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Transformation at BTR.

CASE DESCRIPTION

The primary subject matter of this case concerns the viability of the transformation being undertaken in a large, widely diversified company with a storied past. Secondary issues include assessing merger and/or acquisition partners and the ability to assess organizational "fit" with its environment, between its headquarters and businesses, and across the portfolio. The case has a difficulty of six (appropriate for the second-year graduate level). The case is designed to be taught in three class hours and is expected to require six hours of outside preparation by students.

CASE SYNOPSIS

The story of BTR spans exactly 200 years and includes some of the most prominent leaders in British industry. The decision to be made in the case is the direct result of a successful corporate strategy coming out of phase with the changes going on during the 1990's. New management attempts to refocus the firm, but the plan is not well formulated initially, requiring adjustment and a protracted period of implementation.

The case describes the recent history of BTR in two major phases. The short first section begins in 1965 and is marked by the application of a niche-oriented business acquisition policy. In using this policy, management scanned the environment for wayward businesses that would respond to BTR's methods. Heavy reliance was placed on sound financial reporting and oversight, after a period of transformation.

By the end of 1995--after exactly 30 years--BTR's performance had sharply deteriorated. Forces outside and inside the firm incited mammoth change in the company. Initially, BTR was to be an "international manufacturing and engineering company," a more focused firm, better able to exploit relationships between the businesses. The depth and pace of the changes required were underestimated, however, and corporate management was forced to re-develop BTR the following year into a "leading global engineering company". But, the difficulties of the changes, and the complicating factors of BTR's decreased dividend and an over-extended warrant program, suggest that time and patience may have run out on the firm. At the end of the case, management is left to decide whether to finish implementing the current strategy or to seek partners for merger.

INSTRUCTORS' NOTES

Recommendations for Teaching Approaches

This case offers students solid insight into the formerly successful strategy of a prominent company in Great Britain that now requires painful adjustment. The case is taught most comfortably in a module devoted to corporate strategy, but can also be easily included in a general offering in Strategic Management. As well, the case contains a variety of major sections demanding attention, such as the relationship of environment and strategy; the interrelationship of strategy, control and culture; the sometimes overwhelming interests (and power) of key stakeholders; and the inseparability of strategy formulation from implementation. Finally, the student is allowed an overview of the effects of organizational history, how past decisions and events impact the present and the ability of management to deal with the future.

After full analysis of the case, students should have knowledge of and/or the ability to: assess organizational "fit" between the firm and its environment and within the firm (both between HQ and the businesses and across the portfolio); explain how strategy aligns the activities and resources in an organization to take advantage of opportunities; detail the difficulties (the sources of inertia, resource availability, stakeholder management) that commonly impede strategic change; and analyze the pro's and con's associated with fully implementing a plan for change versus taking up a plan to merge with any of three prospective partners.

Suggested Readings

If the supporting instruction for the case makes use of a textbook, limited opportunities are usually available for secondary reading. However, if a single article can be added to the reading list, the following piece is recommended:

Porter, M. (1987, May-June). From Competitive Advantage to Corporate Strategy. Harvard Business Review, 43-59.

The article by Porter informs readers about the large number of value-destroying diversification efforts marking recent industrial history. As well, useful strategic directions are given to students: restructuring (with obvious repercussions for BTR's unrelated diversification), skills transfer and activities sharing are clearly explained as methods for creating value from the corporate level. The difficult tests for diversification described by Porter should also help guide the discussion:

1 The Attractiveness Test: Does the move provide adequate returns?

2 The Cost-of-entry Test: Does the price for getting established erode the potential profits?

3 The Better-off Test: Is the business more powerful within the diversified company than outside it?

Finally, the time-boundedness of some of the diversification efforts--again, restructuring is often affected by large, but one-time value additions--is another of the valuable insights offered in the article.

If more space in the reading list is available, the following articles are recommended:

Hamel, G. & C.K. Prahalad (1990, May-June). The Core Competence of the Corporation. Harvard Business Review, 79-91.

Collis, D. & C. Montgomery (1981, May-June). Creating Corporate Advantage. Harvard Business Review, 71-83.

The article by Hamel and Prahalad makes a major contribution to corporate strategy (and to a case discussion concerned with divestment) by explaining the logic that should cut across the corporate and business levels, fostering and guiding innovation and diversification. The piece will provide help in identifying worthy core competencies and in eliminating the organizational clutter and over-reach that characterizes many diversified firms. Moreover, the article makes clear the deep level of integration required within a portfolio truly leveraging core competencies, directly impacting the reorganization of BTR.

The Collis and Montgomery piece aids in understanding how competitive advantage, coordination and control are inter-related. During the case discussion, students should be able to explain how the markets, strategies and skills combined to put different demands on the firm. These were met in quite varied ways. Indeed, the decision point at the end of the case is tangled in related issues: Are BTR's strategy, structure and control systems best suited to the opportunities and challenges that it faces? The Collis and Montgomery work will go a good way in helping to identify and deal with the salient issues.

A final piece can be distributed AFTER the class, to broaden and deepen the analysis of firms pursuing unrelated diversification:

Kerr, G. & J. Darroch (2005, July-August). Insights from the New Conglomerates. Business Horizons, 347-361.

But, a caution should be offered about the use of the article. Events after the decision point of the case are recounted. As well, other points are offered in the article that should come from classroom analysis rather than directly from the reading. However, the article is useful in that it outlines the available ways in which headquarters can add value to the diverse businesses in its portfolio. As well, a contingency approach to corporate strategy is described that can help students further understand the manner by which organizations--even those widely diversified--link with their environments. Finally, the article can form a bridge with the study of Invensys, the company that emerged from the merger of BTR and Siebe. (A case analysis of Invensys is currently under development.)

DISCUSSION QUESTIONS AND SUGGESTIONS FOR CLASSROOM ANALYSIS

Two basic methods are available for developing the discussion. The first can begin with a bid for recommendations from the class. The operative question could be posed, "What should be done at BTR?" Categories of actions can be developed. "Hold the line" is one of the obvious options. Recommendations should also include a merger with broad-based engineering firms like Emerson Electric, Siebe, or Siemens. Votes should be tallied once the choices have been generated. The aforementioned route for developing the analysis has the appeal of an opening "attention grabber" which demands students take a stand and be ready through the ensuing discussion to explain and defend their positions, even as the evidence against them mounts.

However, the bid at the beginning for recommendations will probably keep the discussion firmly involved in the here-and-now and will make for greater difficulties in drawing together the insights that are available from the company's history. The long period of success at BTR could easily be missed, and the possibility of losing out on a full analysis of the three-decade-long experience with restructuring is probably too great a chance to take.

Therefore, the following questions are recommended as signposts for steering the discussion:

1 What were the primary elements of the "new" strategy of 1965? Why did it lead to such a lengthy sustained success?

2 Why did the company falter in the early 1990's? Why did the firm's management use so much time in making changes to its strategy?

3 What is your assessment of the current strategy? What suggestions do you make for improvement?

4 Do other options exist for BTR? How and when should they be played out?

1. What were the primary elements of the "new" strategy of 1965? Why did it lead to such a lengthy sustained success?

Four "pastures" can be created in the discussion, each centered on a set of key, related issues. The first pasture (opened through the question "What were the primary elements of the "new" strategy of 1965?" and then by "Why did it lead to such a lengthy sustained success?") must include a number of features, including:

Consideration must be made of the forces driving the adoption of the new strategy. In a word, the force is leadership. While the strategy was hardly unique (it had been prominently pursued in the United States) BTR's top management deftly carried out its implementation. The vision was also maintained through two changes in top management, a natural corollary of the fact that each of three leaders had close connection to the original formulation and implementation of the strategy.

Students should also be expected to see that the strategy was a sustained success for a number of reasons:

First, the niche positions held by most of the early acquisitions typically needed guidance, as do most entrepreneurial firms, in making the transition to "professional management," BTR's strong suit. Financial controls were expertly fitted to the low-to-medium technological intensity of the targets. (The Collis and Montgomery article can provide help analyzing the topic.) As well, the natural constrictions placed on businesses serving niches (the fact that niches are, by definition, severely reduced in size and opportunities for growth) were relaxed by BTR's expertise in serving international markets and, therefore, the same niches in multiple locations.

Second, a group of competitive competencies were developed at the corporate level for enabling the strategy. (See the Prahalad and Hamel article). As the case material makes clear, headquarters was instrumental in identifying, negotiating, acquiring and transforming the target. A strong system and supporting skills for each of the key areas had been developed.

Third, the competitive intensity of the era was much lower than the present. Furthermore, the acquire-and-restructure strategy that spawned many of the conglomerates of that time was only getting started. Thus, many viable targets, and directions for growth, were available to the company.

Indeed, the present case should allow a lively discussion to develop about unrelated diversification. The commonly held notions about diversification (related diversification is good strategy; unrelated diversification is bad strategy) can be held up and examined using the events of this case. The best students should be able to look at the restructuring strategy (to use Porter's term) and see that it can be broadly applied and result in a disparate portfolio of businesses. What is "related" is not the panoply of end products. Rather, the "relatedness" within the portfolio is less obvious: it is linked to BTR's ability to spot and rectify management failures within its acquisitions, regardless of industry.

The best students should also be able to see two, sometimes unfortunate, facts about the restructuring strategy. First, to sustain a long period of steady and sizeable growth, increasingly larger acquisition targets must be pursued, or larger numbers of similarly sized acquisitions must be undertaken. Either way, the pressure on the firm can grow exponentially. Second, the "time boundedness" of the value additions must be taken into consideration. The restructuring strategy at BTR created most of the value added in a revolutionary phase in the first year or two after the acquisition. However, as the case material plainly states, the company went through a long stretch in its history during which divestments went largely ignored. Questions remain about which businesses should have been sold much earlier, and when.

2. Why did the company falter in the early 1990's? Why did the firm's management use so much time in making changes to its strategy?

This last issue opens the second pasture. It concerns the ways in which the organization became increasingly out of phase with the changes in its environment during the 1990's. The reasons are stated in the case:

They are attributable to metamorphosis in the macroeconomy (lowered rates of inflation; increased technological change and intensity), and in the ways key industries were being re-organized (increased international trade and competition; changes in supplier/manufacturer/customer relations; growing service requirements; new patterns in industry consolidation).

Inside the firm, the previous patterns of doing business (customer relations; investment regimens; price management) and the internal control and planning mechanisms (the planning process; divisional and business autonomy; financial performance measurement) were increasingly out of step with the changes just described.

The best students (perhaps with exasperation) will ask at some point in the discussion why the strategy was allowed to continue for so long without adjustment. The answer must reside, in large part, with the inertia that is attributable to the long period of success the company enjoyed, and to the overconfidence (perhaps arrogance) this sometimes breeds. As the case points out, the culture constructed by Nicolson, Green and Ireland was extremely strong and well entrenched. A strong-as-steel culture can sometimes form itself into handcuffs.

3. What is your assessment of the current strategy? What suggestions do you make for improvement?

The way to the third pasture is opened with the next obvious topic: the implementation of the restructuring plan(s). Perhaps the best way of opening this last major area is to ask students to recount and improve upon the strategy as it was formulated and rolled out over the past two or so years.

The class should realize that the restructuring itself also took far too long. In part, this delay is attributable to underestimating the resistance that was to be encountered throughout the firm. (The information that 19 of 50 top executives left BTR during the period can be interpreted as a sign of a pretty wide-scale resistance of the new plan.) In part, the plan did not reflect a well-conceived first attempt to create value among the remaining businesses. The point must be driven home that the restructuring regimen demanded a fundamental re-orientation within the firm. Yet, the case doesn't mention (in the first go-around in 1996) much in the way of the mechanisms that would facilitate the plan's implementation, or the ways in which the corporate level was going to add value.

The second place in the final pasture can be gotten to with a question about BTR's current performance: "How is the company doing?" Answering this question can actually be quite tricky. On paper, BTR appears to be doing pretty well--or perhaps can be better stated that the worst seems over. The strategy, as described in 1997, seems far more deeply conceptualized and implemented. The financial results, in accounting terms, seem to illustrate similar improvement. Operating profits are the highest since 1989. Numerous expense categories show brighter prospects. So, why has the stock price stayed at such dismal levels, showing no signs of improvement?

The question of performance is, of course, relative to BTR's past and to the expectations (and their supporting mechanisms) that have been built up in key stakeholders. Students must remember that BTR had been generating large profits and returns to the owners of its equity for years. The warrants issues and the high stock valuations reflected past success. As long as performance was maintained, management was given free rein. The size and audacity of some of BTR's acquisitions in later years support the point. But, once performance proved unsustainable, the dividends also became unsupportable at current rates, and the warrants became mere paper. Moreover, strategic reorientation demanded profound change, generating sizeable risk to the firm. The company is beholden to its creditors in both the equity and bond markets, and patience is clearly running thin. A broad body of equity has to be fed earnings; interest and principle payments have to be met. Student analysis must fully draw out the challenges and the central players, realizing that very little time remains to complete the reorganization if that is the recommendation.

4: Do other options exist for BTR? How and when should they be played out?

Of course, three other related alternatives exist. They are mergers with Emerson Electric, Siebe or Siemens. A combination of qualitative and quantitative issues can provide a solid start at choosing among the alternatives. The table below assesses the firms using the following criteria: leadership, the added value of the combined portfolios (through savings and complementarity), the extent of M&A activities, the probable cultural fit, the relative size of the two organizations (with the merger of equals likely more problematic), and financial position.

Students are exposed through the analysis above to the high risks that are associated with a large merger. Even Siemens, by far the largest of the firms under consideration, would be pressed to marshal the resources (both financial and managerial) to undertake such a massive undertaking. Moreover, timing is an important consideration for Siemens because of the company's current restructuring. Pro's and con's can be drawn up for a merger with each of the three potential partners. In two of the cases (Emerson and Siebe), great amounts of breadth would be added to the existing portfolio, suggesting that asset sales or further acquisitions would soon have to be in the works. The overlap and/or complementarity in the portfolios appear to be fairly narrow. However, a plausible economic rationale could be spun out of the relationship between Siebe's businesses and a number of those currently at BTR. The situation at Siemens, by comparison, appears to be much less conducive to taking on the disruption of a large merger.

A spirited debate should ensue over whether a merger or staying with the existing plan should carry the day!

EPILOGUE

In fact, BTR did not last long enough to enter the new millennium. The precipitous drop in the firm's performance and key stakeholders were putting enormous pressure on leaders to rectify the trouble. This weakness was compounded by a restructuring plan that took years to implement. The first round clearly reflected an underestimation of the depth of the required changes and the level of resistance it was going to meet.

The result, in hindsight, seems inevitable. BTR entered into a merger with Siebe, a British engineering firm, early in 1999, cementing the union from the decidedly weaker position, and losing primary control of its former operations. In the following year, a new company, Invensys, was created from most of the assets of BTR and Siebe. But, the BTR name, of course, was gone, a fixture on the British industrial landscape for more than 60 years, with a history that ran back exactly 200 years.

An operative question remaining for students and analysts alike (and the central decision focus for the case) is whether what BTR offered its shareholders was a viable plan to create value, with the right people at the top to support it. In the end, though, the company simply ran out of time, in a few short years having burnt up the goodwill that had been built up over the previous decades.

Gerry Kerr, University of Windsor
Table 1: Analysis of Prospective BTR Merger Partners

 Emerson
 Electric Siebe Siemens

Leadership Solid management Long- Established,
 team, established vigorous
 experienced with strength in leadership
 success and top intent on
 refocusing leadership; introducing
 strategy now led by a greater
 young and competitiveness
 vigorous CEO in the company

Savings from Obvious overlap Much depth in Siemens is
Combined in controls; controls currently
Businesses but, BTR's offers a undertaking a
 businesses are number of large
 much broader potential rationalization
 than Emerson's opportunities of its very
 current to leverage/ diversified
 portfolio rationalize portfolio;
 mktg., mftg. savings are
 and R&D; likely from the
 however, BTR Industry
 will division
 considerably (namely
 broaden Automation and
 Siebe's Drives)
 portfolio

Complementarity The current BTR Potential The already
of the Combined portfolio would value heavily
Businesses add much breadth additions can diversified
 to Emerson; come from the portfolio would
 however, the application of become even
 value to Siebe's more
 customers is intelligent diversified;
 uncertain automation to what kinds of
 portions of rationalization
 BTR's are necessary
 portfolio; and how will it
 but, the impact the
 breadth of the existing goals?
 resulting
 portfolio may
 not create
 much value

Merger & The company is The company is The company is
Acquisition an active an active deeply
Skills acquirer of acquirer of experienced
 businesses; but, businesses; with M&A
 the targets are but, the activities and
 much smaller and targets are with strategic
 more focused much smaller alliances
 than BTR and more
 focused than
 BTR

Cultural Fit Emerson is a Continuity of Siemens is
 strong culture leadership and undergoing
 company, with commitment to cultural change
 established employees has from a company
 systems and created a that Jack Welch
 mores supported strong, called an
 by outcomebased engineering- employment
 compensation and based agency to one
 a long history culture--a that is more
 of success potential fit hotly
 with the new competitive and
 direction of entrepreneurial;
 Siebe therefore, the
 timing of a
 large merger
 seems dubious

Relative Size The two The company is Siemens is
of the organizations approximately approximately
Organizations are 40% the size eight times
 approximately of BTR (by larger than BTR
 equal in size revenues) (by revenues)
 (by revenues)

Financial Emerson is Steady growth The company is
Position financially in all going through a
 strong in nearly meaningful very challenging
 every relevant categories; year,
 category debt has grown attributable to
 but appears both the
 manageable restructuring
 and to the Asian
 currency crisis;
 however,
 sufficient
 resources are
 probably
 available--but
 should just as
 likely be
 carefully used
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Article Details
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Title Annotation:CASE NOTES
Author:Kerr, Gerry
Publication:Journal of the International Academy for Case Studies
Article Type:Case study
Geographic Code:4EUUK
Date:Jul 1, 2006
Words:3697
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