THE FOUNDATION FORUM
WEDNESDAY 21ST NOVEMBER 2012
The following article is a summary of an event we held on 21st November 2012. The event explored how to create value where there looks to be none: turning the worthless to the prized, factory waste to new revenue, loss to profit. The subject was discussed by Jonathan Chippindale, founder of consultancy Plouton and previously a Managing Director of the De Beers Group, Karl Carter, former Technology Director for British Sugar, and Jon Moulton, founder of Alchemy and Better Capital. Their conversation has been summarised by Simon Caulkin, formerly Management Editor at the Observer.
Management is all too often thought of as a grind – crunching numbers, writing reports, ‘working too hard in rooms that are too big, reducing to figures what is the matter, what is to be done,’ as Auden described it in his poem ‘The Managers’. Much of it is. But as a packed and intrigued audience heard at the 21st November’s Foundation Forum on ‘From Muck to Brass: how you create desire from detritus, wealth from waste, a future from financial meltdown’, at its best it contains a less obvious and too often neglected ingredient: an imaginative leap that makes it into something nearer art than science, and perhaps closer still to alchemy in its ability to distil value from thin air.
"What might be called ‘the magic of management’ deserves more attention than it gets"
This is not a fanciful comparison. What might be called ‘the magic of management’ deserves more attention than it gets for at least three reasons. It is independent of economic conditions. It works – even if it is a spell, the value created is real. It is a question of mind rather than matter, and so essentially free. And it’s powerful justification for Peter Drucker’s claim that management is best thought of not as a scientific discipline but ‘a liberal art’.
Consider the diamond. At a billion years old, notes Jonathan Chippindale, founder of consultancy Plouton and previously a managing director of the De Beers Group, diamonds are indeed forever. But it was only in 1947, when their value was crystallised (just as diamonds are in fact crystallised carbon) in the famous line scribbled by a young advertising copywriter, 'A Diamond is Forever' – since dubbed the most effective advertising slogan of all time – that they grew into today’s supreme object of consumer desire.
That they did so was the fruit of two brilliant leaps of imagination by Ernest Oppenheimer, then chairman of De Beers. ‘Let’s be honest,’ says Chippindale. ‘What Oppenheimer did for a living was dig a hole in the ground in South Africa, pull out stones and sell them to cutters and polishers’. His first stroke of genius was to realise that far removed from retail as he was as a miner, if Oppenheimer could encourage consumers to buy diamonds in retail shops, ‘the demand and desire would be pulled up through the value chain, and ultimately he would dig a bigger hole in the ground.’
But how exactly do you create desire from dirt, and a commodity at that? Inconveniently, 33 metric tonnes of diamonds are mined every year, three times more than emeralds or rubies. Oppenheimer’s second stroke of genius was to invest the diamond with irresistible allure by marrying the permanent, physical attribute of the stone with the most potent emotion of all – love. The rest is history. It’s diamonds, rather than rubies, that are a girl’s best friend, valued up to 20 times more than scarcer gems. In the US, which accounts for half the market, 85 per cent of adult women possess at least one stone, 40 per cent have five and 30 per cent buy a piece a year. No one bought diamond engagement rings before Oppenheimer’s brainwave; now no one doesn’t. Think about it: diamonds are a $33bn industry predicated on one marketing idea. (It also helped that De Beers was able to maintain what has been termed the most effective industrial cartel of the 20th century, but that’s a different story.)
‘We took a long hard look at every single thing that went in and went out of the site...’ Karl Carter, Technology Director, British Sugar
Sugar beet might seem a less promising raw material than crystallised carbon. But at British Sugar's (now AB Sugar Group) huge Downham Market plant Karl Carter (‘Mr Sugar’) as technology director practiced a different kind of magic, developing process efficiencies that conjured not one or two but at least nine revenue streams out of the humble root, including earth and stones. In the process he changed the face of sugar manufacturing.
The Downham Market plant is almost unimaginably huge, processing 20,000 tons of beet a day and making 500,000 tons of sugar during each six-month season. Twenty years ago, the plant made just two products, sugar and animal feed from leftover fibre. But then, says Carter. ‘We took a long hard look at every single thing that went in and went out of the site so that we could understand what the factory was doing, over and above making our two products at the time.’
The first unregarded input to come under scrutiny was muck. The quantity of unwanted earth and stones delivered with the beet was so great that the company was considering buying quarries to dump them in – until it discovered that dried and bagged topsoil could be sold at £40 a ton or the stones taken off its hands for £10 a ton by a local crusher. Cost had become revenue. It quickly did the same thing with waste lime from sugar purification. Sure enough, with a bit of processing lime had a value and could be sold. By thinking differently, the plant had evaporated £35m of waste costs into thin air.
But that was just the start. Next up, managers found that technology for improving sugar extraction, unviable on its own, could also be used to produce an amino-acid betaine as a by-product – ‘a nice little offshoot for something that went out in the molasses part of the refinery and had very little value.’ Downham Market is now the largest producer of betaine in the world.
‘...we thought, hang on a minute, we ought to be able to do better than that.’
Almost every other process or by-product of the factory has been similarly exploited. Bioethanol became another output from efficient yeast-based processes and lower sugar streams when the EU cut back on sugar production quantities. Waste from yeast yields vinasse, which recycles back into animal feed. Meanwhile alcohol production gives off carbon dioxide which instead of being released into the atmosphere, is liquefied on site and sold to Air Liquide as an ingredient for fizzy drinks. Next, energy. The site has always generated its own power. But ‘when we looked at it and at electricity pricing we thought, hang on a minute, we ought to be able to do better than that. So we took a view and invested in electricity generation’. At 90 per cent efficiency compared with 55-60 per cent for a conventional gas power station, Downham Market now puts 50 megawatts through the National Grid, enough to supply 110,000 homes, for a revenue of £50m.
Finally, the most lateral thought of all was tomatoes. Power generation gives off hot water and CO2. What do you do with those? After a little bit of work, says Carter, the answer was horticulture. To cut the story short, from an initial £5m investment, the Downham site now has 18 hectares, or 24 Wembley football pitches, under glass and is the biggest tomato producer in the country. All in all, 25 per cent of AB Sugar’s revenue comes from non-sugar, in some years more. This is not only responsible manufacturing: it has turned AB Sugar into the lowest-cost producer in Europe, and the Downham plant is competitive with any in the world.
‘...Unlike private equity, or business in general, for a turnround you positively select for crap management’
Jon Moulton’s something-from-nothing act starts from an even more counterintuitive form of waste. His firm Better Capital specialises in turning round troubled companies, for which, he says, there are four main sources of supply. The first three are government, criminals and fraudsters, and large corporate empires harbouring unloved and neglected companies in their midst. But the biggest source ‘by a mile,’ he says, ‘is lousy managers. Think about it: if you have a floundering company with excellent management, where do you go? Unlike private equity, or business in general, for a turnround you positively select for crap management’.
Dire managers, you might say, are a turnround artist’s best friend. And, marvels Moulton, they are common as, well, muck. Some companies are barely managed at all. At one boatbuilder, more than half the tonnage was leaving one factory as scrap, much of it consisting of ‘good old-fashioned stealing’. Building around 40 58-foot boats a year, the yard was taking 600 man-hours to wire each one, one wire at a time. ‘If you have a manufacturing background you may have heard of the wiring loom. Since we introduced this brilliant piece of high technology, it now takes eight hours and we don’t get the enormous number of failures and warranty claims that we used to – the most memorable being the one that had the pumps that empty the toilets wired the wrong way round.
‘Buying a company like this is a joy’ says Moulton. ‘Forget the marketing, forget the products – you can take £1.5m a month out of manufacturing cost alone’. Companies like this can be put back on track within three months, he says.
Longer to implement but equally promising opportunities are provided by managers pursuing daft product strategies – the more wrong-headed the better. When Moulton bought Parker Pens the company was languishing in the ownership of Manpower, where it had zero fit. On day one, Moulton closed the vast US headquarters and transferred it to an eight-person team in Newhaven, Sussex, at a stroke saving £8m a year. But the real prize was reshaping strategy. Parker had been competing on price, selling jotters for $1.50 a time. Under the guidance of a Frenchman with a feel for luxury, Parker instead concentrated its advertising on high-end pens retailing at £200 or £250. It didn’t sell many; but the halo effect worked its magic right down the rest of the range, enabling the company to charge £3 for pens that cost a fraction of that to make. Under the new ownership Parker went from losses of £21m to profits of £44m in seven years, after which it was sold to Gillette – and was back in losses three years later.
‘... unexploited business opportunities are everywhere – in the human heart, chemical processes and idiots’
As these examples show, unexploited business opportunities are everywhere – in the human heart, chemical processes and managers operating beyond their capabilities, to name but three. What does it take to capture them? A bit of daring and some investment to back it up are essential, but the starting point is the most underrated quality in management, imagination. Truly there is no such thing as a mature industry; only mature management.
The Foundation's view
At the end of the Forum we marvelled first at the diversity of the three stories, but we also saw common threads that had not been obvious when we originally set this up.
Each story demonstrated extraordinary confidence. Facing into a situation that looks set on a path to failure, or rooted in the way things are always done, it takes conviction and belief that are rare to push to such dramatic outcomes
Fuelling that confidence and providing direction was a strong vision of the result, or big characteristics of the result, such as all waste being eliminated, knowing that just a few things matter in a business turnaround, or seeing how culture can be changed affecting women all over the world
And to get there, they each showed why energy is needed to get things done. Sometimes it's sustained over time, taking decades to transform a vast processing plant or ways of thinking, and sometimes it's needed in a devastating burst, going into a failing factory and reversing habits, morale and the general acceptance of mediocrity
About The Foundation
We are a management consultancy working with all kinds of organisations to achieve customer-led success. This means tackling big organic growth challenges; growing faster, growing into new markets or fending off threats to growth by starting with what matters to customers and then making it work for the business as well.
The aim is to influence customer behaviour, but this is inherently tough. Why? Because people in any organisation naturally see the world from the inside-out, with colleagues close and customers distant, and lots of assumptions about how things work that aren't challenged.
We help clients look from the outside-in, re-connecting them with what customers really value (the problem they want to solve, not usually what the client sells), then finding new and better ways to create this value.
This means working both as expert advisors and facilitators. The issue with simply gathering outside-in information is that it lacks impact to get senior teams to tackle inconvenient truths in what customers want, and to believe their own organisation can be different.
By using ‘Immersion’, personal conversations with customers and leaders of organisations in other sectors who have tackled parts of their challenge, we help teams get around the natural and limiting inside-out beliefs that stand in their way. This helps them develop better answers for customers and new ways of achieving lasting success.
We answer three sizes of question:
Small – a new proposition or an improved customer experience
Medium-size – growing value per customer or improving retention (a sub-set of the former)
Large – creating customer-led business success, often by uncovering a true outward-looking purpose and the genuine belief needed for it to be acted on
Our clients include HSBC, JLR, O2, M&S and Ebay, with achievements including helping create Plan A at M&S, adding £100m of value to a Travelex travel money proposition, and giving Morrisons a competitive direction contributing to their return to growth.
Behind our work our most distinctive characteristic is our team and their outlook. Each individual is motivated to and experienced in crossing the border between the worlds of customers and business which often resist mixing well.
This link will take you to more information about us and our Forum events: http://www.the-foundation.com
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