Chapter 9 ——_____ THE ADVENTURES OF A TROJAN HORSE: BOXES, BUBBLES AND RUSSELSTEEL SUMMARY David Hurst is the vice-president and “strategist extraotdinary” of Russelsteel Inc., a Canadian steel distributor with 1989 pre-tax profits in the $30 million range. He has seen his company much bought and sold since 1979. But, like the wooden horse pulled through the gates of Troy, the company has proved itself in many ways more alive and resourceful than those who acquired it. ‘When companies are bought and sold by remote conglomerates only their hard surlice characteristics are treated 35 meaningful. “We judge theen,” says Hurst, “by the boxes in which we have placed them and by arbitrary labels stuck on chem. Inside the ‘box’ we often find the “bub- ble’, which gives the acquisition ics life and culeure, if indeed it is alive at all” There follows the story of Russelsteel, che purchased box that came alive, with a lessom forall the barterers of boxes. ‘THE STUDY ‘Simple task, subtle culture: the growth of Russelsteel The company Hugh Russell Inc. was fotinded in 1962 to supply Canada’s widely dispersed steel users. fe grew’ largely by acquisitions until, in $979, it was che 50th largest company in Canada, arith a net income of $14 million on §535 million in sales ~ not impressive, but sol- vent. It was an organization in “industrial distribution”, a term chosen co cover the highly diverse series of acquisitions, including the Building Supplies Group. The year 1979 cured out co be something of a water~ shed, and the three years which fallowed were years of unprecedented turbulence, disillusion and reorganszanon, and a complete revolunon in the management culcure {inter Dovid Hurst ln the recession of 1981-83, the deepest in the Canadian steel induscey since the Great Depression, the companw’s old order died and 3 newTHE ADVENTURES OF ATROJAN WORSE_W72 order was born. The unchallenged conceptualizer-in-chief of Russel- steel is South African born David K Hurst, a Stanford MBA, whose descriptions of the company’s rebirth have appeared in the Harvard Busi- ness Review and Organizational Dynamics. Hursc has been involved in company curnrounds before, notably in his native South Africa, He has transformed his experiences into an sstonishingly original, stringent and far-reaching critique of conventional business strategy, dominated as itis by finance and acquisition, and he has made a powerful plea for alterna- tive inodels based on the nurture of corporate cultures. The story that follows is compiled from several private interviews with David K Hurst, from his many public presentations, and from his published works. “My conclusions are somewhat drastic, bue justified, I believe, by ‘what we have achieved here. (like to explain, in the words of an article I wrote, ‘Why strategic management is bankrupt’ * ““[began my management career in the 1960s, working for man- agers who had been taught chat the principles of strategie manage- ment could be aansferred successfully from one business (0 another. The more 1 saw of dhe results of axtempts co do this, the less persuaded I was that it was really possible. By cursing chem- selves off from the realities of customers and operations, corporate managers often scemed to end up in a world of abstraction witich provided poor maps of realiry” The conglomerate: fictional world. "The logic of this world was domirigted by the interests and concerns of the local financial community. Ie cook me some me co realize that stockbrokers and investment advisers need a contin~ ‘uous supply of stories about companies in order to induce theie customers to trade stocks. They look to corporate management to supply these, What had starced out as a modest statement of corpo- rate intentions for incernal consumption would grow prodigiously co become a ‘grand strategy’ “In che benign economic conditions of the 1960s, financial results often ‘confirmed’ these serategies. And so the stories, once (old, grew in the telling, encouraged by an adulatory business press which sang the praises of corporate management. + Orga Honel Dynami, Nawerber 19867A_ THE ADVENTURES OF A TROJAN HORS “Successful conglomerates orten seemed to me to become sophisti- cated chain lecters, whose continued survival depended upon their abil- ity to tell eloquent tales and detiver results in the shore term. Gradually theit corporate managers became obsessed with quarterly earnings, accounting ‘optics’ and the management of the stock price. They would spend huge amounts of time searching for ecological niches in the tax system and very litde on the distinctive competencies which had made them successful in the first place ~ competencies in businesses which they no longer understood, “The management theory of the time was characterized by the search for, and the purported discovery of, the fundamental principles of man- agement. Management theorists believed they had isolated the elements of administration that were common to all management situations Because they thought these principles were universal, they believed chat management skills were a cultural and could be crnsferced from one Dusiness to another. Our own case was typical. Hugh Russell Inc. was a textbook case of federal decentralization, to use the term that was coined by Peter Drucker. This produces a split between the operating managers who run the profit centres and the ‘investors, the corporate office heads who run the holding company on behalf of the shareholders "The latcer were practinioners of what might be called ‘the empty box approach to scrategy’. Divisions and their units were moved across an abstract chessboard like so many interchangeable units taking opposing pieces from the board. “The strategist scanned the environment; set objectives, usually finan cial ones, developed options, made strategic decisions, adapted the orga~ nization, so thar i could effectively implement éhe strategy, and then had periodic strategic reviews, in case it had missed something. All chis is supposed (0 be dane by corporate office heads, far removed geographi- aally, cechnologieally or culturally from the units they are playing with, whose designation as ‘industrial distributors’ isso abstract as to be virtu~ ally meaningless. Whar, in fact, these corporate heads did to prevent themselves getting bored out of their skulls, was to sore out ‘dogs’ from “cash cows’, ‘question marks’ fom ‘stats, 25 pieces on a board game and {go on the crail of acquisition and divestiture, buying companies that fit- ted wichin some notional concept of what the conglomerace was all abour, and selling others.THE ADVENTURES OF ATROJAN HORSE_175 with fictional profits and cultural travmos “In our case it was largely acquisitions, 27 of them, involving more than 40 distinct businesses. This hugely increased our size, but in the process the investment function and its needs totll overpowered the management function and its concerns. “We did not grasp the cultural turmoil you can create by ‘aking 2 company over. In some cases the companies had been buile up by single enerepreneurs and, without chem, were leader- less and hollow. When one of our vice-presidents was put in charge, t0 introduce ‘the necessary organization and control’, all chat company’s managers resigned or had to be replaced. Two other companies were supposed to be iti the same business. Their merger would, on paper, create big improvements in margin and a radical reduction in overheads. Yet, no sooner were they merged than they started to fight. Their management styles were different as were their cultures and, while cheir markess overlapped, they ‘were not the same. In another ease, a whole group of employees resigned, started up cheir own business and eclipsed their original company within chree years “Thete followed a disstrous divenification into Building Supplies, a family company with s rich culcure, in which the orig inal founders agreed :o stzy. But their money was no longer where their mouths were. After ewo years of profirability, the group began to sink. During those years, group headquarters received 2 lot of “hockey stick’ forecasts. Yes, profits could gip in the short term, but then they would shoot upwards without pause. “The conglemerate HQ knows a great deal about historic costs, but very litle about how the companies it owns are actu~ ally engaging themselves here and now, what ideas, ambitions and competencies shape their cultures, or whether the creature inside the box has long since died and only its trappings The predator strikes “If HQ believed in these erappings, the markets did net. The pendulum had starced co swing back against the fashion of diversi- fication and the large, unwieldy conglomerates this created. Hugh Russells poor financial ecurns, less than three per cent ROI, made i a target for takeover. In 1986 2 predator struck. In the same year.176 THE ADVEKTURES OF A TROJAN HORSE the steel cycle faltered, recovered briefly in 1981 and chen, a year later, plunged “The crunch came as the economy curned down, wiping out those of our businesses which had not provided real value to their customers, Many of our operating subsidiaries, neglected for years, fall into large losses. I'd seen this kappen before. I came 0 realize that very few of these would-be acquisitors were villains, cynically manipulating the system, Rather chey were victims of their own abstractions, tragic heroes of the stores they had cold to themselves and their shareholders." ‘The whole concept of “management by remote concrol”, 2 surviving, theme of scientific management, had foundered. The financiet-as-scien- tist at the apex of an experiment, which doles out carrots «© managers and brings down sticks upon their backs on the basis of a rational model, hhad been exposed as a giant illusion. Hurst believes that an organization’s strategic concepts are like the hard shells buile by organisms, or suits of armour worn by knights. The structures give protection and security, but at the cost of restricting shape and mobility. In North America, che corporate structures, built lyer by layer during the warm climate of the 1960s, have proved highly unadapt- able in the brisker cemperatures of the 1980s. it had been so long since anyone looked inside the shells being bought and sold or their alleged ‘market value, that no one had realized how many of them were already hnalf-dead and in no shape t0 compete for survival “We had seized che shell and lost the substance. { can’, off-hand, think of a more important issue facing che finance-dorninaced industry of Canada, the UK and USA. Are iwe dealing with reali- ties of creating and growing businesses, or are we manipulating. ‘mere counters at one stage removed from reality?" The takeover ‘The takeover of Hugh Russell Inc. in 1980, in a 100 per cent leversged buy-out, was not the end of its roubles. It then merged with the large and bugely unprofitable steel fabricator, York Steel Construction, to become York Russell. Hurst recalls: “As members of the acquired company’s corporate office, we waited nervously for the axe to fall. Nothing happened. Finally, after about six weeks, Wayne Mang, now our president, asked the new owner if we covtd da anything co help the deal along, TheTHE ADVENTURES OFA TROJAN HORSE 17 new chairman was delighted and gave us complete access to infor- mation about the acquirer” However, che information was hardly reassuring. The business had litte sment suength, no plan and, worse, no money. ‘The deal had been desperately conceived to keep Hugh Russells meagre profits and cash- flow from the cxman, and to finance the large debt burden of York: Steels fabsication business. The acquiter, it turned out, needed Russell far more than Russe needed che acquiter and, more important, the acquirer had not the slightest idea of what might be done to improve its ‘operations. For once, corporate HQ was admitting its ignorance. It des- perately needed the Russell operasios so survive and prosper. How it was done was entirely up to Russell The turnrouad plan — from within 1c was really 4 “Trojan horse’ sievatior " Borst explains. “They had found us auc2ctive, if only because we were marginally less broke, had pulled us wichin their walls, and now it was our spicit which took over, along with a veritable change of paradigm.” Hust joined a task force which put together 2 $300 million bank loan application and 2 credible eurnzound plan. York Russell survived, but x ces of 25 per cent took their toll, Seven divisions of the 25 were closed: 16 were sold. Five of the Inter. cogether with the steel distribution and metals businesses, were bought by Federal Indus- tries in 1983, and with chese moved the “nerve centre” of the survival plan ~ Wayne Mang, David Hurst and their colleagues. The Trajan horse had been towed into another city, bur the group was sil cogether, sal meeting and still had the confidence of is bankers. More important, it had “a logic of recovery" encoded within i On “boxe: and bubbtes’” Writing in the Harvard Business Review* Hurst contrasts the living processes which grow their outer shells with che shells themselves devoid of their living contents, aften spectacularly beautiful, but in fact deposits fom che past. He calls chese living processes “bubbles” and their final stevctures boxes”, Boxes and bubbles complement one another, like the creature which lives widhin its shell. However, they are frequently mis: conceived as being oppased (0 one another, * “Or boxes, bubbles and effective mangement”, Hard Businst Peowew, May-June, woes178 _THE ADVENTURES OF A TROJAN HORSE Table 9.1 Boxes and Bubbles: HF] C ings ty ay (esc tig) mt Tomarow/s bases ake ithoppen tit heppan For example, tasks are che boxes, while the roles people play are the ‘bubbles, thar is, the life-giving origins of those tasks. The structure of an. ‘organization is the box or shell formed by the dynamics of its teams which are its bubble. The compensation systems are a box created from. the living history of rewards that people have exchanged. Boxes are rational, left brain, precise, Bubbles are social, right brain, ambiguous (Gee Table 9.1). Strategies are typically made of boxed thoughts and products, while missions are what fill those strategies with bubbles of imagination and creativiey The corporate HQ which becomes obsessed ‘with ourward appearances has los sight of the missions ofits companies, the vital complement co any strategy that adds value in che longer run. Reading versically down the left column of the box, the following policy statement could be made: “The strategy consists of planning and carefolly analysing chings excernal (© the organizanon, together with sts key strengths andTHE ADVENTURES OF ATROJAN HORSE. 179° weaknesses. These are reduced to fundamentals from which are designed objectives, each with precise targets set for it, which focus vupon and search for the means to make today's business happen.” veutically down the rigit cofumn is like entering a wholly dit ferent cealm: “The mission involves spontaneous synthesis of phenomena inter- ral co people and to the organization, from which its competencies and preferences emerge, and its purposes evolve from its values, ini- tally ambiguous but finding their own direction. Employees become aware and recognize the ends which will make tomorrow's business happen.” All t90 often the cwo policy statements above exclude one another and subscribe to “hard” and “soft” approaches respectively. It is the peculiar ‘capacity of an effective corporate culture to reconcile the hard with the soft, the box with the bubble. A company needs both to sueceed. From mission to strategy Hurst not only believes, but has demonstrated through his successful curnrounds, that mission creates strategy, and is the soft origin of hard reales. The answer, cherefore, isto read across the columns in the box. “The spontanecus synthesis of novel phenomena is what creates the plan of analysable chings and elements. The internal compe- tencies and preferences which emerge are what constitute the externally visible organization, capable of reduction into key strengths and weaknesses. The values, initially vague, which flow in = particular directions, are whac make the precisely targeted objec- tives possible, And awareness and recognition of common ends, cowards which tomorrow's business can be dedicated, are what ‘energize the search focusing on the means by which today's busi- ness can be transacted.” ‘The right column, facing forwards to the furute, is the living element within the left-hand column that fices towards the past. The result is a Janus-ficed organization, looking backwards and forwards at the same ‘ime, both solid shel! and ving substance. It is important to grasp that the backward-looking “boxes” are by no means useless. They prune, call, rationalize and shake down the excesses of creation. They schema- tize and turn into routines and rules the ideas already implemented and operationalized ‘Yer the shell by iself can only look backwards. The bankruprey of