Michael Alao Management Study Bmgt-111-76406

Michael A. Alao June 1, 2009 BMGT-111-76406 Management Study

Company (Sections 1 – 3) Wolseley is a Fortune Global 500 company based in Theale, United Kingdom (Cable News Network). The company is traded on the London Stock Exchange under ticker symbol WOS. Wolseley operates in 27 countries located throughout Europe and North America(Wolseley plc). This company was chosen for research because the author of the paper worked for the company as an internal auditor from 2005 through March 2009. Further, Wolseley is an interesting subject because in the United States it is not well-known despite having in excess of $33 billion in annual revenue, with half of that amount earned in the United States and Canada(Wolseley plc). In the United States and Canada Wolseley operates under the company name of Ferguson, Inc., which is a wholly-owned subsidiary. Wolseley describes itself as “the world's number one distributor of heating and plumbing products to the professional market, and a leading supplier of building materials and services (Wolseley plc).” By “professional market” the company means that it sells primarily to contractors such as plumbers and heating and air conditioning (HVAC) technicians.

Sections 4 -11 The company describes itself as entrepreneurial in the sense that it grants its operating companies a large degree of independence – as long as they remain profitable, of course. Wolseley states in its annual report that it is a “decentralized group where local management has considerable autonomy to run and develop their businesses(Wolseley plc).” This results in the company having as many cultures as it has operating companies. The head office, as the British call their corporate headquarters, also has its own culture, but that is less relevant given that the head office function is relatively small and staffed primarily by financial and operational managers who are not actually running the operations of the operating companies. The culture at the head office is typically British and anything but entrepreneurial, which suits its function of providing general oversight, compliance with financial reporting regulations, and communication with shareholders. The US operating company Ferguson, Inc., on the other hand is entrepreneurial. It generates this entrepreneurial culture through its management and recruiting program. Management trainees are recruited on college campuses throughout the United States and Canada. The company recruits the type of individuals that fit the stereotype of fraternity members – loud, bold, brash, and loyal to the organization. When one spends time in a typical Ferguson branch office the first thing one notices is that the people are loud, give each other high-fives, and are mostly white males under the age of 30. This may sound odd for a corporate environment, but it works. The managers are college-educated, but have an easy time relating to their customers who are primarily tradesmen. The business of selling plumbing and HVAC

supplies is based largely on customer relationships and the thought at Ferguson appears to be that you need managers that can relate to their customers, but at the same time have the education to properly manage in the business environment. Another thing that is unique about Ferguson’s culture is the fact that management trainees are given significant responsibilities immediately upon joining the company. For example, each branch has its own credit manager who makes decisions on the amount of credit to extend to each customer. These branch managers are management trainees and may have as little as a year or less of experience, but are given the responsibility of extending thousands of dollars in credit. To appreciate how remarkable this actually is you have to understand that most US corporations centralize their credit functions and tightly control this risky area. Ferguson does the exact opposite and puts a credit manager in each of its branches. The brilliance of this is that their credit managers, despite being young and inexperienced, know their customers face-to-face and truly understand their businesses. This allows Ferguson to more closely monitor its customers’ creditworthiness because a credit manager that lives in the same community as the customer is more likely to be acutely aware of local market conditions. This type of information is far more current than Dun and Bradstreet reports which tend to be dated and report adverse information only after the customer has begun to experience financial difficulty.

Wolseley proves to its stakeholders that it is an ethical company by including in its annual report information that readers are likely to view as indicative of a company behaving in an ethical manner. For example, its 2008 annual report includes a section titled, “Corporate responsibility report” where the company lists its goals and actions for health and safety; the environment; people development; responsible business; and community engagement. The back of financial report itself even states that it is certified as carbon neutral and that the “The CO2 emissions from the production and distribution of this Annual Report and Accounts have been neutralized through a waste heat recovery project in China (Wolseley plc).” As touched upon previously in this section, Wolseley has a decentralized structure and operating companies are given a great deal of autonomy in the way that they are managed. Wolseley has a small head office function that is based in the town of Theale, which is on the outskirts of London, United Kingdom. The Company than has various operating companies throughout Europe and North America. The following table includes the operating companies and respective countries and/or regions:

Operating Company Brooks Cesaro

Country/Re gion Ireland Italy Luxembourg

CFM DT Group Electro-Oil International Ferguson Manzardo OAG AG Stock Building Supply Tobler Wasco Wolseley Canada Wolseley France Wolseley UK and Ireland

Scandinavia Denmark United States Italy Austria United States Switzerland Benelux Canada France United Kingdom

(Wolseley plc) Wolseley is not a learning organization because of its decentralized nature and the fact that it allows its operating companies to operate so independently. The individual operating companies may themselves be learning organizations, however. The argument can be made that Ferguson with its management training strategy is a learning organization that is quickly able to adapt to circumstances specific to individual markets. The example given earlier with the credit managers located at each branch

supports the argument that Ferguson’s decentralized structure within the decentralized Wolseley group of companies does allow it to fit the definition of a learning organization. It must be stressed though that Wolseley as a group does not fit the definition as lessons learned by managers in Italy may not be relevant to those learned by managers in the US, and even if they are, there is no central mechanism to allow for that knowledge to be shared. Wolseley is a sales-driven company and its managers are motivated by receiving large bonuses based primarily on sales performance. It is a sales-driven company because of the nature of what it does – it is a distributor after all. Even employees such as the writer of this paper were paid large bonuses based on overall company sales, despite the fact that internal auditing has nothing to do with driving sales. The highest bonus received by this internal auditor was equivalent to 20 percent of gross salary and was based mostly on overall company sales and profit margin. Within Ferguson, specifically, the recruiting practice described earlier also provides a great motivation factor due to the feeling of belonging that these frat-boy recruits experience when joining the company. Sections 12 -14 Wolseley, with its decentralized structure, focuses heavily on the financial performance of its operating companies. The tools used by managers at the head office are the budgets and monthly financial results submitted by each operating company. If an operating company meets its budgeted goals, the operating company is left to continue operating in its own way. When targets are missed, the CFO and CEO of the

individual operating companies must explain to Wolseley head office managers the reasons for the unfavorable variances. If results continue to be unfavorable, Wolseley will eventually step in and replace the management of the operating company or consolidate it under a better performing operating company. The problem with decentralization and using only sales and profit metrics to control your operating companies is that the assumption that company management should be left to their own devices as longs as sales are strong can be risky. To address this risk Wolseley did create an internal audit function beginning in 2003. The internal audit function was based out of the head office in Theale, United Kingdom, but internal auditors completed internal audit engagements at all of the operating companies throughout Europe and North America. This internal audit function gave Wolseley head office managers an additional control mechanism by which to monitor the operating companies without taking away their independence. Wolseley’s decentralized management structure, which has been touched upon repeatedly throughout this paper, is both its greatest strength, but ultimately also its biggest weakness. The fact that Wolseley is decentralized allows its individual operating companies to be nimbler and more attune and responsive to their regional customers. Manzardo, the Italian distributor, can adapt more quickly to rapid changes in the Italian market than a centralized competitor based out of Germany or France, for example, which may have to get approval from foreign managers to make the necessary changes. If this decentralized management structure where individual operating companies are given great autonomy is so successful, what is the benefit of having them all under Wolseley, which upon closer analysis begins to sound like nothing

more than a holding company. Could the decentralized management structure of Wolseley actually be a weakness or a lost opportunity because best practices are not shared among the different operating companies? There actually are not lost opportunities as a result of the decentralized management structure of Wolseley. Its most successful operating company is Ferguson in the United States. Wolseley did actually try to take some of the strengths of Ferguson, such as its supply chain and use of distribution centers, and apply them to Europe with little success. The problem is that Europe, despite being a single market under the European Union, is not actually a single market in practice. France and Austria may both use the Euro as currency and have no border between them, but a toilet or boiler in France has different specifications from those in Austria. These differences, among others, made adapting the US supply chain model to Europe impossible. If there is no advantage to be gained by Wolseley operating as a group rather than individual companies, isn’t the value of Wolseley’s pieces potentially greater than the whole? Wolseley’s strategy for the next decade will be heavily influenced by the question of whether its structure as a single company with multiple, semi-autonomous subsidiary companies is actually an advantage. When I started with Wolseley in 2005, the goal was to double the size of the company through acquisitions every seven years. By early 2009 the company was beginning to consolidate on a regional level and shedding some of its weaker operating companies and exiting entire regions, such as Eastern

Europe. In my opinion, a global market downturn makes for a great test of a company’s strategy and operating structure. In the case of Wolseley, the only apparent advantage of its structure during this downturn was the fact that the US housing market collapsed prior to the European one, which in effect softened the blow to earnings initially because Europe was still growing at the begging of the US downturn. This advantage was shortlived, however, once the European housing market crashed as well. Section 15 I will write of my impression of Wolseley immediately prior to working there, and then after having four years there as in internal auditor to thoroughly investigate and research the company from the inside as well as through publications such as the annual financial reports. When I saw the posting for the position on monster.com I did not recognize the name. When I started researching the company further I was even more mystified given that it was a company with sales in excess of $20 billion at the time. During my entire tenure with Wolseley, I met few people outside of the building industry that had heard of the company. I used to joke that Wolseley was the $20 billion company that no one had ever heard of. In essence, I didn’t really have an impression Wolseley prior to working there. Four years later and having since left the company, my impression of Wolseley is that it doesn’t really exist. The operating companies are real, of course, but Wolseley itself is really little more than an annual consolidated financial report.

Works Cited Cable News Network. Fortune Global 500. 2009. 1 June 2009 . Wolseley plc. Annual Report and Accounts 2008. Public Company Financial Report. Theale: Wolseley plc, 2008. —. Wolseley.com. 2006. 1 June 2009 .