THE PLESSEY COMPANY, PLC

1917–1989

Stock Index: London

Plessey is one of Britain's largest electronics manufacturers. Primarily involved in the design and development of communications systems, it has in recent years been an excellent case study in corporate revivals. As late as 1979, Plessey was in such poor shape that it was touted as an industrial garage sale waiting to happen. But after a long search for an effective management strategy, Plessey finally launched an aggressive development program that drastically improved the company's prospects. By 1981, Plessey was growing at a record pace. A strong performance throughout the decade ended in the joint purchase of Plessey by the General Electric Company PLC, Plessey's foremost British rival, and Siemens, the German electronics giant, in the fall of 1989.

The company was founded in Ilford, Essex in 1917 by Allen Clark. Plessey was originally a manufacturer of small electronic components. Clark later transformed Plessey into a "jobbing shop," or secondary manufacturer; Plessey manufactured entire parts and components lines for other companies at a greatly reduced cost. Its products were primarily simple technology items, such as switches, connectors, sockets, relays, and even sheet metal. Clark was meticulous about every aspect of his operation, but because his business depended on spreads, he paid particular attention to minimizing unit costs. In addition, by selling only to other manufacturers, Plessey insulated itself from turbulent consumer markets.

The company prospered as the British electronics industry expanded, and was thrust into a period of high growth by World War II. In order to meet wartime production goals, Plessey maximized use of its plant space and added shifts. Although a small player in the wartime defense industry, the company's work on the development of advanced electronic devices for the war effort was the start of its intimate involvement with the armaments industry.

After the war, Clark was able to use Plessey's cost advantages to win new business and build market share despite Britain's difficult postwar economy. The company also found itself well positioned to build upon its wartime relationship with the government. Anchored by Plessey's traditional job-shop business, Clark was quick to exploit the opportunities that came with the nationalization of major industries by securing government contracts for Plessey.

Clark, who was knighted Sir Allen, died in 1961. He was succeeded by his two sons: John, who became president, and Michael, who took charge of financial affairs. In his last year Sir Allen had placed Plessey on a new course through the purchase of two large telephone electronics manufacturers. The acquisition of Automatic Telephone & Electric and of Ericsson Telephone doubled the company's size and made Plessey a major supplier to the government. But as the company evolved into an end seller, it became necessary to develop long-term planning capabilities--something Plessey had great difficulty achieving.

In 1970 it purchased Alloys Unlimited, an American electronics company particularly strong in semiconductor packaging technologies, for $81 million.

1963–1974

Plessey continued to grow by acquisition during the 1960s. It purchased the Ducon Group and the Rola Group, both in Australia, in 1963 and 1964, the Telegraph Condenser Company in 1965, and made its first American acquisition, the New Jersey-based Airborne Accessories Corporation, in 1968. In Britain, Plessey acquired the Painton Company (later Plessey Connectors) in 1969. Also that year, at the behest of the British Minister of Technology, Plessey acquired the numerical controls divisions of Airmec-AEI Ltd. and Ferranti Ltd., which were later merged to form Plessey Controls.

With each takeover, however, Plessey lost some of its focus; as it grew more diverse, it became harder to manage. John Clark recognized this problem early on, and oversaw the splitting of the company's operations into four divisions: telecommunications, components, dynamics, and electronics, to better match Plessey's diversified nature.

Continuing its streak of acquisitions, Plessey began buying into International Computers, Ltd. in 1967 in the belief that computer and communications technologies were converging. In 1968 Plessey attempted a takeover of English Electric, but was outbid by GEC. It did, however, succeed in taking over the heavy radar operations of Decca.

Plessey's profits grew 17% annually between 1966 and 1970. But this was mainly due to acquisitions, and cracks in the new management scheme were beginning to show. Decentralized management eroded Plessey's cohesion and left it directionless. John Clark, who had assumed responsibility for long term strategic planning, was frustrated by the company's lack of coordination. Michael Clark, in charge of day-to-day affairs, was overwhelmed as corporate headquarters lost control of line operations. In addition, the tough, hands-on management style both men had adopted from their father was inappropriate for the company at that stage, and resulted in increasingly high employee turnover rates.

In 1974 John Clark abandoned the four-division structure and replaced it with a system in which each of Plessey's 24 businesses operated as an independent profit center. The 24 businesses were organized into nine divisions, each represented by a manager who reported directly to Michael Clark. This unorthodox rebuilding of the corporate structure from the bottom up bridged the gap between management and operation, and allowed the company to take advantage of unrealized synergies.

Plessey was soon back on the acquisition trail. In 1970 it purchased Alloys Unlimited, an American electronics company particularly strong in semiconductor packaging technologies, for $81 million. This addition reduced the company's reliance on increasingly unstable government business. It also made Plessey the only European company with such broad strength in the growing semiconductor market. Unfortunately, the semiconductor market crashed and Alloys began to lose money. At the same time, Plessey's troubled numerical controls and hydraulics divisions also started to post losses.

1970–1981

Instead of reforming its poorly-performing profit centers, Plessey made more strategic acquisitions. In December of 1970, the company took over Arco Societa Per L'Industria Elettrotecnica, an Italian components manufacturer. In 1971 Plessey, which already owned the stereo manufacturer Garrard Engineering, attempted to buy BSR, a turntable manufacturer. BSR, however, backed out when the monopolies commission began an inquiry. Already established in manufacturing telephone equipment, radar systems, stereos, and other products, Plessey began a major push into postal automation systems.

The reorganization process begun in the late 1960s--what Sir John called "subsidiarization"--was successful in most respects, but failed to distinguish between operations and policy responsibilities. This backed up both product development and marketing efforts and, once again, upper management became bogged down by too many decisions.

To remedy the situation, Plessey began to hire personnel and management experts away from competitors in 1974. The following year, the old product divisions were abandoned in favor of a system of "strategic business units." This system, devised by the American General Electric, created independent subsidiaries divided according to product lines and geography, and forced them to perform on their own merits. Strict budget discipline was enforced, and assets were controlled to prevent individual units from hoarding capital or manpower.

Although the scheme faced strong opposition from the directors of Sir Allen's era--"the Ilford Mafia"--it marked a turnaround at Plessey. Decentralization helped line managers to identify with company interests and stimulated plant and equipment modernization programs. It also identified terminally underperforming units for disposal. In 1979 alone, Plessey sold Garrard, Plessey Controls, a Portuguese subsidiary, and its 25% interest in International Computers, and phased out production on marginal lines such as burglar alarms, test equipment, and power rectifiers.

Plessey cleaned up its books by collecting debts more rigorously, and cut employees from 66,000 in 1976 to 47,000 by 1981. Investors' one remaining concern was Alloys, which never regained its market footing and was too component-oriented to be an asset in Plessey's systems-oriented future.

Lacking the capital to invest in the development of a major new product and unwilling to sell any other operations, Plessey next entered into a joint venture with its chief rival, GEC, with financing from British Telecom. The two companies formed a special group to develop a new digital switching device called System X. The venture was located at Plessey's Edge Lane facility in Liverpool, which had been nearly idle and losing money since 1976.

1981–1989

The first System X was delivered in early 1981. Despite joint development, the two companies manufactured the devices in competition to avoid accusations of monopoly. Initial sales to the Post Office (which runs the British telephone system) guaranteed a stable market for System X in the near term, but both companies expected further profits from exports promoted by British Telecom.

In 1985 GEC expressed an interest in purchasing Plessey. A merger would have eliminated costly dual System X production and created a stronger company by combining Plessey's research capabilities with GEC's development strengths. Roundly opposed as anti-competitive, however, the merger eventually broke down.

Even amid the merger speculation, Plessey was preoccupied with its 1982 acquisition of the American company Stromberg-Carlson, a telecom manufacturer, from United Technologies. Plessey bought Stromberg-Carlson for its access to the American market. The company had been a money-loser, suffering from many of the same problems Plessey had overcome. Plessey was able to apply the lessons it had learned, and by 1985 Stromberg-Carlson was profitable.

In 1988 Plessey agreed to merge its international telecom operations with GEC for better international competitiveness against Siemens, NEC, Ericsson, and a host of American companies. Because the companies maintained their domestic competition, there was no opposition from the British government.

But this comfortable arrangement with GEC was short-lived. Late in 1988 GEC and Siemens jointly bid to take over Plessey for £1.7 billion. Plessey tried to block the bid, arguing that the takeover was in violation of Article 85 of the Treaty of Rome. In addition, the bid violated an earlier agreement made by GEC and Siemens stipulating that neither company would seek to acquire more than 15% of Plessey. But a general lack of sympathy from the European Commission and Britain's Monopolies and Mergers Commission, together with weaknesses in Article 85, made Plessey's defense quite difficult. After a fierce ten-month long battle, Plessey finally succumbed in September, 1989 to a £2 billion bid from the two companies.