Continuity in the diversified business structure

Tampella was a conglomerate business enterprise in the mid 1940s consisting of three main divisions: textile, engineering and wood–processing divisions. Being established in the mid 1856 and having its original roots in linen, metal and engineering production, the company had diversified into wood–processing industry in 1873, when it established a wood pulp mill in Tampere. By the 1940s, the company had also diversified within its different lines of businesses. In textiles Tampella had expanded into cotton production by acquiring a cotton mill in 1934. In the engineering industry Tampella manufactured various machines for the wood–processing industry (e.g., paper, board and grinder machines), water turbines, steam boilers, locomotives and various armaments (e.g., cannons and mortars). In wood–processing industry Tampella had shifted to more refined products, such as board (started in 1897) and paper (started in 1938). The initiative for

expanding to paper production came from an American newspaper publisher, which guaranteed the sales of paper for several years. In addition, Tampella was a major producer of electric power. It owned several power plants and a share of an electric company. In fact, Tampella was self–sufficient in electricity (TA, Annual reports 1934–

1938 and Minutes of the board, December 17, 1936; Urbans 1956, 138–150).

The three main branches of industry were relatively equal in size in the mid 1940s (Figure 5.6.). The textile and wood–processing industries contributed together roughly one third of the turnover, whereas the metal and engineering industry (including Tamrock specialized in the production of rock drilling machines) accounted for one fourth of the annual sales. However, immediately after the Second World War, the relative importance of the textile industry gradually declined until the mid 1980s, when Tampella sold its textile industry operations to its domestic competitor Finlayson. At the same time, the emphasis of Tampella’s business operations shifted increasingly toward the wood–

processing and engineering sectors. Wood–processing remained the largest business sector in Tampella until the late 1980s. After the late 1970s the rapid growth of Tamrock increased the share of engineering division within the company. Tampella began producing rock drilling machines in the early 1950s. In 1969 Tamrock was established as an autonomous department of the engineering division. It was only in the mid 1980s that Tamrock became an independent division within the company. By the early 1990s Tamrock had developed into one of the main business areas of Tampella, accounting for one third of the company’s net sales.

In addition to the three main branches of production, Tampella was also active in the plastic industry and electricity production. Tampella diversified into the plastic industry in 1966, when it acquired two minor plastic companies. The purpose of the diversification was to support product development in the textile and wood-processing industries. The initial expectations from the plastic industry, however, never materialised, and its share of the total production of the company remained low. In 1983 Tampella sold all its operations in the plastic industry (TA, Annual report 1966, 1983).

Figure 5.6. Net sales of Tampella by branches of industry in 1945-1990, per cent

0 % 20 % 40 % 60 % 80 % 100 %

1945 1950 1955 1960 1965 1970 1975 1980 1985 1990 Year

Textile Engineering Tamrock Forest Others

Source: TA, Minutes of Tampella’s Annual General Meeting; Tampella’s Annual reports, 1959–1990

Tampella was an internationally–oriented company during the entire research period.

The share of exports and foreign business operations increased over the decades³⁹. In the late 1940s and 1950s the importance of the Soviet market was significant, especially for the engineering division and to some extent the wood–processing division. As of the 1960s, with the emerging foreign trade liberalisation, an increasing share of Tampella’s exports was directed at Western Europe countries. Concurrently, Tampella started to put more emphasis on the marketing endeavours in North American markets and to widen its scope of internationalisation by establishing and acquiring production units and marketing offices in foreign countries. In the mid 1970s, one third of Tampella’s production was sold to the Western European market (EEC and EFTA), whereas the respective shares of Eastern Europe (Soviet Union and SEV–countries) and North America were 12 and 5 per cent. By the early 1990s the shares of Western Europe and

39 In the late 1960s the avarage share of the exports was 65 per cent, whereas in the late 1980s it was almost 80 per cent. Here, the export share refers to the combined share of exports and foreign operations of Tampella’s net sales.

North America increased respectively to roughly 40 and 25 per cent. At the same time, the relative importance of the Eastern European markets for Tampella clearly diminished, covering only 5 per cent of the net sales (TA, Annual reports of Tampella, 1967–1991).

In terms of patterns of internationalisation, there were clear variations between and even within the industrial divisions. The wood–processing industry was extremely export–oriented throughout the research period, the share of exports ranging from 80 to 90 percent. There were, however, some business areas (e.g., converted paper and board products) that were more dependent on domestic market demand than the others. Another heavily export–oriented division was engineering. Compared to the wood–processing division it followed a different path of internationalisation. Whereas the wood–processing division expanded its foreign markets mainly by increasing exports, the engineering division focused more on expanding its production capacity abroad. In fact, the wood–

processing division engaged in several foreign operations in 1960s, but withdrew from most of these businesses during the 1970s after incurring massive losses. In the late 1980s, Tampella had only a few foreign units in the wood–processing industry. The textile industry, on the other hand, relied heavily on the domestic market, the share of exports running at 25 per cent of the total sales. There were, however, some exceptions.

Most of the non–woven fabric production, which was started in Tampella in 1969, was sold to the export markets (mainly to Sweden) from the very beginning. Moreover, the textile division established a few sales companies abroad during the 1960s and 1970s (TA, Annual reports of Tampella, 1944–1991).

One of the main principles and guidelines of Tampella’ top management during the post-war period was the persistent belief in diversification. In the 1950s and especially in the 1960s and the 1970s diversification was a popular way of conducting business operations, not only in Finland but also internationally. A generally accepted view was that a diversified structure would protect the company from the negative effects of unanticipated business fluctuations. For example, the economic trends of Tampella’s business areas typically followed divergent patterns in the Finnish economy. The cyclical depression was first aimed at the wood-processing industry and after a few months at the textile industry. The engineering industry was affected much later, because the long-term deliveries gave the industry time to adapt to the changes in economic trends. In the case

of cyclical recovery, the industries were affected in reverse order (TA, Annual report 1962). Several positive experiences of the diversified business structure during the 1960s and the 1970s further strengthened the opinions of top management about the benefits of diversification (TA, Annual report 1967; Aamulehti, May 1, 1977; Talouselämä, 27:1980). Moreover, there were several other large-scale Finnish firms, such as Nokia, that considered diversification as the foundation of their long-term success during the 1970s (Talouselämä 1981:33, 24).

Following the international trends in business thinking, an increasing number of Finnish firms started to focus on a few business areas during the early 1980s. At the same time, Tampella faced an exceptional situation as all of its business areas were simultaneously in a state of slump (TA, Annual report 1983). Despite this, Tampella did not begin to radically restructure its businesses⁴⁰. As a consequence, by the late 1980s Tampella was one of the few Finnish large-scale companies to remain diversified (Talouselämä 17:1988, 46). Even the new owner, SKOP bank, continued the old tradition of diversification. The reason for this, however, was more likely the inexperience of SKOP bank in managing an industrial enterprise. As SKOP bank did not exactly know what to do with Tampella,⁴¹ they decided to maintain the old main business areas (Talouselämä 5:1987, 30–33).

In practice, the benefits of diversification in Tampella were highly debatable, at least after the early 1970s, when the financial situation of the company began to deteriorate.

The economic performance of the firm was constantly unsatisfactory during the 1970s and 1980s (cf., Laurila 1989, 51). Tampella had been a diversified company since its founding in 1856. Since the 1970s there were several attempts to reorganise the business structure of the company, but these plans were never completely realised. In other words, top management did realise that the company had diversified into too many business

40 Tampella did, in fact, streamline its businesses by relinguishing the textile and plastic industries 1983–

1984. These moves, however, were cosmetic, since the shares of these businesses of the total production were insignificant. Moreover, the divestment of the textile industry was only partial, because Tampella remained a large minority shareholder (49 per cent) in the company moulting form a merger of Tampella’s and Finlayson’s textile industries.

areas (e.g., Talouselämä 36:1973, 44–45; Talouselämä 12:1977, 76–77) and the issue was discussed several times by the board of directors (e.g., TA, Meeting of the board, June 6, 1974, September 17, 1975), but for one reason or another the measures to streamline the company actually constantly failed. Moreover, top management actively raised the level of diversification during the 1960s and 1970s, when it acquired and merged several small-sized subsidiaries operating in various unrelated segments.⁴² Many of these subsidiaries were doing poorly financially, and in some cases the mergers were executed in order to save the subsidiary from bankruptcy (TA, Meeting of the board of directors, April 27, 1972).

It seems that efficiency was not the main driving force behind the idea of a diversified business structure. Instead, the stickiness to historical roots and the concerns about social responsibility were the more obvious factors increasing organisational rigidity and restraining the readiness for change. For example, in 1972 Tampella took a decision-in-principle to terminate the production of water turbines (initiated in 1871) by the end of the 1970s, because it was unprofitalble (TA, Meeting of the board, October 10, 1972).

Two years later, however, the attitudes were totally changed, and Tampella decided to expand the business area (TA, Meeting of the board, April 24, 1974). Then, in 1980 the department of turbin production went into a severe crisis causing the company huge losses (TA, Meeting of the board, December 10, 1980. The main problem was not related to the market situation, but attributed to incompetent management (TA, Correspondence of Arvo Karhola, Grotenfelt to Karhola, December 10, 1980). The final decision on the divestment of the department was made in 1992, when Tampella sold it to the Norwegian engineering company Kvaerner (TA, Annual report 1992; cf., Laurila 1989, 58–61).

On the other hand, the persistent adherence to the textile industry was an example of the forces of social responsibility. Since the Second World War the profitability and competitiveness of the textile industry were heavely dependent on government

41 The initial purpose of SKOP bank seems to have been to demerge the company and sell it off in parts at a good profit. There were, however, contradictory opinions within the bank of the proper policy. See, Saari 1992, 116–117.

42 Examples of these mergers were the fusion of Lainapeite Oy in 1966, the fusions of Eralki Oy, Syrjänen Oy and Kalvotuote Oy in 1969, the fusion of Teknoglass Oy in 1972 and the fusion of Vitivalko Oy in

interventions (price regulation, import tariffs and direct subsidies). Due to the trade liberalisation initiated in the late 1950s, import competition intensified, causing further threats to profitability and increasing dependence on government actions (see, e.g., FFI, Meeting of the board, June 29, 1947; TA, Annual reports 1952, 1954, 1961–64;

Aamulehti, October 2, 1977; TA, Meeting of the board of executives, October 3, 1977).

Top management was aware of the poor prospects of the industry and some tentative discussions on downsizing or fusion with Finlayson took place in the late 1970s (Interview of L. Vatanen, September 2, 2003). However, top management was not willing to sell or close down the factories, fearing that the consequent unemployment would damage the company’s reputation in society. The managing director Grotenfelt defended the decision by pronouncing that “the most important task of Finnish companies is to provide jobs for Finnish workers” (Talouselämä 27:1980, 22–28; see also Laurila 1989, 58–61).

The adherence to certain business areas and the inability to make major strategic changes was not, however, a product of the 1970s. In the 1940s and 1950s Tampella already had certain difficulties in divesting itself of its unprofitable units. According to the managing director Kihlman, “the closure of a groundwood mill in Tampere in 1954 was executed ten years later than it should have been, and purely because of ambition”

(TA, Meeting of the board, September 12, 1968).

To conclude, Tampella remained a highly diversified company during the whole research period. Although the company executed several divestments and closures over the decades, its portfolio included 23 areas of business in the late 1980s (Talouselämä 3:1990, s. 26–29), ranging from non–woven fabrics to equipment for reducing air pollution. The level of synergy between divisions was relatively low. In fact, only the wood–processing industry and part of the engineering industry had potential for real synergic advantage. Most of the machinery in Tampella’s wood–processing mills (e.g., paper, board and grinder machines, steam and recovery boilers) was delivered by the company’s engineering works. Instead, Tamrock and the armaments department were relatively autonomous and unrelated parts of the engineering division. In addition, the textile division was unrelated to other divisions except for some technological overlap with the wood–processing division in few special products.