Reorganisation per se isn't a miracle cure for inefficiency, says Robert Heller. Organisational peformance and the processes involved in achieving it are what a corporation should focus on.
Every management must pine for some marvellous means that 'will enable us to grow faster in the future, as well as making us more efficient', according to Lord Cairns, chairman of BAT Industries. BAT's own miracle cure for stagnation and inefficiency is simple: reorganise.
The cigarettes (BAT's raison d'etre) have been stuffed into one box, labelled British-American Tobacco Holdings. The four companies in financial services, so expensively acquired during BAT's variegated efforts to reduce its dependence on the tobacco habit, have been placed into another container. Neither box contains anything new, and none of the re-crated businesses has been recreated.
Taking Cairns at face value, the implication is that the previous order of things, or companies, impeded growth and caused inefficiencies. Tobacco and finance have nothing in common except their ownership, and concentrated attention presumably went on neither portion. That appears to suggest a strange absent-mindedness among top management.
Absence of mind isn't rare among rich diversifiers. BAT's original strategic urge was simply to buy something - anything - different, to give its one-legged stool another leg. In these sagas, one new leg leads to another.
However, the apparent gains in stability are commonly offset by feeble returns on businesses, which the acquirer neither grasps intelligently nor manages constructively.
If Royal Dutch-Shell, after several decades, is unable to get chemicals straight (their profits slumped by 54% in the first half-year), the chances of BAT dynamising financial services can't be high.
Typically, the one-legged base business outperforms the new legs, year in, year out. Amputation often follows as a business realises that diversification on its own is not necessarily the right answer.
Neither is divestment. BAT's divestment programme was less considered strategy than nervous reaction to the threat of takeover and break-up.
The current reorganisation has a break-up flavour of its own: BAT could hive off financial services as easily as another tobacco diversifier, RJR Nabisco, could abandon food - as a large, dissident RJR investor wants. After all, if separation within BAT will work wonders, wouldn't total independence be better still?
That logic justified ICI's reaction to the same takeover threat: splitting Zeneca's drugs and specialities from ICI's basic chemicals aimed, not just to repulse Lord Hanson, but to achieve simpler organisation, narrower focus and more homogeneity. The cure sounds similar to BAT's new split. For shareholders, it worked wondrously, partly because of stock market infatuation with health care.
But ICI sans Zeneca has found no magic bullet.
First-half profits, down 28% pre-tax on 3.9% higher sales, testify eloquently that reorganisation, even in the extreme form of demerger, of itself solves very little, if indeed anything. With Zeneca retained, ICI (and the 5,000 workers whose jobs will now vanish) would still have been zapped by setbacks in polyester. Equally, BAT's insurance businesses will find no escape in their new box from the over-capacity and over-regulation that continue to plague the industry.
If reorganisation per se makes nothing better, can it make bad worse?
According to the logistics hero of Desert Storm, General Gus Pagonis, reorganising is 'the worst thing a corporation can do'. Managers won't normally leave bifurcations like BAT's alone: they love to reshuffle the repackaged businesses. That's where Pagonis thinks reorganisation does critical harm. Most employees really don't like reorganisations and resistance will form among the reshuffled.
At Shell, guerillas resisting the current reforms actually twice delayed their introduction. The issue, Pagonis insists, is organisational performance and the processes involved in achieving it, rather than the organisational chart itself. At BP, Sir David Simon sings the same song. To make BP's apparently failed reorganisation work brilliantly, 'The first thing we did was to focus the efforts of everyone - throughout the business - on performance'.
Speaking to MCE's Top Management Forum, Simon told how 80 heads of business units gained clear authority through cutting down 'the layers of bureaucracy which can so easily grow up between the core functions of head office and the operational team running the assets'.
Simon's reforms concentrated on organisational process. BAT's diversifying, however, self-evidently lacked the right processes for building new businesses able to sustain powerful brands and high profitability.
The proper set-up would have recognised from the start that BAT had nothing to contribute to its acquisitions save the flood of cigarette cash. Powerful new business teams should have been left to finance their own strategic decisions and create better-balanced stand-alone groups able to out-stare tobacco. Had that objective been kept in mind, BAT wouldn't have drifted into strange fields like making pulp and tomato products - both recently sold, by the way.
Robert Heller was founding editor of Management Today.