JANUARY 5, 1984
Imperatives for Business Survival: Learning to Live with Less
AN ADDRESS BY Victor A. Rice, CHAIRMAN AND CHIEF EXECUTIVE OFFICER, MASSEY-FERGUSON LIMITED
CHAIRMAN The President, Douglas L. Derry, F.C.A.
Distinguished guests, members and friends of The Empire Club of Canada: When one contemplates the successes and failures of Canadian businesses over the last century, there are many fascinating examples of each. However, there are few companies that have travelled the roller coaster of brilliant success on a world scale and near bankruptcy with the panache of Massey-Ferguson. A few examples:
Started in 1847 in Newcastle, the company became - and still is - the world's largest manufacturer of tractors and a world leader in multi-cylinder diesel engines. With ownership almost entirely in Canada, but 85 per cent of its sales outside Canada, its exposure to fluctuating world forces has been significant.
In the last sixty years Massey-Ferguson staggered close to bankruptcy during the Depression, recovered with war production in the 1940s, faltered in the 1950s, thrived in the 1960s, and reached new records of size and profits in the mid-1970s, as a prologue to its most recent difficulties. Throughout this time it has been owned or controlled by some of Canada's most prominent businessmen - a feature guaranteed to keep the interest and attention of the public - first the Massey family itself, and more recently through the Argus Corporation by E.P. Taylor, Colonel Eric Phillips, Bud McDougald, and the Blacks.
In its most recent crisis, it has had the dubious distinction of breaking a number of Canadian records, one of which is losses since 1977 exceeding $1.4 billion. (I believe that this record has now been surpassed by Canadair, which lost this amount in one year alone.) It also had long-term borrowings and bank debts in 1980 of $1.6 billion, the rescheduling of which required unparallelled negotiations with banks throughout the world, and support from the federal and Ontario governments. More recently, Dome Petroleum has provided some competition in this area.
Of course everyone has his or her own theory as to why Massey-Ferguson has had such problems. Mine, based on personal experience, is simpler than most. Their product is too good. As the owner of a thirty-year-old Massey 35 tractor that continues chugging along year in and year out, I cannot help but suspect that the market for perpetually operating farm equipment is getting saturated.
However, in spite of this, there are signals to suggest that a brighter future is in sight. Although the company is still absorbing losses, these have been reduced significantly through paring of costs; and while industry sales have continued to decline, Massey's share of the market has been improving. With some signs of an improvement in major markets, 1984 is looking more promising and the recent acquisition of RollsRoyce Diesels International seems to confirm this as being management's view. To have weathered such problems and survive is to the considerable credit of Mr. Rice and his management team.
Out of such levels of adversity there has to be some benefit, and this can be seen in an organization that is much leaner and more tightly run than has been the case for many years; it is far better poised for the demands of the second half of this decade and for the next. So it seems appropriate that the Chairman of Massey-Ferguson should select as his topic, "Imperatives for Business Survival: Learning to Live with Less."
Victor Rice has been running Massey-Ferguson since 1978 - he has addressed the problems in the worst of times and, it is to be hoped, he will continue to do so through improving times. After gaining experience with Ford, Cummins Engines, and Chrysler in the United Kingdom, he joined the Perkins Engines subsidiary of Massey-Ferguson in 1970. He served as Director of Finance and then marketing prior to moving to Toronto in 1975 to become Controller of Massey-Ferguson itself. In 1977 he was appointed Vice-President Staff Operations and a year later he became President and Chief Operating Officer. In 1980, at the age of thirty-nine he was elected Chairman and Chief Executive Officer.
I am pleased to welcome Mr. Victor Rice to address us today.
Mr. Chairman, ladies and gentlemen: I hate to begin with bad news for such a distinguished audience - but I think the microphone is working.
I want you to know I'm grateful for the remarks I heard as I came up here - but I'm going to speak anyway. Actually, I'm deeply honoured by your invitation, and by your gracious welcome. After such a fine meal, it may seem unlikely I can persuade you that less is really more. I'm going to try.
I want to review with you some of the things that I believe this world - especially the economic sector - needs less of, in order to make more headway in the years ahead; not just obvious things like inflation and international tension, goodness knows, we can always use less of those, but other things that many people seem to feel are all but inevitable these days. For example - we need less confrontation between government, business, and labour, and more collaboration. We need a lot less demand for the quick fix in economic policy - and a lot more perception of the need for basic structural changes. We need less lip service to the urgent requirements of job creation, and a lot more productive investment. We need less inclination to resolve economic issues among nations by throwing up more trade barriers. We need to pay less heed to the notion that we can cure liquidity problems in the developing world by cutting off the flow of credit. We need a lot less alienation among workers - and a lot more understanding of the causes of that alienation.
That's what I mean by making more out of less.
I'm a believer, you see, because I consider myself an expert on living with less. At Massey-Ferguson, we had no alternative. When the well ran dry, we had to learn to survive on short rations or not at all. So we learned ... and in the process we made some interesting discoveries.
We found we could not only survive in a low-cal economy, but we could shape up as we slimmed down. I suppose you could draw a parallel between our experience and society's new preoccupation with physical fitness and the no-bulge profile. It seems to me there are two ways to fight the flab - and this applies to business as well as to people. You can let yourself become scrawny and emaciated. If you're undernourished, it's inevitable that you will shrivel up and lose your energy. Deep inside, you will still yearn for the rich provisions of the good old days. Or you can adapt. You can train yourself to thrive on less. You convert your low-cal diet into sinew and strength.
I believe that's the choice facing much of the world's business community today - to shrivel up and eventually fall by the wayside, or to become trim and tough. In other words, to make more out of less.
Those of you who are fitness addicts already know the process starts with your frame of mind. You've got to believe. You've got to convince yourself you are willing to make the sacrifice, willing to give up certain indulgences to achieve a new level of fitness. It's no different in the world of business.
We've got to convince ourselves that we stand to gain by changing our ways, that we cannot afford to indulge ourselves any longer, that new mandates for economic reform have emerged, perhaps while we weren't looking. We've got to convince ourselves that the old rules of supply and demand just don't work the way they used to.
In this new economic frame of mind, we may find ourselves wondering why we suffered recessions, on two different occasions during the seventies, that failed to overcome inflation. That had never happened before. Hindsight suggests that the economy was sending out a signal. I think it was telling us that a generation of unbroken growth and prosperity in the post-war industrial world was coming to an end. It was also telling us, to my way of thinking, that the old economic equations were no longer relevant to the new conditions.
Let me give you four reasons why I believe the rules of the economic game have changed in very profound ways:
- Number One. The world has fused into one big global economic system. Upwards of one-quarter of everything mankind produces is now traded across national boundaries. Political divisions or not, our world has become economically interlocked.
- Number Two. Governments have become massive economic institutions in their own right. In Canada, government now accounts for 55 per cent of gross domestic product. In the non-Communist world, 85 per cent of the oil is owned or controlled by governments. State enterprises produce 54 per cent of our steel, 40 per cent of our copper, 20 per cent of our motor cars.
- Number Three. Economic power has become highly concentrated. In the United States the top fifty among the nation's thirteen thousand banks control 48 per cent of all bank assets. In Canada, the one hundred biggest companies account for a comparable share of all private economic activity, and Canada's unions and professional associations represent nearly a quarter of the entire labour force.
- Number Four - and this may be the most decisive change of all. After centuries in the shadows, the Third World has emerged as a major economic force. Exports of manufactured goods from the Third World to the industrial economies doubled in the period 1970 to 1980. Scan the latest list of Fortune's five hundred largest international companies and you will find entries from Brazil, South Korea, Taiwan, Mexico, India, Peru, and the Philippines.
Four good reasons why the old rules won't work anymore. Four good reasons why we need to cultivate a new economic frame of mind.
Four good reasons why we should reshape our old concepts of the economic machine if we truly expect to make more out of less.
That won't be easy. Again, I speak from hard experience. We have devoted five painful years to changing the way we think at Massey-Ferguson, and the process continues. Someone told me a long time ago that experience is what you get when you're expecting something else. It took me a long time - and a lot of hard knocks - to realize that he was right.
Old concepts, like old habits, die hard, and we cannot count on a sudden burst of illumination to light the way, a sudden revelation of new economic wisdom. It doesn't happen that way. Instead, we find ourselves coming to grips with the new economic imperatives in a succession of tests of will. We can expect to be tested and challenged in every major economic arena - monetary policy, international trade, capital formation, structural unemployment, and all the rest.
At this point, the crucial need is to accept the task confronting us, to realize we have reached a watershed in economic history, to understand that we must develop new policies and programs to respond successfully to the new imperatives.
So far today we have examined the economic kaleidoscope from a perspective of macroeconomics - that's a buzzword favoured by economists looking at the big picture. I would like to spend a few moments looking at this issue of making more out of less from a tighter focus, so I invite your indulgence while I review some of the pivotal experiences of MasseyFerguson in recent times. Perhaps, with a bit of luck, I can interpret our ordeal in a way that sheds some light on matters that concern us all.
Let's step back in time to the go-go years of the sixties and early seventies. Oil shocks were the furthest thing from our mind. In the farm machinery business - just as in steel and chemicals and automobiles, among others - we couldn't make our product fast enough. I can set the scene for you with several passages from our company's annual report for 1973 - the full impact of the first energy crunch was still ahead of us. "During 1973, sales by farm machinery manufacturers were generally limited only by availability of supply. . . ." "Construction of additional production facilities for Massey-Ferguson, undertaken in the latter half of 1973, will begin to contribute in 1974 to improve supply capability." "During 1973, capital expenditures of $72 million were authorized; actual expenditures, the largest in the company's history, amounted to $60 million...." "Any over-all reduction of demand from worldwide monetary, energy or economic complications would seem at this date to be far less significant than supply constraints."
So we built new factories here and there around the world. At the same time, we were leaping into new fields - things like office furniture, construction equipment, snowmobiles. We financed this expansion, needless to say, largely with borrowed capital.
Please don't get me wrong. We were not spreading our wings in isolation. All around us, other companies were doing exactly the same - expanding as fast as their banks and investors would permit, going flat-out for high volume and high returns. You spent more to make more.
I might point out that the prevailing prime rate in Canada at the time was 9 per cent.
In 1975, Massey-Ferguson netted $99 million on sales of $2.5 billion. In 1976, we netted $118 million on sales of almost $2.8 billion.
Then the roof fell in.
We didn't know it at the time, of course, but the farm machinery market was entering its deepest slump in memory - a long-term erosion of sales that has just completed its seventh consecutive year.
What else happened in the late seventies? A better question is, what didn't happen? A litany of economic affliction comes to mind. With inflation kicking up, governments imposed credit and monetary restrictions. As interest rates went up, sales of capital goods went down ... and the cost of maintaining heavy inventories and overbuilt production capacity exploded. The price of finally bringing inflation under control turned out to be a lot higher than anyone expected. The industrial economies tumbled into the worst recession in fifty years - a deep hole which we are still climbing out of. At Massey-Ferguson, our predicament was aggravated by weakened farm economies. As commodity prices declined, so did demand for our products. These are the circumstances that brought us face to face with the business imperatives of living with less. Not just our company, but our entire industry, and a good many other industries along with us.
Perhaps the recent distress and suffering have been most visible at the so-called smokestack industries - but they are certainly not limited to basic producers. In fact, the new economic imperatives apply across the board. No industry is immune. Some may have suffered less than others; but the problems are systemic.
Most of us in the business world are going to try our hand - if we haven't already - at making more out of less. As evidence, consider today's unprecedented volume of corporate divestitures. Thousands of companies in all parts of the world are shrinking of their own accord, peeling off the fat. The pace of spin-offs, leveraged buy-outs, and outright sale of divisions has never been greater.
Why? I'll tell you what I think. I believe the new economic imperatives are penalizing haphazard growth for growth's sake. I believe we will think twice before we devote a large share of business investment to buying assets from each other. These transfers may save jobs, but they don't accomplish much in the way of creating new job opportunities. Business, government, and labour have all discovered we cannot prevent structural unemployment by swapping corporate resources. It is no accident that, of the acquisitions made by MasseyFerguson in unrelated businesses during our go-go years, not a single one remains.
One small step toward making more out of less - but divestment of peripheral businesses seems to be becoming a trend. I'm told one large conglomerate south of the border has fifty-two subsidiaries on the block.
Let's get specific. I want to outline for you what MasseyFerguson has done, and is still doing to this day, to convert less into more. You might call it our five-step formula for corporate re-emergence. Our program evolved out of expensive experience - painful experience, much of it self-inflicted. I've always thought experience was the hardest kind of teacher: it gives you the test first and the lesson afterward. A five-step formula for survival and re-emergence. Five simple steps ... so simple and uncomplicated that we are still hard at work, five years later, putting them into practice. I think I mentioned that economic reform isn't easy - whether you are dealing with the big picture or a single enterprise trying to stay afloat.
Step number one. We decided what our economic mission in life really is. We took a long, hard look at ourselves - as dispassionately and objectively as we could - to determine what we could do best. We undertook this punishing process by practising what some authorities call zero-based thinking. We went back to square one and asked ourselves: Are we manufacturers? Are we marketers? Are we deal-makers? Are we some combination of these or other capabilities? In the end, we decided we are marketers first. This was not, I should tell you, a casual or spontaneous journey from point A to point B. Quite the contrary. It demanded a wrenching self-appraisal. Sacred cows toppled. Emotion intervened. In the end, pragmatic judgement prevailed.
Step number two was only slightly less difficult. Now that we had determined what we did best, what should we be doing to fulfill our potential? So we said, all right, we are first and foremost a marketing organization. Our corporate objective should be to become the best international marketers in our industry. With seven thousand dealers and distributors scattered through all parts of the world, it should be no great trick to win the marketing derby. That's when we discovered we had not yet made a total marketing commitment. Elements of the organization continued to think in production terms. In some respects, we were structured as a manufacturing enterprise. In other words, some of us still thought we were in business to sell what we could make. Quite the opposite of the marketing concept: make what you can sell, and do it profitably. At that point, we had taken two significant steps on our new course. We had decided what we do best, and how best to do it. Which brought us to step three. How to achieve our goal within a framework of diminished corporate resources. Did it really make sense to pursue a grand strategy with a flat wallet?
A very careful analysis of our prospects in the world marketplace - a shrinking marketplace, as I mentioned - confirmed that our goal was realistic ... if we could squeeze more value out of shrinking resources. So we tore down barriers, consolidated, and discovered the efficiencies of sharing talents, spaces, and other assets. We found we really could make more out of less - not only by paring off that fat, those peripheral activities unrelated to our core interests in farm machinery, industrial machinery, and diesel engines - but also by reaching out for new marketing opportunities. We make castings for ourselves - so let's make castings for other companies. We make hydraulic systems for ourselves - let's sell hydraulic systems to others. We maintain a highly skilled engineering capability for our own needs - so let's share our special brand of engineering know-how with others willing to pay for it. We know Third World countries want tractors but lack foreign exchange - so let's go into trade and barter by swapping tractors for commodities. Those are some of the ways Massey-Ferguson is making more out of less.
Now, step number four. This may seem simplistic; believe me, it isn't. To make more out of less, you must develop throughout your organization a thoughtful appreciation of the value of the corporate dollar.
I'm often astonished to find at fairly high corporate levels a near-absence of financial understanding - sales managers all but ignorant of cash flow, engineering managers insensitive to return on investment. Perhaps it takes a few bad years to generate rank-and-file appreciation of profits. At the reborn Massey-Ferguson, we expect everyone on the payroll to accept the imperatives of fiscal responsibility. Too much to ask of a shop floor worker, a computer programmer, a draftsman? I don't think so. You won't either, when you have worked as hard as we have to restore profits to your income statement.
Now, step five. We give our people the right to fail. You cannot make more out of less if your employees are reluctant to take chances; if they prefer to stand pat rather than run the risk of failure. I like to remind my colleagues that even if they are on the right track, they will still get run over if they just sit there. I'm convinced there is room in the corporate atmosphere for entrepreneurial initiative. I want Massey-Ferguson people to know their company supports them when they try new things ... when the set their sights on some new target. If we were perfect as we stand, we wouldn't be digging ourselves out of this hole. So go ahead - try something different, something daring, something bold. If it doesn't work, get up and try something else. We acknowledge your right to fail. Just give us your best effort.
Five simple steps... and every one of them associated with a new economic frame of mind.
I will say it again: it all starts up here, with our frame of mind, with our intellects and emotions and judgement coming to grips with the new realities of a world economy convulsed by change. A world economy that is transmitting urgent signals on the business imperatives to make more out of less,
less in the form of lower deficits in our public expenditures - deficits that trigger inflation and hinder productive investments.
less reluctance on the part of investors to draw their money out of gold and other non-productive havens and put it into new technologies and rebuilt industries that create jobs.
less resistance to basic structural adjustments that will enhance industrial productivity and raise our capacity to compete in world markets.
less insistence on government intervention as the appropriate response to import competition. less polarization on the part of business and labour in their common quest for policies that promise job enrichment as well as gains in productivity.
less reliance on happy-go-lucky tinkering with tax, credit, and public spending programs as the cure-all for every economic ailment.
and finally, less complacency and unconcern in the face of massive unfulfilled economic needs existing side by side with a massive pool of sheltered petrodollars and other lazy capital.
That's what I mean by making more out of less.
I would like to make a final point before I thank you for your very gracious attention.
Newton taught us long ago that for every action, there is a comparable reaction. A basic law of dynamics that happens to apply to the business world. Think back to the years we spent exporting our technology to the Third World in return for raw materials and cheap labour. Did it ever occur to us that sooner or later our technology would be coming back in the form of finished goods? We taught the developing countries how to make steel and textiles and television sets. Now we run to government to save our beleaguered industries from import competition. It doesn't make sense ... any more than it makes sense to pump up our economies with monumental infusions of public capital for armaments. In 1980 - only four years ago - the Brandt Commission discovered, and I quote, "One-half of one per cent of one year's military expenditures would pay for all the farm equipment needed to increase food production and approach self-sufficiency in food-deficit, low-income countries by 1990." A classic opportunity to make more out of less - and make Massey-Ferguson very happy in the process.
The appreciation of the audience was expressed by H.N.R. Jackman, a Past President of The Empire Club of Canada.