UK: THREE OVER THIRTY.

UK: THREE OVER THIRTY. - Rolls-Royce, Imperial Chemical Industries and Thorn EMI have undergone the sort of upheavals which typify the changes witnessed by all of British industry over the past 30 years.

by Geoffrey Foster.
Last Updated: 31 Aug 2010

Rolls-Royce, Imperial Chemical Industries and Thorn EMI have undergone the sort of upheavals which typify the changes witnessed by all of British industry over the past 30 years.

In the end, it becomes impossible to present an accurate picture of business management over a given period without looking closely at businesses themselves. So this retrospective section concludes with brief sketches of three major British enterprises during three momentous, and tragicomical, decades.

The selection of this particular trio is partly, but not entirely, random.

All three were important, high-profile companies throughout the period under review. Imperial Chemical Industries, Rolls-Royce and Electric & Musical Industries (EMI) were all members of the then FT-30 Index when Management Today was born. Thorn EMI, ICI and Rolls-Royce help make up the FT-SE 100 today. It was their size and economic significance which led MT to visit and report on each of the three at intervals. All were (and, to a large extent, are) manufacturers. And 30 years ago, the magazine's readers were overwhelmingly employed in manufacturing. All but four of the FT-30 were manufacturing companies, and Britain was a manufacturing economy in a sense that no longer holds.

Rolls-Royce

Rolls-Royce has been the symbol of all that's best in British engineering for as long as anyone can remember. But it is also famed for an episode its managers might prefer to forget. This is the cataclysmic event which has dominated its history over the past three decades and which occurred 25 years ago - the company's bankruptcy.

With hindsight, there was an inevitability about what happened in the years leading up to the collapse of 1971. Rolls was desperate to become an established supplier to the US aircraft industry, which built most of the world's planes. The US already accounted for a substantial proportion of the company's aero engine sales. But management reckoned that, in order to stay in the same league as Pratt & Whitney and General Electric, Rolls needed to become prime producer of engines for a successful new plane by one of the big US airframe builders.

Rolls had the disadvantage of being the smallest of the big three engine makers - and a foreigner to boot - and nobody was surprised when it failed to win the order for the first Boeing 747s. It then set its sights on Lockheed's impending TriStar. The design called for an engine far more powerful than Rolls had ever built in the past, but the company was not deterred.

In the event, delays caused by technical problems combined with massive cost overruns to bring Rolls crashing down. The Heath government stepped in to keep the company alive - while declining to honour its obligations to Lockheed. Disaster was probably unavoidable once the decision had been taken to win the TriStar contract. But, as DTI inspectors pointed out, the crisis was aggravated by management failings. Financial controls were woefully inadequate: expensive modifications were implemented with scarcely a thought to the return. Design, manufacturing and purchasing were hopelessly uncoordinated, and so on.

The first to pick up the pieces, however, were not engineers but a businessman (Lord Cole, formerly of Unilever) and a banker (Lord Keith, of Hill Samuel). And, as Rolls began its faltering return to profitability, steps were taken to plug the holes in its management machine. These days production engineers become involved at the outset of every project: they no longer tell the designers, 'If you can draw it, we can make it'.

In 1987, after a decade and a half of state ownership, Rolls was floated once again. It reappeared in the private sector shorn of its cars division but soon provided itself with an alternative second string in Northern Engineering Industries. The acquisition was intended to fill out the industrial side of the business, and help span the troughs in the aviation cycle.

But power engineering was hardly the ideal answer to that need in the early-'90s recession.

Ironically, Rolls' principal prop has been the same RB211 engine which brought about its downfall. Pearson, the engineer, is in a sense vindicated.

Further enlarged - or compressed - the RB211 has engendered a stream of derivatives, including the Trent, which helped Rolls to a 30% share of world civil jet engine sales last year.

The recovery has silenced those who forecast that Rolls' inherent frailty must ultimately force it into the arms of such as Pratt & Whitney. The British company's margins are still little more than wafer-thin. Nevertheless, Sir Ralph Robins is forecasting that Rolls will overtake its American rivals. Except during one 16-year period, Rolls has never been short of optimism - or arrogance.

Imperial Chemical Industries

In the mid-'60s, commentators were unable to mention Imperial Chemical Industries without adding 'Britain's biggest industrial company'. But today ICI ranks about 30th in the UK by market capitalisation, and trails, for example, BTR on almost every measure. More to the point, ICI has lost touch with its three longstanding German rivals, Hoechst, Bayer and BASF, and been overhauled by Rhone-Poulenc of France. Once an industrial colossus, it is now just another big chemical company.

There was a time when ICI could always be assured of the minister's ear, and of a seat at the table. Before 1939, like Roman triumvirs, Du Pont, ICI and the Germans had divided the world between them. Cartels were out of favour post-war, but from their London fortress at Millbank, ICI's rulers continued to control a huge portion of the chemical industry of Britain's tottering Commonwealth. At the end of the '60s the company employed some 200,000 people spread across eight UK divisions (plus one on the Continent) and 400 scattered subsidiaries. By headcount, if by no other reckoning, ICI was the world's greatest chemical company.

A vast bureaucracy served the rulers of this empire. Each division had its head office close to a manufacturing centre, but Millstone House - as it was known - determined strategy and allocated resources. It also planned, coordinated, monitored and otherwise gave support to a board whose structure, in the '60s and '70s, was bizarre, unique and exceedingly British. The average ICI director had a general oversight of one of the divisions (but was not profit-responsible), kept an eye on the group's business in a far corner of the globe and looked after a staff function.

In fact he had wide-ranging powers without personal responsibility. And when divisions had strong technical or trading links, the relevant board members came together in 'policy groups' - creating potent cabals in the boardroom.

The baronies were exceedingly difficult to dislodge. After ICI's humiliating (failed) bid for Courtaulds at the start of the '60s, the directors vowed that never again would a chairman achieve an ascendancy like Sir Paul Chambers. Those who followed him were able men who'd risen through the hierarchy, and reached the head of the table via an arcane process resembling that of the old Tory party. (There was no vote: a senior board member would 'take soundings' and report to the retiring chairman who would name his own successor.) ICI had no chief executive, and the chairman was explicitly 'primus inter pares'. Thus no one had the capacity to initiate radical change.

The organisation that evolved along with this regime was naturally cumbersome.

It was also (overlooking the Courtaulds affair) well-behaved. ICI was amply stocked with intelligent, educated and decent people, and its basic humanity was evident in, for example, its progressive personnel policies.

But speed, agility and a sharp commercial instinct were not among its attributes. On occasion, decisions were made but nothing happened. At the start of the '70s, the board agreed that the group should lower its exposure to bulk chemicals by investing more in high added-value specialities.

However, the need to protect a market share in commodities meant that these operations developed a momentum of their own. When the directors took stock 10 years later, the distribution of the business was virtually unchanged - and commodities were responsible for ICI's mounting problems.

A loss in 1980 was the first of a series of jolts that have shaken the group to its roots. The shock allowed Sir John Harvey-Jones to enlarge the chairman's powers and under-mine the baronies. It lent new vigour to the drive for added value, and into overseas markets. Bulk products were lumped into a business-within-a-business - Chemicals & Polymers - making it simpler to hive them off some time.

Ironically, in 1993, it was the added-value bioscience businesses that were demerged, as Zeneca. The then chairman Sir Denys Henderson insists the split was conceived within ICI, although Lord Hanson's famous share stake undoubtedly had an influence. There has been no more talk of evolution.

Change has caught up with ICI. Traces of the imperial past are still evident, but acquisitions, plant closures, joint ventures, asset swaps and new technologies have transformed the landscape. And the payroll is barely a quarter of its length of 30 years ago.

Henderson was not only chairman but chief executive. The present chairman, Sir Ronald Hampel, has a chief executive as his number two - Charles Miller Smith, recruited from outside ICI. In recent years, top management has learned to respect the shareholder. It's been a long journey from 1966 - and a long learning curve.

Thorn EMI

Rolls-Royce is easily recognisable as the company it was in 1966: a narrowly focused producer of aero engines, with one or two add-ons. ICI is a broadly based group which belatedly adapted its chemical formula to a different world. Thorn EMI, by contrast, is a leopard that changed its spots - almost entirely and of its own choice.

Three decades ago, Sir Jules Thorn was still at the helm of the business he founded in 1928. One of the great immigrant entrepreneurs, Thorn began by importing electric lamps from the US. A few years later he was pioneering rentals, hiring out electrical goods. And before Thorn Electrical Industries floated in the mid-'30s, he was producing his own lamps for an expanding market. After the war, Thorn Electrical became second only to Philips among the lighting manufacturers of Europe. The company was also a major force in the manufacture and retailing of appliances and, above all, in television rental.

Thorn Electrical lost momentum as its feisty chairman aged. And, in a period of increasing internationalism, it remained largely confined to the UK. At last, in 1979, Jules Thorn retired. Sir Richard Cave arrived from Smiths Industries as chairman, and there was a new managing director in Peter Laister whose varied experience spanned oil, chemicals, transport and brewing.

One of the first acts of the newcomers was to buy EMI. The two companies had conducted merger talks a few years before, when Jules Thorn's dominating personality proved an obstacle to progress. But in the late-'70s EMI was at a low ebb, a slump in musical entertainment having coincided with catastrophic losses in the medical business. The medical division was soon divested. (EMI's scanner had been a world leader: it was developed in the company's laboratories and had won its inventor a Nobel prize, but the business collapsed when it was effectively shut off from the US market in the Carter years.) On the positive side, Laister saw EMI's entertainment business strengthen Thorn's hand in its dealings with the Japanese. Thorn had an agreement with JVC to import home-entertainment products for the UK, and to manufacture the equipment 'at the appropriate time'. EMI's music, and its library of 1,000 films, were the vital software that would create and expand the market.

On this basis, Thorn EMI could begin to think about winning itself a place in the multimedia future. The boardroom hummed with talk of cable and satellite. Laister, who had a technical background, was eager to see the group carrying the banner of high technology, and bought the Government's stake in Inmos, Britain's great hope in advanced semiconductors. But most of Thorn EMI's manufacturing units lacked the volume to earn adequate profits, or to match the Japanese on price. They were surely incapable of supporting grandiose ventures in high tech. In the spring of 1985 the issue sparked a flare-up in the boardroom, and Laister abruptly departed. The newly elected chairman, Sir Graham Wilkins, appointed Colin Southgate, an executive who had only lately joined the board, to be managing director.

Sir Colin Southgate was to prove a relentless axeman. Out went Thorn's heating company, EMI's screen entertainment, Thorn's domestic appliances, Elstree Studios, Ferguson televisions, Inmos and around 60 lesser enterprises, to whoever would buy them. With the proceeds of sale, Southgate bought further rental operations on both sides of the Atlantic, and some additional music companies, but also others in the lighting field.

In the early '90s, lighting, too, joined the disposables, while the entertainment business ballooned with the £500 million acquisition of Virgin Music.

Southgate, now chairman and managing director, found takers for the remaining electrical bits and pieces. That leaves Thorn EMI with two divisions, both of which are world leaders but in very different sectors. Music (EMI) is glamorous, often highly profitable, but volatile. Rental (Thorn) is unexciting, fairly steady, with good earnings.

It has long seemed clear to observers that they'd part. Indeed, some time after July, Thorn and EMI will separate. The latter's independence may be short-lived, as several multimedia giants are poised to pounce. This would be the final flourish for the shareholders for whom Southgate has excelled. Sometimes business seems to be about buying and selling rather than cultivating and building.

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