stake in South Africa in early 1992). Instead the focus shifted to the US where, since 1983, it had been steadily building up a network of wholly owned subsidiaries along the eastern seaboard, not just in cement but also in aggregates and readymix concrete. Today it stands as the fourth-largest national operator and, in some regions, such as the north east, is the single largest player.
Here Blue Circle has sought to leverage the benefits of acquisition by applying its long-held cement making skills, using the know-how from its UK research centre to transfer advanced process technology to the US - with often dramatic results. In 1991, for example, it acquired the Harleyville cement works in South Carolina from Beazer for $60 million. At the time it was producing 620,000 tonnes per year. After an outlay of £3 million on process improvements it is now producing 750,000, with an eventual projected output of 800,000. 'Considering that you pay anything up to £100 million for a new plant, that sort of money is chickenfeed,' observes David Lovett, president of Blue Circle America. Similarly, in Ravena, New York, it runs what it claims is one of the lowest cost plants in the world. And while it has exported technical skills to the US it has, it says, brought back a few lessons for Europe - on lower manning levels and operating in what Lovett terms a 'competitive crucible'.
While accelerating its push into the US, Blue Circle spent much of the 1980s attempting to reduce its reliance on cement. It was a policy initiated some two decades earlier when the then chairman, Sir John Reiss, set up a committee to consider the options. Nothing happened, at least visibly, until the late-'70s when the issue was raised again and a commercial development division created. The declared aim was to move into a sector that was in some way related to the building industry but far enough removed to be subject to a slightly different cycle.
Its first step was to acquire Armitage Shanks, the manufacturer of ceramic sanitaryware, in 1980. It was a move that puzzled many observers, including, apparently, some within Blue Circle. 'When we bought Armitage we didn't actually do very much with it,' reflects finance director James Loudon. 'In those days Blue Circle was still a very cement-orientated company and, to be honest, I don't think we really understood it.'
And so for seven years Armitage stood alone, its protracted isolation seeming to suggest that the rationale for diversification had entirely dried up. Then, in late 1987, Blue Circle bidded for Birmid Qualcast, a conglomerate spanning gas cookers, boilers, foundries, lawnmowers, and bathrooms, already the subject of a hostile offer from Hepworth. Though Blue Circle eventually succeeded - after the humiliation of a failed first attempt, a ear's stand-off and a much increased second offer - the prolonged battle drew unwelcome attention to the sometimes impenetrable logic of its strategy. Concerns were voiced over both the apparent lack of fit (what, after all, did Blue Circle want with petrol lawnmowers?) and the direction in which it was heading. To many, the taunts contained in Birmid's final defence document - that Armitage Shanks was 'an embarrassingly unsuccessful diversification' and Blue Circle 'a stagnant cement company in search of a destiny' - seemed to contain a wider truth beyond that of the ritual insults of a nervous prey.
When, two years later, it acquired the boilermaker Myson, its strategy - of creating a home products division based on the twin pillars of heating systems and bathrooms - began to emerge. The taunts, however, persisted. Blue Circle was a 'colossus with feet of concrete', a cumbersome giant who paid too much for its prizes and, worse, didn't quite know what it was buying. Five years on that view still rankles. 'There was a lot of confusion sown by the fact that some of our major acquisitions brought with them a whole range of fringe activities,' counters Orrell-Jones. 'And the fact that those were later sold could be interpreted, perhaps mischievously, as Blue Circle buying, not knowing what it had got, and then selling on.' The reality, he claims, was quite different. 'What we wanted out of Birmid and Myson were the heating companies and Qualcast bathrooms. Yet there were also a lot of things we didn't need and that we've actively disposed of.' Hence Birmid's foundries were sold to Thyssen and, after a gap of several years, Atco Qualcast sold to its management.
On the basis of its newly acquired strength in the domestic market, Blue Circle looked to Europe. Again, it embarked on a series of acquisitions, buying Ceramica Dolomite, an Italian, family-owned maker of ceramic sanitaryware, in 1990, Thermopanel, a Swedish radiator company, the following year, and most recently and expensively, France's Celsius, a heating group, in 1992. Though they provided Blue Circle with a truly European base the timing, in some cases, was unenviable. Thermopanel was bought just as the Swedish economy collapsed, while the acquisition of Celsius coincided with its principal markets entering severe recession.
Yet if the initial circumstances were unfavourable, their joint prospects are somewhat better. Most immediately, the heating business is beginning to enjoy substantial economies of scale, particularly in purchasing. In bathrooms, meanwhile, the transferral of production-line methods from Italy to the UK has brought process improvements to Armitage Shanks. The current task, according to Charles Young, chief executive of home products, is one of consolidation - the exchange of best manufacturing practice, the integration of product development and the selection of the most appropriate manufacturing locations for its future operations. Yet as Loudon observes: 'What has been lacking so far is the actual growth in the market.'
Despite Blue Circle's transformation, it has never truly escaped the suggestion that its management and its original product have certain qualities in common. It has not been aided by what most regard as an insular culture, in which change is infrequent and its pace seldom rapid. Yet with the arrival of Sir Peter Walters as non-executive chairman in 1990 it acquired a belated and much-needed external perspective. Walters set about stamping on Blue Circle the disciplines he had applied at BP - defining the core businesses in terms of strategic advantage and insisting that those businesses performed. Equally critical was his role in the appointment of Orrell-Jones, another outsider, first as head of the US division and then as group MD. In turn, Orrell-Jones has set what many regard as a tough agenda, demanding a high return on capital and tightening the divisional responsibilities of board members. In the process, five divisions were last year reduced to two core operating units: home products, narrowly defined as heating and bathrooms; and heavy building materials, comprising cement, concrete and aggregates.
In reality, Blue Circle is not nearly so neat. It still, for example, owns New World gas cookers, a business, acquired with Myson, which contributes little to the group in terms of either strategy or profitability. Similarly its forays into cement production overseas have led into often unrelated areas. In 1988 it acquired Emasil, a Chilean forestry business; 'another area', admits Orrell-Jones, 'in which we had no experience. And there are also those who consider its link with Denmark's Aalborg a strategic error, that without gaining full management control it has, up until recently, been unable to impose the efficiencies it clearly sought.
The signs from its further-flung cement operations are almost uniformly good. Having successfully dealt with earlier management problems, cut costs and improved cashflow, revenues from Blue Circle's US division are now growing at an annual 12%. With the 1996 Olympic Games triggering a boom in Atlanta, the home of the US's cement and aggregates businesses, and the economy as a whole entering a strong cyclical recovery, some analysts, such as Robert Donald at NatWest Securities, claim that the US market is now approaching a 20-year high. Similarly, its operations in Chile and Malaysia, both current cash cows, are operating at full stretch. As a result it faces some critical decisions as to where next to put its money. 'Cement investments come in big chunks,' observes Orrell-Jones. 'You just have to be sure that you get it right.' The City now seems to like what it sees. 'The mistakes are historic, the recovery prospects current,' claims David Taylor, building materials analyst at UBS. Last year, on the back of such sentiment, Blue Circle became the best performer of the market's 30 leading companies, its shares rising 70%. Only 18 months previously, when Orrell-Jones took office, they had stood at a seven-year low, making Blue Circle, an asset-rich, cash-generative business, a hotly tipped bid target. Yet, as on numerous other occasions in its 92-year history, the threat never materialised and, by luck or default, the crisis passed.
Unsurprisingly, in such a context, Orrell-Jones urges a long-term view, claiming that by 1995 the success of its diversification should be fully apparent. 'In most people's minds the jury is still out,' he reflects, 'and I accept that. But if you're setting out to dilute your dependence on cement then you're bound to make mistakes.' To do so repeatedly and survive would be a luxury few enjoy - of that Orrell-Jones is only too aware.