It's time to put down the knitting: David Connell argues for organic business development

IT IS now widely accepted that the British economy is suffering from having a manufacturing base that is too small. Despite the productivity improvements of the past 10 years, this problem has not been tackled. I would argue indeed that it has been exacerbated by one of the great management fashions of the Eighties: managers have been 'sticking to the knitting' when they should have been branching out, developing new products and services.

When Peters and Waterman talked about sticking to the knitting in their book In Search of Excellence, they were criticising conglomerates that made unfocused and scattered acquisitions. Their idea of best practice was companies such as 3M, which progressively moved into a whole range of different businesses based around its core competences of coatings and adhesives.

Much of UK industry has completely misunderstood and inverted this advice. Organic business development is virtually dead in a large proportion of large British manufacturing companies.

This can largely be blamed on another phenomenon that has flourished in the past 10 years: the dominance of a management style that emphasises financial control and delegation of authority: the Hanson, BTR, GEC model. Managers of subsidiaries are measured solely by their ability to meet short-run financial targets.

Even if chief executives want their managers to think in the long term, this month's sales and costs will invariably sit at the top of the agenda. Discussions of strategy and R&D investments suffer as a result.

In such companies costs are forever being reduced to meet profit budgets. In the UK, that usually means rationalisation, especially of people who can be classed as overheads. This is the only mechanism that can deliver profit improvements in the time demanded by this sort of management process. The people required to develop the business, through R&D or market development, are progressively squeezed out.

In this environment, acquisitions provide the only way to generate growth. In one big public company we examined, virtually all the profits growth over the previous five years had come from acquisitions and cost reductions. Organic growth through R&D was virtually zero, despite a respectably sized research organisation. Managers did not expect to get much out of this, so they concentrated on shorter- term expedients. As a result R&D became progressively weaker and more out of touch - a vicious circle of decline all too familiar across British industry.

Small wonder that financial commentators reinforce this model by regularly calling on companies to stick to the knitting - to avoid dabbling in anything they do not fully understand.

It is only necessary to look at manufacturers demonstrating the most successful long-term performance to realise how different their way of thinking is:

Honda did not make its first car until 1962. It now manufactures products from lawnmowers to outboard motors based on its competences in power train technology.

Mars, the confectionery and pet food company, is also the world's leading manufacturer of electronic payment systems, a business that developed from its move into sweet vending machines.

Brother, founded in 1934 as a typewriter company, now generates 44 per cent of its sales from business machines and 20 per cent from machine tools and other products.

The fivefold increase in Canon's sales in the Eighties came from business equipment, not from its original line of cameras.

These companies share one common feature - a desire to exploit and build on their core competences by moving into new, demanding markets. This has often involved learning new technical, manufacturing and marketing skills. The last thing any of them can be accused of doing is sticking to the knitting.

Every Japanese company has a brochure spelling out the milestones in its development: when it moved into new businesses. That a business can - indeed, is expected to - move into new product markets is inculcated into each employee.

Anyone could be forgiven for imagining that most British companies do not have a history. Few produce corporate brochures, and the continual process of acquisition and merger means that the historical process of business innovation is totally obscured. As a result, managers lack corporate pride, and have no understanding of the processes by which new businesses are developed over the long term. No role models. Far better to stick to the knitting.

To escape from this mentality, British industry needs to adopt a shift in management approach. First, delegation of authority to subsidiary management must be linked to a shared vision of the future, backed by an agreed plan for creating it.

Second, short-term financial control must take place against a long- term view of businesses' competitiveness, and must not be allowed to jeopardise business innovation.

Third, managers must understand that strategic business development is not just about buying businesses but about acquiring, developing and exploiting the competences of the company as a whole - building assets rather than trading them.

Six specific changes in business philosophy are needed:

A shift in emphasis towards a competence-based view of the company. While strategies to strengthen current competitiveness are essential, companies must also be continually searching for new ways to exploit and extend their competences.

A new approach to cost. Companies must focus on steadily reducing variable costs, without undermining the 'overhead' of R&D and business development resources.

Resources for business innovation. The failure of innovation lies not in R&D, but in a lack of resources applied to exploiting it. Chief executives must ensure the resources are available - not as a detached group of head office staffers, but by making sure managers have the time and money to develop their businesses. There should be a central and separately monitored budget available for new business activities.

Technology road map. There must be a long-term plan to acquire new competences. Leaving it until you need the product that uses them is too late.

Strategic partnerships. Companies should use partnerships with others more systematically - to gain access to missing competences, to build international marketing networks, and to learn about new markets and technologies before making large investments.

Role models. Companies should encourage managers to understand how business development works in other firms, and use them as role models against which to provide benchmarks for their own approach.

Long-term competitiveness is as much about the speed at which you spot and take advantage of new business opportunities as it is about being competitive in existing ones. Sticking to the knitting is an option - but only for those prepared to accept the lower living standards that go with it.

The author is director of strategy at the Technology Partnership, Cambridge. The article is based on a paper given at the Strategic Management Society's international conference in Chicago.

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