- 21 Mar, 2021
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- 13 Mins Read
Case Study: Modeen Gears
Stefan Ellis-Hao took the long walk from the plane towards the Arrivals lounge. He noticed the shimmering heat rising from the airport tarmac. Denver International was hot. Having transferred from Chicago O’Hare the journey had been dull. The flat unchanging landscape of American farm-land didn’t deserve too much attention. Neither did the surly stewards and stewardesses of American Airlines. They were as uninspired by the trip. Instead, despite the early start-time from Leeds, Stefan was excited. He loved airports. If he could spend his days travelling the globe and avoiding Head Office he would, happily. His 20 years as Chief Executive Officer of Modeen Gears had matured into a relatively free schedule. The Chairman and the Board in the last six years allowed extensive travel to take the company from a UK-based operation only to manufacturing sites in India, Italy, and, most lately, the United States.
Stefan’s slow progress through tight US security checks and US Immigration was offset by the growing anticipation of meeting his suppliers’ CEOs. He was confident they would give him a Royal welcome. Especially given his growing status as the best-performing specialist high-performance gear-box manufacturer in Europe. He was the bright star with ambition to acquire parts of his supply chain in the US. Forward and backward integration had seen the company grow from £180k in the early 1990s to £85m in 2012. Acquisitions were proving effective also in masking the performance of the core business, which, when the annual accounts were prepared covered over the poor like-for-like organic outcomes. The Mk IV sports gearbox business-unit delivered consistently high profits year on year; and above the industry average. However, its manufacturing machinery and process management systems were three iterations out of date. The staff received little meaningful training beyond token one-day seminars. Some managers were pressing for funding for business degrees, including MBAs, but Stefan kept the training budget tight. He preferred the ‘many’ to be trained, if any, rather than the ‘few’. And anyway, an MBA was a huge investment in one person. Hotel bills, travel and other ancillary expenses make these degrees unnecessary, he thought: “MBA? Mediocre but Arrogant! He would often joke during company meetings. Although undertrained staff struggled to see the funny side. The profits had been invested in acquiring new businesses whose performance were draining funds. But, Stefan preached the gospel of Critical Mass and Economies of Scale. If he could gain size, he could command superior terms. If he could acquire some of his supply chain, he thought, he could further penetrate the US market, and create other synergies with his Italian and Indian operations.
Having made it through to the Arrivals area, after being quizzed by the stern immigration officer, whose suspicion was familiar, Stefan looked around for his willing hosts to roll out the red carpet welcome. He checked his watch. He was right on time. Stefan’s PA, Derek, was a stickler for travel arrangements being clear and precise. Stefan’s itinerary read like ‘military orders’. Stefan strolled around the concourse looking for a sign of welcome or a familiar face. He was sure Jerry and Tyler would be there after the recent New York Gear 2013 Conference. They’d discussed enthusiastically a merger of the companies. Well, for merger, read acquisition. Merger was a code-word for Stefan taking over Jerry’s and Tyler’s mediocre outfits. They had both grown tired of business and were looking for a get-out offer. Their facilities were worse than Stefan’s but Stefan’s Board didn’t know how bad. Acquiring Jerry’s and Tyler’s Colorado firms would be the ticket into the fiercely competitive specialist US market, with its massive opportunities. The Board didn’t need this level of detail.
Stefan was growing anxious. Derek called to say that both Jerry and Tyler were ‘out of town’. No apology, no messages. Stefan sat in the back of the cab mortified. Aside from the deals looking lost, he couldn’t understand why no-one, literally no-one from either organisation had the simple courtesy of collecting him from the airport. Stefan was wounded. The US deal would be the dream come true. His 1995 Business Plan had envisaged this day when he would set foot on American shores to begin building a truly world-class operation. Stefan had long admired the American management vision. Hard talking, tough-dealing. He was like them, he felt. In his years in the industry Stefan had felt a poor-relation to the massive scale of his US counterparts. The smell, taste and energy Stateside made him model his leadership and communication style on the archetypal American manager. Aggressive, confrontational, accountable, hard-working, straight-talking.
Stefan’s mood was far from confident as he checked-in at the Marriott, down-town Denver. He caught his fierce reflection in the smoked-glass windows. As soon as he stepped into his room he phoned Derek. No messages. He slept fitfully waking at 3am, 4am and then eventually walking the straight lines of Denver’s clean city centre streets. Stefan then had a call from the Chairman at 5am. James was a highly experienced strategist and Chair. He had kept a tight rein on Stefan but this had loosened as company performance settled and other activities consumed. James had driven Stefan to adopt a more corporate structure of five business-units. He had told Stefan also to stop acting like a Managing Director and more like a CEO. ‘Told’ because Stefan rarely took hints. James wanted dialogue but Stefan found the language of reflection and engagement conflicting with his background: “You can take the boy out of the street, but you can’t take the street out of the boy!”, he would remind his managers; especially when his managers objected to the blunt communication style and complained to HR about their repeated ‘humiliations’. James knew Stefan was happier managing the numbers and detail but found thinking strategically too complex for his directive style. James wanted Stefan to appoint Managing Directors for the business and give them scope to grow their operations. To adopt a more facilitative mindset and spend time ‘on the business’ and not in it quite as much. Stefan often ‘drilled’ his MDs on ‘the numbers’ even though he’d lost touch with key performance ratios and their meaning. He wanted to see if ‘they knew their stuff’. Giving more scope to MDs terrified Stefan as he feared some of the talents emerging, who were graduates and MBAs, could satisfy James’ vision of a maturing global player. They used big words and felt comfortable strategically. Stefan was a street-fighter, deal-maker and self-made man. No cocky graduate was going to steal his legacy. James knew this tension. He also recognised Stefan’s talents were considerable and beyond many of the graduate pool, even though there were hints of paranoia and narcissism which were increasingly evident.
As an example Stefan often put his thumbs in his pocket at Board meetings and told long painful stories about his past, and his experiences in running various, if truth be told, mediocre businesses, until his big break with Modeen. He talked about leaving a global legacy. Of being President of Modeen International. He had written extensively in company journals about the industry and how it needed shaking up. He had contempt for some of his competitors and distributors who he saw as out-of-date. The future was in offering a faster and more complete service. James sometimes mocked Stefan at Board meetings. He knew James was desperate to grow. He teased him about his Business Plan for having no real appreciation of the changing environment. Stefan hated talking about the macro-environment and the fact that the specialist car market was transforming with consumer tastes moving towards both very high value cars, which Modeen struggled to serve, and towards hybrid-green-fuel technologies. Something that Modeen would need to tackle soon if it wasn’t to be left behind. Even the US car market was changing. But, the image that Stefan had in his head was of a market still needing his ‘robust’ gear-boxes; for what he called the ‘petrol-head’ sports car driver, who enjoyed raw power, and who ignored both the, what he derogatorily called, the ‘tree-hugging’ debate as well as the brute fact of rising US gas prices.
What drove Stefan was his vision of dominance of the US market within 10 years. That was on the plan. He envisaged going head to head with competitors on price and service. But, neither Tyler nor Jerry returned his calls. Stefan called his Managing Directors telling them to be in the Board Room for 6pm Friday evening. At 7.30pm Friday Stefan walked into the Board after 36 hours of travel looking less than fresh. Fiona looked across at David and they both agreed, without saying a word, it was going to be a long night. Stefan spoke for two hours purely on the ‘dishonour’ of a supplier not turning up to receive him ‘professionally’. Stefan looked as if he was going to cry at one point. He was livid. He shouted at Fiona for looking disinterested, saying: “Your body-language Fiona suggests you don’t want to listen?” Fiona ran the core business-unit and knew that without major re-investment soon its customers would find her competitors’ products and service overwhelmingly more appealing. Fiona was a strategist, a little cerebral, with a desire to re-shape the Business Model. She thought Critical Mass via global acquisition was suicide. She wanted to re-engineer the operation by ditching some distributors and focusing on a make-to-order gear-box using new multifunctional tools that could produce a vast range of new products to meet the changing market.
Fiona had confided in the HR Director that the Modeen core consumer had already migrated to new tastes in performance cars. That having a fixed goal of a global business with multi-manufacturing sites would implode under the costs of re-fitting ageing acquired businesses and subsidising business that gave only ‘boarding’ access to the US. She said she wanted to tell James personally that Jerry and Tyler were going to take Stefan ‘for a ride’ (rip him off). Fiona said Stefan had become fixated with size and legacy. That he wanted to use the acquisitions to position himself as attractive to one of the US’s leading manufacturers. Stefan was easily flattered and two major US conglomerates had suggested one day he might be ideal as a Global CEO. Fiona laughed nervously in the HR Director’s office as they knew this vision relied upon a gamble. If they purchased both US companies it would stretch their bank lending to what she thought was insane levels. They were already borrowing money to re-equip their process management systems.
Stefan paused eventually in his long diatribe to catch Fiona staring out of the window. He was tired and angry, but most of all he was hurt that his key step to securing a foot in the US market was slipping away. He looked around at his MDs and cursed their contributions. “I had this vision long-ago. I want to end my career leaving a golden legacy for the industry.” Stefan felt he was leading the service levels in Europe to new heights and ending old traditional practices where the slow time from concept to manufacture was eventually going to leave the door open to Chinese firms, who were now eyeing specialist markets. He wished to retire at the pinnacle of a global outfit. He knew that his MDs were brighter and more critical in their thinking about the transforming consumer. He’d fired four MDs in four years. He felt like firing Fiona there and then. She talked articulately, transparently about herself, feeling, and anxieties. She held progressive team meetings with the support service heads, integrating her business plans with IT. Her team found her a little abstract at times and wished for more clear instructions but they couldn’t help agree that her narrative offered a securer future than Stefan’s. They felt that the next acquisition would rob their core business of the necessary refits. They had had to make do with ageing equipment for years. They’d earned the profits while Stefan ignored re-investment appeals. Italy was OK and India was showing real signs of growth but regular system failures were hampering their own growth plans. The operations directors talked openly in the canteen about Fiona replacing Stefan as she could understand the sophisticated new corporate structure where Stefan still behaved like a hands-on MD instead of reflective CEO, guiding and nurturing. In fact Stefan hadn’t nurtured any colleagues in a meaningful sense.
The meeting ended at just after midnight. Not even pizza and beer softened another chaotic business meeting. The MDs went home dazed and beaten. Stefan slumped back in his leather hi-back executive chair and wondered what next. Jerry then phoned: “Hi Stefan, how was your trip?” Stefan wanted to swear. “Sorry I couldn’t meet up; maybe next time buddy”. “That’s fine” stuttered Stefan. Stefan added: “Look Jerry, about my offer to talk about a purchase; I’m serious”. Stefan could hear Jerry laughing. “You, buy me out, you gotta be kidding. You two-bit grease head. You couldn’t stand the pace here my friend!” Stefan retorted: “I’m looking at Westgate in Canada Jerry”. “Ha, you can have it with bells on. We looked at them last year, they’re bunch of crooks”. Stefan thought entering North America through Canada was too risky but he was desperate to encourage Jerry into a deal. Jerry’s business had reliable customers and clients who had been loyal to Jerry. Stefan wanted to keep Jerry on the Board in his retirement, so it would appear like ‘business as usual’. Jerry waited patiently. Stefan upped his offer 20%. He didn’t have the money. Jerry said: “You fool. I’ll have the Heads of Agreement drawn up tomorrow. You’re a sucker Stefan. Your Chairman will kill you.” Stefan didn’t care at that point. The deal was back on. He was in America now.
Stefan scanned the British Airways flights for Sunday Departures. The Corporate Board was Wednesday. He could do the deal on Monday and present the new Organisational Chart. Stefan did strategy via the Organisational Chart. Each year he moved directors around like RAF Flight Operators marking the position of heavy bombers on a bombing mission. He believed these ‘shake-ups’ create energy and possibilities. But he couldn’t explain his rationale easily so didn’t try. The Organisational Chart was solid, obvious, tangible. Not diaphanous like strategic thinking or being reflexive.
At Wednesday’s meeting James eyed Stefan. He was like a school boy with a new toy. James asked Stefan: “What is the valuation you place on Jerry’s business Stefan?” He couldn’t answer. Stefan had paid US$3m and James knew he’d put the whole business way beyond what the bank advised. If the bank called in any of its six major loans they’d be sunk. James asked to meet the board without Stefan present. Stefan was mortified. He’d never been excluded. Fiona was waiting outside. James asked her to step in “for a moment”. Stefan was non-plussed. After three hours James asked Stefan to pop back in. Stefan was fuming, red-faced. James said to Fiona: “What do you think?” Fiona had new glasses and shoes. She looked over the top of her glasses and said: “Stefan, I’ve just got off the phone to Jerry. The deal is off.”
Stefan ignored Derek entirely as he left his office. Fiona came to wish him good luck, squeezing his hand so hard it hurt: “Leave your car keys with me Stefan. You won’t need them anymore. Derek, call Stefan a taxi. One of those cheaper firms”.