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Making the Elephant Dance: Resurrecting Wolseley Plc with lessons from IBM

October 1, 2009
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In July of 2008, I penned a blog entry1 on the pending changes in Wolseley Plc and if they signaled a change in the existing model of distribution. The entry garnered much interest and was one of the top e-mailed installments for Supply House Times for many months.  It also kept me busy answering emails and phone calls from current and ex-Wolseley Plc employees and Wolseley watchers across North America. In all, I had some three dozen correspondences/phone conversations from insiders, outsiders, and former and current executives and managers regarding my commentary. This blog entry will capture the thoughts of these watchers on the future of Wolesley Plc. I’ll try to, from this commentary and my own experience, detail the options for rebuilding the company as relayed to me, over the past year, from my conversations and correspondences.  

In July of this year, Ian Meakins was appointed CEO of the corporation replacing Chip Hornsby. As Mr. Meakins closes in on the end of his 100-day honeymoon, he is charged with perpetuating the dominance of Wolseley Plc in PHCP distribution. My conversations and correspondences lead me to believe that the future can be bright for the global leviathan. The feedback I engaged was illuminating and not only from the stance of what’s good for Woleslely Plc but also pertaining to what other distributors need to do to thrive in the years ahead. The lessons should be considered by all who want to make it in a much different, slow growth and price sensitive global marketplace.




From Organic Growth to Acquisition

The original growth model for Wolseley Plc was heavily influenced by Ferguson Enterprises where green-field sites (new branches) were established and the reigning branch manager got a substantial piece of the pie. In the old days, branch managers had their names on the local branch. Names such as Peebles Supply and Dunn Supply still exist in my gray matter as past evidence of the new branch/new town model. The culture was an outside seller/branch manager/gazillion trainee driven model where managers in training were put into many of the support functions until they could be moved into a branch manager or outside salesman role.

As the company grew, Ferguson Enterprises acquired companies and was itself acquired by Wolseley in the early 1980s. At that time, Wolseley management appeared content to let Ferguson do what they knew how to do which was grow branches across the U.S. Over time, Ferguson Executives were tapped to help guide Wolseley from its headquarters in the U.K. During much of the 1990s, Wolesley began a series of acquisitions to drive their growth. (See partial list at http://www.ukbusinesspark.co.uk/wolseley.htm) These acquisitions were well-placed, well-timed, and of a reasonable pace. In the new millennium, the acquisitive nature of Wolsely Plc took a steroidal turn. According to one source, the company made some 70+ acquisitions from 2000 until early 2008.2 Wolseley Plc was the most acquisitive company in 2005/06 outside of General Electric.

The pace and scope of the acquisitions were astounding and the expert economic forecasts and equity markets supported the decision. Housing values were skyrocketing, money was inexpensive and available, and the need for building and construction materials showed no signs of stopping. Of course, some two years into the housing collapse, we know that many of the assumptions and forecasts were wrong. When the market crashed, Wolseley was hit especially hard as its building materials acquisitions had a difficult time downsizing commensurate with the pace of the market collapse. Hence the stock tanked, creditors became anxious, and employees were shed by the thousands.

The question arises should Wolesley Plc have anticipated the market decline? If one looks at companies who anticipated the pending collapse, the list is very short. As distributors go, there were few, that I am aware of, that did not get caught unawares and had to make immediate and significant cuts. Going forward, much of the conversations and correspondences, generated by my original blog, regarded the balance of acquisitive growth versus organic growth. The response was mixed in that many felt there were significant opportunities for acquisitive growth while others stressed the need to push organic growth. If one looks at the Wolseley site, the Ferguson entity is listed as gaining share which would imply organic growth.
(See forecast at: http://www.wolseley.com/media-centre/news-releases/2009/27-July-2009.aspx) From a long-term strategy perspective, Wolesley Plc may be prudent to slow the pace of acquisition for several reasons.

First, it is generally accepted that organic growth benefits shareholders more than acquisitive growth. A 2007 study done in the UK by Deloitte M&A and the Boston Consulting Group found that “…poor execution of mergers and acquisitions can destroy shareholder value. …50% of company failures are attributable to poor M&A with 80% of those failures subsequently disposing of the business they acquired.” Another study done by KPMG in 1999 found that “…83% of mergers were unsuccessful in producing any business benefit as regards shareholder value.”

These studies do not mean that all mergers and acquisitions fail to enhance shareholder value but the majority do. As it regards Wolseley Plc, their long history with successful acquisitions and rising share price, until the housing collapse, would indicate the company had a, more than less, successful process for buying and integrating companies. 

I have had personal experience in guiding distributors through acquisitions and helping them enhance revenue streams for selling the business. Done right, acquisition can be a superior means to grow. But, I’ve never believed that acquisitive growth was as good or lasting as organic growth. Organic growth means you have to beat out a competitor in the battle for customer mindshare with a better product, service or value proposition. Organic growth requires cementing a bond with the customer who is the ultimate buyer of your product. It means you anticipate what the customer needs or wants and create a solution to a problem. Simply put, organic growth means you win by beating out the competition and it is much closer to a marketing orientation than anything growth by acquisition can muster.

Acquisitive growth can be a dark temptress and it comes with a lot of unintended consequences. After the big bump in sales is over, post acquisition problems emerge including combining cultures, rationalizing approaches to the market, and uncovering and dealing with unwanted stuff that always seems to be hidden in the discovery process. 

Repeated acquisition often weakens the base culture of the acquiring company. In addition to this, the cost structure of distribution is semi-variable which means that acquisitions don’t scale all that well and eventually scale diseconomies result including redundant assets, people, and clashing cultures. In the current economy, acquisition opportunities are rare and firms should consider driving organic growth with a top notch marketing strategy that creates new value streams.  

Driving Market Growth

When Lew Gerstner turned around IBM in the 1990s, he quickly discovered that the company was a sales culture and not a marketing culture and the rah-rah sales culture   landed Big Blue in severe trouble. Selling is about developing a relationship with an account and influencing a buyer to purchase. Marketing, at its core, is putting the product, service, price and promotion together before the seller hits the street. To quote the bumper sticker, “Marketers do it by segment,” and, if you’re not driving your growth by segmentation, you’re not “doing it” very well. 

Most wholesalers are sales cultures and, hence, they often don’t understand or appreciate good market strategy. When I asked about the marketing orientation of Wolseley Plc, the response was mixed. Many felt Wolseley’s existing model was market driven but others conceded that the emphasis was still on sellers and branch managers who came up through the sales rank where marketing was mostly foreign. 

Based on my experience, I am of the opinion that a marketing orientation can help the organic growth of any distributor as it did IBM a decade ago. In particular, a solid market strategy can be used to:
  • Segment the business and focus organic growth efforts on parts of the market with the best combination of growth and profits.

     
  • Reduce inefficiency by discouraging sellers from procuring all types of business; especially segments with limited growth and bad transaction economics.

     
  • Research and create services that can be sold to existing customers.

     
  • Cement partnerships with key manufacturers, maximize joint marketing funds, and bring new product technologies to market.

     
  • Hone strategic pricing to capture value and avoid the sales mentality that all orders are good.

     
  • Develop new models of business that reduce cost and enhance the value to price paid ratio.

The drive toward a marketing orientation follows the maturation of the plumbing industry. As companies expand and seek competitive advantage, they mine new knowledge and use it to increase performance. The evidence for this in distribution is the increased interest in pricing as a functional discipline. Eight years ago, I and co-author Jane E. Baynard penned the first pricing text for wholesalers. Since then, there have been two other publications and several software packages that tout enhanced pricing capabilities. 

Pricing is a subset of marketing and can be a powerful discipline. But lasting pricing gain eludes many wholesalers because of implementation. Why? Wholesaling has always been a decentralized industry and branch managers and sellers control much of the go to market strategy. Strategic pricing, however, is largely set at the home office with the field operatives implementing the goals set by marketing. Branch managers and sellers can have influence in and some control over pricing but, time and again, empirical evidence shows that sales control over pricing drives margins lower. The issue in distribution, as illustrated by pricing, is how does one mine new functional knowledge, break it down, and get it implemented in a decentralized culture? 

Wolseley Plc. and especially the Ferguson Enterprise entity has traditionally been a branch centric culture. Mining new functional expertise and getting it to the field is, in my experience, difficult in a decentralized organization. Often, multi-branch wholesalers will try to get the branch manager to absorb the extra knowledge and “up their game.” Too often, this fails because the appropriate control systems and feedback loops are not available. Also, it is typically not practical to dump a new functional discipline, such as pricing, entirely on the head of a branch manager. There is only so much one person can master.

For Wolseley Plc, or any wholesaler with multi-branch operations, the challenge in driving gain from new knowledge is often not what to do but how to get it done. This will require establishing functional expertise, breaking the knowledge down into usable chunks, and creating control and measurement systems to make sure it is used. This takes administrative genius and a will to break away from the branch manager as super –hero model.

I have seen many wholesalers lose pricing gain because they did not understand how to design an organization that perpetuated the new knowledge and instead adhered to a decentralized, local entrepreneur, organization. The title of “Branch Manager, CEO,” may be catchy and swell the pride of the field operatives, but it is less practical in a far-flung organization that is mining new knowledge for competitive gain. Having every branch manager “doing their own thing” is a nostalgic pollyanna and downright dangerous in a large, complex organization.

A final, but necessary piece, to driving market growth in a large organization is the need for better educated managers. In the early years of its history, Ferguson Enterprises recruited from top colleges in the mid-Atlantic. The company got high potential graduates, trained them and indoctrinated them in a culture of long hours. The final result was a blossoming of labor productivity that was essential to organic growth.

As Wolseley goes forward, it will be essential, for organic growth, to attract the best and brightest. This means hiring managers not only from top colleges but with also those with graduate degrees. I have witnessed a slow but steady growth in graduate degrees in the management ranks of distributors and, for the most part, advanced educations and experience are far more potent combinations than the four-year degree and experience. 

Currently, wholesaling is a woefully low achieving industry in educational attainment. Our 2006 White Paper, “I Can’t Believe I Ate the Wholesale Thing,” found employees with graduate degrees were 8% of the U.S. workforce at large, but only 3% of employees in the Wholesale Trade had a graduate degree. My experience finds that the complexity of running a large organization is made much better with the perspective of a graduate education. Managers with graduate educations aren’t inexpensive, however, and the ability to attract these employees will be a test for Wolseley which is in a rebuilding mode. 

Globalization and International Supply Chains

Two years ago, I and co-author Steve Griffith, did a research study and book on the changes in distribution due to the globalization of manufacturing.3 The research found that distributors were flocking to foreign sourced “off-brand” products that were an average of 30% less in landed cost than domestic brands of which many were made off-shore. Our financial modeling showed that, at a 30% saturation rate, companies not buying “off-brands” were at a competitive disadvantage and there were six distinct sources of “off-brand” products. 

Today, two years later, the move toward “off-brands” is well-underway, pervasive, and generally accepted. From my conversations, Wolesley Plc has a strong global supply chain effort. The company was lauded for having a strong logistics organization and global reach. 

A targeted, well-funded, and global sourcing effort for “off-brands” can propel growth and profitability in many ways. From our survey, “off-brands” are perceived as having comparable quality and features to most domestic brands and at a better price point. “Off-brands” were also used to attract new customers and keep them buying due to their low price. The e-mails and phone conversations I had were almost unanimous in that Wolesley’s international sourcing and supply chain were competitive strengths. 

While the sources of supply for “off-brands” are increasing for all distributorships, controlling an internal global supply chain is, from our research, a hefty advantage. Don’t be surprised if Wolseley Plc recognizes this and takes advantage of international manufacturing and it’s low cost, high quality products. A recent survey of large company CFOs found that 62% expected “global sourcing activities to increase over the next three years.”4

Currently, there is little public information about distributors’ efforts to source from foreign shores. Our book on the subject was the first empirical study to quantify the move to source foreign “off-brands” but the message was difficult to get into trade magazines and the marketers of industry knowledge. Many were afraid of the repercussions of domestic brands. Whether or not the fear was valid is, in our view, beside the point. The point being that international sourcing and globalization of supply is a competitive necessity, is here to stay, and many domestic brands may end up competing with their distributors. 

The old designations of distributors and manufacturers are not always clear in the flat world of instant information, international supply chains, and global manufacturing. WW Grainger, the leading industrial supplier based in Chicago, has released information that they have funded a global supply chain effort with executive and managerial positions and “private label” products represent a substantial portion of branch sales.  

Global reach or scope is a tremendous advantage in a local market industry such as wholesaling. Recently, I have worked with two importers and their businesses, in a down economy, are booming. Why? It’s simply a function of their knowledge of scope and the allure of low cost/high quality goods. Wolseley Plc’s scope can offer tremendous advantage to the internal branch organization and, possibly, spawn other business models. In several instances, I have witnessed large wholesalers with scope that have created import organizations that sell to local distributors and buying groups.  

The Levels of Cost and Managing Size

Most PHCP products are mature and their applications are well-known. The industry is over 100 years old having formed its roots when a Chelsea, London plumber, Thomas Crapper, placed a modern design ballcock on a siphon-type fixture. While plumbing products continue to change with applications becoming easier, the price points of these products, like most industries, continues to fall.  

In the late 1980s, I sold state of the art, brass body, ceramic valve faucets for the Kohler Co. with price points (if memory serves) at $50 to $100 wholesale. Today, I can buy the same technology retail, as an “off-brand”, for $19.95. I put one of these “off-brands” in a spare bathroom in my parent’s coastal condo eight years ago and, today,  it works as well as it did the day I bought it.

As cost in product comes down, the products become more affordable and markets expand. However, the margin dollars earned on any one sku decline because of lower cost goods.  If product costs decrease faster than markets grow, as it appears to have in the PHCP industry, the challenge for distributors is managing cost to serve or operating expenses.

The first level of cost management is controlling purchasing or material for resale cost. Most wholesalers I deal with are dialed in on a competitive purchase cost with smaller companies being ardent supporters of co-operatives, “marketing groups” and a panoply of master distributors, importers and private buying organizations to survive. Managing the cost of material is a first level of cost management.

The next level of cost management is budgeting and setting levels of operating expenses including salaries and bonuses. Again, most wholesalers budget reasonably well and, in today’s Great Recession, have visited their operating cost structure many times. In good times, the lifestyle managers, can get a bit sloppy with their operating expenses but, for the most part, wholesalers are a frugal lot.

The third level of cost management is process documentation and streamlining. The most formal part of this discipline is the ISO processes created in the 1990s. ISO has a well-established program of mapping and managing processes which is essential to consistent quality and cost management. Many wholesalers take a more ad hoc approach to processes and benchmark them with other non-competing wholesalers, use accounting ratios for guidance, or plain old Yankee ingenuity to drive out redundant costs. My experience is that many wholesalers are familiar with these disciplines and use them to varying degrees. Several top PHCP wholesalers have specialists for process management.

My conversations over the last year lead me to believe that Wolseley Plc has a keen understanding and robust management of the first three types of cost management. However, there is a fourth level of cost management that is creeping into distribution and it has potential for great change and competitive advantage. This understanding of cost begins with the realization that financial accounting and accounting ratios are, at best, crude instruments to managing strategic costs. Financial accounting is a time period based discipline but the step cost structure of distribution is influenced less by time and more by types of work and transactions. In essence, cost behavior is greatly determined by the types of transactions, customers, segments, sales territory configurations and solicitation choices.  

It’s not just about ledger costs but how the costs contained in the ledger are used to serve the customer. In essence, the market and sales strategy of a wholesaler can greatly determine its costs and cost competitiveness and this is not something you can get from standard accounting reports or from the previously mentioned tools.

To understand how market and customer decisions can influence a low cost platform, wholesalers need to develop and use a costing methodology that allocates costs by transaction type or activity.  The discipline of activity costing has been around distribution for close to two decades. Several PHCP wholesalers are consistent users of an activity-based costing logic.  

More recently, activity costing has taken a backseat to hybrid models of costing that use transactions or work definitions as an allocation method. In a recent conversation with a top 20 PHCP wholesaler, the company has invested heavily in understanding market and sales costs as driven by customers, segments, and sales configurations and is working the kinks out of a transaction based model. The results from the efforts are premature but hold great promise. 

Our experience with Transaction-based costing or a similar work-based methodology is that they will become increasingly useful for multi-branched and multi-market companies. The understanding of operating profit and how to maximize it is limited with financial accounting reports and ratios. For instance, our work with Transaction costing finds that rewarding outside sellers on margin dollars has little correlation with operating profits. And, certain transaction types such as non-stock orders, counter orders, and branch transfers sap the operating capacity of most distributors. Armed with accurate Transaction costs, a wholesaler can accurately target areas of loss, eliminate or curtail losing transactions, and even develop low cost models of distribution that can lower the market price by 20% or more.

As the firm becomes sizable, managing costs takes new learning and a certain genius. Far flung and diverse markets cause complexity, managers develop fiefdoms, people want the latest gadgets and costs rise accordingly. This type of cultural inertia can be slowed and managed by understanding and attacking costs.  

Purchasing costs, budgeting, and process documentation and streamlining are all necessary for cost management. Developing advanced costing allocations and understanding how marketing and sales choices drive costs is the great frontier of cost management for distribution and the interest is nascent but strong. Sixty to 70 percent of operating costs are in people and a significant amount of their costs are taken up by transactions, processes, and customers who don’t contribute to the fixed cost of the firm. Knowing where the waste is, from a marketing and sales perspective, is essential to a low cost platform and the only way to get there is by using advanced costing measures.

What Won't Work and Making the Elephant Dance

Successful companies that stumble badly have a tendency to get back to the roots of their success. For the most part, however, getting back to one’s roots doesn’t work. Why? The firm and its markets have changed too much to accept the old ways of success. In the past, Ferguson attracted newly minted graduates with promises of big incomes, running one’s own branch, and making it big if they performed. The hours were tremendous but the rewards were substantial. 

If Wolseley Plc tries to recover the glory of the past with the branch manager/outside sales/gazillions of trainees culture, it’s my estimate that this will not be as successful as it was in the past. Our research, over the past five years, says that sellers and branch managers will be trimmed back. Much solicitation will go to other, lower cost models and many of the branch manager duties will be absorbed at the home office. If you are in doubt about our work and theories, read the interview (Sept.’09-Supply House Times Cover Story) about incoming ASA president Frank Nisonger and the changes he made to the branch centric culture of Slakey Bros. If Wolseley Plc is to provide superior returns, it will need to take the appropriate pieces of the past and quickly develop new value streams.

In turning around IBM, Lew Gerstner quickly moved the company into services as a new and important revenue stream. He picked the best and brightest and gave them marching orders and where he didn’t have the talent, he quickly recruited it and put it to work. He mercilessly cut losing ideas, turned on a dime, and searched for new revenue streams. 

When Gerstner finished his turnaround of IBM, he penned a classic business text on the subject titled “Who Says Elephants Can’t Dance?” The charge for Ian Meakins is to make the elephant dance again. There is a great potential for Wolesley Plc to remake itself and leave the troubles of the recent past far behind. Recent press on the company’s troubles has been a popular read partially because of its tremendous past success and because it was the envy of competitive wholesalers. Having an unchained Gulliver in one’s midst is both exciting and terrifying and, when the giant stumbles, the envious come out from hiding to wag their fingers before the giant rises again.

The conversations and correspondences over the last year have led me to believe that strategic marketing, further development of international supply chains, and developing and using advanced cost management techniques will be areas of advantage to the making the British-based company a fearsome entity as it dances into the future. In my estimate, this would be a positive move for the industry just as the Ferguson Enterprises of yesteryear moved the industry forward and made us all perform better.  


1 Benfield, S. See “Do the Current Troubles at Wolseley Signal a Change in the Distribution Model?” Supply House Times, July 2008 at: http://www.supplyht.com/Articles/Blog/BNP_GUID_9-5-2006_A_10000000000000390554.

2 Cudzik, J “Are the good times gone?” Supply House Times, May 2009 at: http://www.supplyht.com/Articles/Feature_Article/BNP_GUID_9-5-2006_A_10000000000000586524.

3 Benfield, S., Griffith, S.  “Disruption in the Channel, Power Publishing, 2008. 

4 Banham, R., “Supply Chains and Demand,” CFO Magazine, September 2009, pg. 60.


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ferguson-more of the same

Kurt Laing
October 5, 2009
The elevation of Chip Hornsby to Wolseley CEO in 2006 was based on the performance of Ferguson(USA)which was as you stated,driven by aggressive acquisition growth.This growth was an artificial enhancement of Mr.Hornsby's vision and ability to lead the corp. into the future.The downturn in the economy exposed this flaw.Wolseley,has wisely reached out for Mr.Meakins,who has a proven track record in his resume. It was not suprising,therefor when Hornsby's appointed successor at Ferguson,John Stegeman,was also shown the door.Why stop there!!!Why does Brad Miller,himself a product of the acquisition fever,remain as COO...and how will the appointment of Frank Roach(a 33 yr. veteran of the same mind set and culture of Ferguson)as CEO serve as a positive change in direction.The rank and file management all have been indoctrinated to the past methods to achieve their goals. Your article of 7/30/2008 should be mandatory reading for the Wolseley Board, for until there is a fundamental change in the culture at Ferguson,there will definitely be an elephant in the room but it sure as hell won't be dancing any time soon.

Reply to Laing-More of the Same

Scott Benfield
October 5, 2009
Kurt: I wouldn't disagree with your assessment of the "aggressive acquisition growth" you have stated as a problem. Stegemann's departure was announced to the press as a, more or less, redundant position but the inside scoop may be different. As it regards Frank Roach and Brad Miller, I do not know of their career paths and capabilities during this time. If I go back to Gerstner at IBM, he most certainly did sack some of the executives but he also kept some around to transition the old culture to the new. In my, experience, if you eliminate all of the execs in the old culture, you can lose alot of the history and understanding of the capabilities of the firm and this can have worse consequences than if you leave some of the original architects around. We will have to give Ian Meakins the benefit of the doubt for his personnel choices so far. You may be right in that other high level types will need to go. In the meantime, consider the culture change that can be brought about by solid marketing, international supply chains, and cost management using advanced costing techniques. Did the Ferguson/Wolseley you know have these capabilities and do you agree with the assessments of the readers? If you have other comments on these subjects, let me know. Scott Benfield

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