Widespread Responsibility

Dec. 21, 2004
Sweden-based but truly global, Atlas Copco finds that universal empowerment can be highly profitable.

To Giulio Mazzalupi, the difference between being CEO and president of Atlas Copco AB and executive vice president of its largest business unit is rather simple. "The difference is the responsibility, not the authority," says Mazzalupi, who took over the top spot nine months ago at the $3.7 billion Swedish manufacturer of compressors, electric and pneumatic tools, and construction and mining gear. "When you move up in a Swedish organization, it doesnt make you a better or more important person--you just grow in your responsibilities." Mazzalupis attitude is a reflection of the Atlas Copco philosophy that everyone has certain responsibilities to fulfill, but that managers still deal with people at all levels of the organization in the same way. "We work with open doors, open spaces," says the native of Italy. "The only thing that differentiates people is their responsibility." His rise to CEO also epitomizes the company strategy of promoting from within managers with broad global experience, regardless of their ancestry. "I am not Swedish, but I am CEO," says the 57-year-old Mazzalupi. "This is a strong message to the organization that there are no prejudices and that if you do well, you can go anywhere." Indeed, since 1991 more than 80% of the companys top 300 managers have changed jobs, with more than half of them moving to a position in another country. For example, the head of Atlas Copco Compressors Inc. in Mount Holyoke, Ill., is from Great Britain and worked for Atlas in South Korea. And the CEO of its Chicago Pneumatic Tool Co. operation in South Carolina is a native of Turkey who once led the companys operations in Japan. But that international approach to choosing executives and the belief that a move within the organization is predominantly a change in responsibilities are just two of the things that distinguish the 125-year-old company from many of its competitors. Atlas Copco also is willing to take short-term criticism to manage for the long-term. A case in point: Two key acquisitions in the last two and a half years were both decried by industry analysts who felt the purchase prices were too high. Yet Atlas was able to achieve record revenues and earnings in 1996 after its purchase of Milwaukee Electric Tool Corp. in August 1995. In the first nine months of fiscal 1997, Atlas Copcos profit after financial income and expense increased by 20%, even though Atlas Copco itself had anticipated an initial negative effect on earnings from the $1.16 billion acquisition in July of Prime Service Inc., the second-largest U.S. equipment-rental firm. Whats more, Atlas Copco now projects that when full-year 1997 results are announced next month, earnings will be better than in 1996 and that it will post record revenues and earnings for the third straight year. "We have seen better volume growth than we anticipated," particularly in the southern hemisphere, China, and Germany and other parts of Europe where markets began to rebound in the second quarter, says Hans Ola Meyer, Atlas Copcos chief financial officer. "The Prime acquisition was an important move for us--even though the market was surprised by the price we paid" and because "we didnt buy something in manufacturing," says Meyer. "But after looking at the options we had, we felt that Prime could help us increase the share of revenues that come from the use of our products. "To us it was not a diversification [into the equipment-rental business], but a case of moving downstream with the same type of customers. It is a move that is important for the U.S. market because it doesnt have the same type of direct, end-use sales [that exists in Europe]. In the U.S. almost everything is built on distributors." Besides, as Meyer is quick to point out, Prime, with $330 million in revenue and $66 million in operating profit, is the largest U.S. buyer of portable compressors (more than 1,000 units annually) and has a 50,000-customer base. The industrial-equipment-rental business has been growing at more than 20% per year in the U.S. the last five years, with profit margins nearly twice as high as Atlas Copcos. The reason for the growth: More and more companies rent rather than buy to avoid purchase costs, to minimize their base of fixed assets, and to always have state-of-the-art equipment available. To be sure, there is a risk--that is, becoming a direct competitor may reduce the number of Atlas Copco products other rental firms offer. But "we saw it as a tradeoff where the positive potential dramatically outweighs the negative," says Meyer. "It makes sense for the long-term," agrees one analyst, "because service and repair revenues tend to have much higher profit margins than equipment." The Milwaukee Electric and Prime acquisitions are just two of the more than a dozen acquisitions--as well as four joint ventures in China--that Atlas Copco has made since 1992 to build for the future. Its all part of a strategy to grow sales and to have them equally divided among Europe, the Americas, and Asia. (Just five years ago, less than 15% of Atlas Copcos sales were in North America and more than 50% were in Europe. The current shares are 40% in Europe, 30% in North America, 17% in Asia/Australia, 6% in South America, and 6% in Africa and the Middle East.) Atlas Copcos growth-by-acquisition strategy has boosted revenues by 50% since 1992--and it has had an equally positive impact on profit margins. The composite operating profit margin of the companys three business units--compressors, construction and mining gear, and industrial products (industrial tightening power tools and motion control products)--has jumped from 7.3% in 1992 to 11.7% in 1996, with composite profit margins rising from 6.4% to 12.2%. Individually, operating profit margins for compressors--which account for 47% of revenues--are near 18%, says Meyer. Industrial products--which account for 31% of revenues--have an operating margin of about 10%, he says. Margins for construction and mining equipment--about 22% of revenues--remain subpar. "One of the good things about acquisitions is that they help you to develop the synergies that can give a boost to your operations," says Mazzalupi. Earlier this month, Atlas Copco consolidated its three pneumatic-power-tool divisions into a new division, Alliance Tools, that will remain part of its industrial products business. The formerly separate units will have one management team and share production and development resources, but retain their brand identities and separate sales, marketing, and distribution channels. Even before that consolidation, though, Atlas Copco had developed synergies among its tool companies. For example, when Chicago Pneumatic moved its headquarters and manufacturing from Utica, N.Y., to Rock Hill, S.C., last year, it began using Milwaukee Electrics distribution center in Olive Branch, Miss., a one-day drive from Rock Hill. In addition, Atlas Copcos tool-manufacturing operations in Germany have benefited from benchmarking the highly developed work-cell concepts and continuous-improvement approach used at all Milwaukee Electric plants where self-directed work teams have reduced manufacturing cycle time for some products by 90% and increased productivity by 65%. "But you cant just take the concept from South Carolina and transfer it to Germany," asserts Mazzalupi. "You need to get managers from other locations to understand the concept and to develop it in the way that is best for them. You must learn [from the strengths of an acquired company], not just copy what they do." That ties into Mazzalupis belief in getting "employees to understand where they are in the work flow" because each employee is "the center of the organization. Atlas Copco starts with you [the employee] whether you are the man on the assembly line [or one of the managers]," he says. "We must get people to work together because it is people who solve problems, not managers. Managers have to create an environment so that people are in the best position to solve problems." Indeed, he believes that managers will have a different role to play as business moves into the next century. "Managers will have to be less concerned with supervision and control and be more concerned with development [of the business]. Our managers must perform the leadership role, be upfront, and be the leader of the process and pull the 21,000 employees in the same direction." That means managers must give workers who come under their supervision an opportunity to succeed under a new set of rules or different style of leadership. "When you bring 20 people along with you, you are not being fair," says Mazzalupi. "So whenever I went to a new business unit, I never brought people with me. You work with the people you find there and give them the first chance." Mazzalupis role? Provide leadership, support people, be fair, and provide the right example. "You have to support your people with your continued presence, with your example," says Mazzalupi. "I dont--and cant--ask more of them than I ask of myself. I only have to be fair. That is what people expect of me--to treat them fairly." But, as he explains, being fair sometimes means that "you have to say things that are not so nice. The big mistake many CEOs make is to tell people only good news. You must give them the bad news [either about the company or their performance] even if it is unpleasant. And fairness must extend to promotions as well." Mazzalupi says it is his responsibility to keep employees focused on the customer. "The most important thing we all have to remember each day is that whatever we do must be to meet a customer need," he says. "Our duty is to produce and satisfy customer needs, not statistics, and sometimes it is easy to lose that perspective, to forget that we need to add value, not costs." For example, says Mazzalupi, a product redesign should have fewer parts and help improve the manufacturing work flow. "We all have to ask ourselves every day, how can we add value, not costs," says Mazzalupi, "because if we dont do that, we havent fulfilled our main responsibility."

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