Change in great measure

To a company chief, it is a listing to die for: Nigel Cope on the new FTSE 100 and a decade of revolution

TO THE OUTSIDER, the movement of companies yesterday on the London stock market was typical of the snakes and ladders game that is part and parcel of being a company whose shares are traded in the City. Up went Compass, the catering company which provides canteen services to companies and airlines, into the FTSE100 list of Britian's largest companies. Down went Dixons, the electrical retailer. It dropped out yesterday after a stock exchange committee deemed it was no longer big enough to warrant inclusion.

And hovering just on the first rung of the ladder was Misys, a computer software firm providing services to banks and insurance companies. It was founded only nine years ago, and now lies just outside the Top 100, having just missed out on becoming the first information technology to join the blue chip list.

These changes may not seem to have much significance beyond the pin-striped environs of the City banking community at first glance but take a closer look at the shifts in the FTSE 100 - often known as the Footsie - and you see something symptomatic of a wider trend - the shifting patterns in the shape of the British economy. And a look at the index's changes over the past 10 years reveals a telling pattern.

The overwhelming trend is a shift towards fast-growing and often youthful services companies and away from the traditional manufacturing groups which were such powerful stock market performers in the mid-1980s.

As Adam Cole, UK economist at James Capel, the City bank, points out: "The share of manufacturing of the UK's gross domestic product has been declining for several years and the strong pound will continue to squeeze that sector as it is a major exporter. What we have seen instead is a growth in services. We see that continuing too."

But there have been other driving forces. One has been government policy, such as privatisation which catapulted electricity and water companies into the Footsie. Another is the de-mutualisation of many building societies, while a third is management trends which have encouraged many of the big conglomerates, such as Hanson and BTR, to break themselves up into smaller, more focused entities.

A glance at the entries and exits from the FTSE100 over the last 10 years tells the story. New entrants have included Halifax, Woolwich and Alliance & Leicester; privatised utilities like National Power, Powergen and United Utilities, mobile phone group like Orange, media giants such as British Sky Broadcasting and young pharmaceutical companies such as Nycomed Amersham.

They have replaced some of the grand old names of British industry which have either fallen on tougher times or have deliberately broken themselves up into smaller groups. Those include Hanson, once the "Big Daddy" of the conglomerate sector run by Lord Hanson, but now simply a humble building materials company; Redland, the roofing tile firm recently taken over by French rival Lafarge, Rolls-Royce and TI Group, an engineer.

The pursuit of "focus" has led companies to concentrate on their core business and contract out an increasing number of services. This has helped providers such as Hays, the distribution and personnel company and Compass.

Dig back into the 1980s and you find evidence of Britain's decline in sectors like computer manufacturing; Ferranti International slipped out of the index in 1986 and later went bust. Amstrad bowed out in 1989 and is now a much smaller consumer electronics group.

According to Bob Semple, at NatWest Securities, the investment bank, the next 10 years may not seem such dramatic changes. Further privatisation is unlikely to feature significantly under Labour and the de-mutualisations of the building society movement seems to have reached a pause. But other trends will continue. The continued erosion of Britain's manufacturing base, which has fallen from 23 per cent of UK economic output to 21 per cent in the last 10 years, is likely to signal the departure of more industrial groups from the big league. In their place will come more service companies - maybe a few Internet service providers, or media groups riding on the back of the digital technology revolution.

The changes will also have an impact on employment. Wages growth has been slower in the service sector than in manufacturing partly due to lower productivity gains but also a higher element of relatively unskilled labour.

As Mr Cole of James Capel says: "Over the next three or four years we should see a continued increase in business, leisure services and financial services but incomes will grow less quickly."

How they win promotion

The FTSE100 was set up in 1984 to take over from the FT30, which dated back to 1935. It was established as a way to measure movements in the stock market and to be representative of British industrial and commercial stocks.

Membership of the FTSE100 and the second-line rankings such as the FTSE250 and 350 are made every three months by a committee of fund managers and stock brokers. The key measurement is stock market value. The main yardstick for promotion or relegation to or from the blue-chip index is the so-called "90-100" rule. If a company's value has risen to be ranked 90th or above (ie it is the 90th biggest firm), the share will be in the Top 100. If a company has dropped below 110th, it is excluded. Being in the Top 100 is very important for companies. It bestows and encourages investment. This often sends the shares higher.