Paper instructions:
Answer questions base on the industry case and a article:
Make brife summary for the case (one paragraph)
(1) Evaluate Peter Arnell’s first two months as general manager of Clayton SpA. Cite evidence of things he did well and where he might have erred.
(2) What are the main challenges Arnell faces? Do you think he understands them?
(3) Are the employees at the Italian subsidiary ready for the changes that Arnell will initiate? How can you tell?
(4) Kegan and Lahey talk about big assumptions. What do they mean? make brief summery for the article Do you see any examples of big assumptions in the
case? if so, explain.
(5) Kegan and Lahey talk about competing commitments. What examples of competing commitments did you find in the case? Use Kegan and Lahey’s concepts
to develop specific recommendations for Peter Arnell going forward.
________________________________________________________________________________________________________________
HBS Professor Christopher A. Bartlett and writer Benjamin H. Barlow prepared this case solely as a basis for class discussion a nd not as an
endorsement, a source of primary data, or an illustration of effective or ineffective management. The authors thank Sisto Merol la (HBS MBA
2002) of Merloni Termosanitari Spa of Fabriano, Italy, for his helpful contributions to the development of this case. This case, though based on
real events, is fictionalized, and any resemblance to actual persons or entities is coincidental. There are occasional referenc es to actual companies
in the narration.
Copyright © 2010 President and Fellows of Harvard College. To order copies or request permission to reproduce materials, call 1-800-545-7685,
write Harvard Business Publishing, Boston, MA 02163, or go to http://www.hbsp.harvard.edu. This publication may not be digitize d,
photocopied, or otherwise reproduced, posted, or transmitte d, without the permission of Harvard Business School.
CHRISTOPHER A. BARTLETT
BENJAMIN H. BARLOW
Clayton Industries:
Peter Arnell, Country Manager for Italy
In late September 2009, Peter Arnell, country manager of Clayton SpA, the Italian subsidiary of
U.S.-based Clayton Industries, faced some daunting ch allenges as the global recession took its toll.
Sales were down 19%, and after decades of solid returns, Clayton SpA was in its third year of losses,
now accumulating at more th an $1 million a month.
Arnell’s attention was sharpened by the imminent visit of Dan Briggs, Clayton’s recently
appointed CEO, and Simonne Buis, Arnell’s direct boss and President of Clayton Europe. Both
expected him to turn around Clayton SpA and posi tion it for future growth. And although he had
only been in Italy for just over two months, Arnell knew that Briggs and Buis would want to know
exactly what action he intended to take.
The Parent Company: Clayton Industries
Founded in Milwaukee in 1938, Clayton Industries Inc. had built a successful business around
window-mounted room air conditioners which it sold for residential and light-commercial
applications. In the early 1980s, management perceived two important growth opportunities—one in
the North American commercial sector, and the other in residential and commercial markets in
Europe—and took steps to exploit both.
As it expanded abroad, Clayton established its position in Europe by acquiring four companies:
• Corliss, a U.K.-based manufacturer of home heating, ventilation, and air conditioning (HVAC)
systems.
• Fontaire, a Brussels-based manufacturer of fans and ventilating equipment.
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4199 | Clayton Industries: Peter Arnell, Country Manager for Italy
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• Control del Clima, a Barcelona-based manufacturer of climate control products for industrial
and commercial applications.
• AeroPuro, a Brescia, Italy-based manufacturer of compression chillers for large commercial,
public, and institutional in stallations. (Chillers are the units at the core of most industrial air
conditioners.)
To manage international expansion, Clayton restructured its organization in 1988. All operations
in the United States and Canada were placed under Clayton North America, while the European
acquisitions reported to a newly created Clayton Eu rope. Each of these entities was headed by a
regional company president. (See Exhibit 1 for the organizational chart.)
Clayton Europe
In 1989, Clayton Europe adopted the Brussels offices formerly occupied by Fontaire as its
headquarters. Recognizing the need for strong management in each country where it had a presence,
the new president of Clayton Europe appointed four country managers. They were given
responsibility for sales of the full line of Clayton products in their home country and their allocated
export markets in Europe.
Early progress was slow. While the European market for air conditioning began to grow in the
1990s, it was from a low base. Even in 1998, air-co nditioning was in only 7% of homes in Italy, and
11% in Spain, compared with U.S. penetration of 71%. Many Europeans saw air conditioning as an
expensive American luxury that harmed the environment.
Clayton’s slow market penetration also reflected Europeans’ different needs and national brand
preferences. For example, Clayton’s window units (assembled in Belgium from components shipped
from the United States) did not sell as well as familiar local brands that Europeans seemed to prefer.
And its central AC units also struggled in Europe where few buildings had duct work required for
such systems. But a couple of Asian producers had been able to gain penetration in Europe, largely
on the basis of price.
As a result of Europeans’ strong national bran d preferences, the Corliss-sourced HVAC systems
and the Fontaire line of fans both sold much better in their home markets than elsewhere in Europe.
But no product represented this geographic concentration more strongly than the chiller line built in
Italy. A decade after it had been offered to all Clayton’s European companies, sales outside Italy
accounted for only 12% of the total.
In 2001, Simonne Buis, previously the hard-dri ving head of the Belgian company, was named
president of Clayton Europe. Determined to create a more integrated European organization, her first
priority was to increase the operational efficiency of Clayton’s diverse portfolio of inherited plants.
She set tough targets that required them to slash costs, build scal e, or both. Then, to encourage
Europe-wide penetration of the entire product line, she informed country managers that in addition
to their national sales responsibility, they would now be held responsible for Europe-wide
profitability of products produced in their plants. She encouraged them to emerge from their country
subsidiary silos and collaborate. The simple geographic-based structure was evolving toward a
product-overlaid matrix.
Over the next seven years, Europe became a major growth engine for Clayton, increasing its share
of the company’s global revenue from 33% in 2000 to 45% by 2009. During this period,
Belgium/France overtook Italy as Clayton Europe’s lead market, its 38% of 2009 revenues ahead of
Italy’s 30%. Spain accounted for 20%, and the U.K. for 12%.
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But the European growth engine stalled when the global recession of 2008-09 hit. ( Exhibit 2
summarizes Clayton’s financial statements.) It was a crisis that triggered strategic adjustments and
management changes in both the U.S. and European operations.
Crisis Response in the Un ited States and Europe
As the economic crisis deepened in 2009, the Clayton Industries board convinced its 63-year-old,
long-time CEO to step aside in favor of Dan Briggs, a 16-year company veteran who, along with Buis,
had been groomed as a potential CEO successor. Briggs was a no-nonsense manager who was
previously EVP of Clayton North America.
On assuming his new role in March 2009, Briggs quickly established two priorities. Facing a cash
crisis, he underlined the urgency of reducing capital use and bringing costs under control. But he also
emphasized that “great opportunities always reside inside crisis,” and urged managers to use the
downturn to rationalize the company’ s portfolio and focus on products that could position it for post-recession profitable growth.
As he discussed these priorities with Buis, Brig gs told her that he saw Europe as a continued
source of growth. But he questioned whether the company should continue its attempts to penetrate
the commercial air conditioning sector. In Briggs’s vi ew, it was a business in which only the top three
or four competitors in any market could make mo ney, and he was skeptical that Clayton could get
there from its current situation.
Buis argued that several record-breaking hot European summers were changing consumer
attitudes and that the market was on the cusp of embracing air-conditioning. She felt that the
company should be positioning for a post-recession expansion. Recognizing Buis’s successes in
Europe, Briggs asked her to prepare a growth plan to review with him.
To translate Briggs’s corporate priorities into European actions, Buis met with her country
managers and told them she wanted all country operations to achieve a 10/10/10 plan to cut both
receivables and inventories by 10 days, and reduce headcount by 10%. She also announced the “Top
Four in Four” initiative, and asked each manager to prepare plans showing how the product for
which he had Europe-wide responsibility would be in the top four in European market share within
four years.
Problems at Clayton SpA
While these new targets would be difficult for all of Clayton’s European companies, in Italy they
would be a real challenge. Lagging other countries in revenue growth since 2004, Clayton SpA
actually recorded a 5.3% sales decline in 2008, followed by a 19.4% drop in the first half of 2009. As a
result, receivables and inventories were both above 120 days sales. In addition, headcount reduction
faced tough local laws and a tense union relationship. In short, achieving the 10/10/10 plan would be
very difficult.
The “Top Four in Four” requirement would also be a challenge for the Italian unit’s Europe-wide
responsibility for chillers. While this line accounted for 55% of 2009 Italian revenues, it generated
only 12% of sales for the rest of Europe. (See Exhibits 3 and 4 for industry sales and projections). Of
the seven companies in the European chiller market , Clayton was in a distant fifth place with a 7%
overall market share.
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4199 | Clayton Industries: Peter Arnell, Country Manager for Italy
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As performance declined, Paolo Lazzaro, presiden t of Clayton SpA since 1998, claimed that the
problems were due to the commodity cycle, and suggested that Clayto n should “weather the storm.”
Frustrated by this attitude, Buis terminated Lazzaro in June 2009. As she began thinking about who
could take over, her mind turned to Peter Arnell.
Peter Arnell
Peter Arnell was the 42-year-old head of the British subsidiary, Clayton Ltd. Raised in a working-class family on the outskirts of London, Arnell serv ed seven years in
the Roya l Marines where he rose
to the rank of Captain before a ttending business school in London. A brief stint in management
consulting left him missing the sense of impact he had experienced in the Royal Marines. So in 1998
he joined Clayton’s Birmingham office in a sales and marketing job that he thought would let him test
himself again on the front lines.
An avid weekend footballer, Arnell was a born competitor, quick with both a handshake and a
smile. He drove himself hard and expected the same from others. While very outgoing, he expressed
opinions bluntly and had alienated a few colleagues during his time at Clayton. Quickly promoted to
marketing manager, Arnell had expanded Clayton’s di stribution network from four distributors in
central England to 14 throughout the U.K. and Ireland, positioning Clayton’s product line to
capitalize on the U.K. real estate boom. In 2002, wh en the head of Clayton Ltd. retired, Buis promoted
Arnell to fill the role.
Within weeks, Arnell took the tough decision of closing the old Corliss boiler plant—a move that
was in line with the cost cutting program that Buis had initiated a few months earlier. After enduring
months of labor pressure and personal threats over the closure, he set about revitalizing the UK
business by replacing the lost revenue. He solicited support from pr oduct managers of other Clayton
lines to help them understand the UK market.
Buis was impressed by Arnell’s military discipline and propensity for bold action and felt he
could be the change agent Italy needed. She was also aware that years of summers spent in Italy with
his maternal grandparents had given him a good command of Italian. When she asked him to
consider taking on Clayton SpA, Arnell saw it as a career advancing opportunity to turn around a
larger operation that was key to Clayton’s European strategy.
A New Subsidiary Manager Arrives
Arnell arrived in Brescia alone on July 20, 2009, having asked his wife and two children to follow
in October so he could focus his energies on work . Buis met him and took him around the offices,
personally introducing him to Brescia’s 10 senior managers. At a group lunch, she told them that the
future of Clayton SpA was in their hands. Re flecting her commitment to empowering country
managers and encouraging them to take initiative, she said she would “get out of their way,” and
returned to Brussels.
That afternoon, Arnell called a management meet ing to share his early assessment of Brescia’s
grave situation and to ask for their support. Emphasizing that this was a time for immediate action,
he requested all of them to postpone vacation plans until further notice. August being the Italian
vacation month, three managers expressed misgivings—the plant manager, the QC manager, and the
company controller. Arnell asked them to meet with him individually before the end of the day. In
those meetings, after each manager reiterated an unwillingness to change plans, Arnell dismissed
them on the spot.
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The following day, after a meeting with his HR director to identify strong successors, he
announced internal replacements for all three positions. He then met individually with his top team,
asking each to help him use his first 60 days to understand the situation and develop a strategy for
the company. He then scheduled follow-up meetings wi th each of them to share their perspectives on
the operations, and also to review their individual work plans for the next 60 days.
But events at Clayton SpA did not wait for Arnell to complete his 60-day analysis. On his second
day, he arrived at work to find four union officials from Federazione dei Lavoratori della Manifatture
(FILM) outside his office with a local TV news cr ew. These officials suggested he was a hatchet man
sent to close the Brescia plant and implement a ma ss layoff. Arnell assured them he had no such
directive, that his mind was open, and that all options were on the table. He told them he would keep
them informed, and promised to meet with union representatives the following week.
On August 4, Arnell met seven FILM representatives to show them how much money the
operations were losing. He explained that in the current econom ic environment, Clayton’s U.S.
parent could not subsidize these losses. (It was a presentation he had made earlier that day to
Brescia’s Mayor who expressed concern about a plant closure and had arrived for his appointment
with press photographers in tow.) After hours of acrimonious discussion, FILM agreed to
recommend shortened shifts to its Brescia members. But Arnell knew that the concessions were far
less than the company needed to break even.
The following week, Arnell made an appointment to meet with Clayton’s bank to renegotiate
terms on the company’s credit line. As a gesture of goodwill, and because he thought it would help
his case, he invited a politically connected union representative to accompany him and his finance
manager. The three men secured the bank’s agreem ent to postpone large payments due over the
coming quarter. Arnell knew that while these few changes would not return the plant to profitability,
they might buy the company some time as he completed his assessment of the situation.
Assessing Clayton SpA’s Situation
Over the next few weeks, in meetings with his management team, Arnell learned a great deal
about the company’s current situatio n as well as the history that brought it there. He learned that
despite being given Europe-wide responsibility for compression chiller sales, Lazzaro had continued
to focus on building political relationships to support large projects in Italy. As a result, chillers
accounted for 55% of Italy’s revenues, and its strong position in the public and institutional segments
ensured its “top three” competitive position at home. However, it lagged among commercial
customers who increasingly favored Asian products that promised lower lifecycle costs through
more efficient design.
He also learned that Clayton’s other product lines were struggling in Italy. Its central air-conditioning system fit poorly with Italian buildings, many of
which lacked the duct work an
integrated system required. In room air conditioners and ventilators, the market was split between
low-priced foreign imports and familiar Italian brands. Offering neither low-price nor name
familiarity, the Clayton and Fontaire brands strugg led in Italy’s residential climate-control market.
And by focusing resources on the chiller line, the company had failed to develop a broader marketing
capability needed to sell these other products.
On the production side, Arnell discovered that th e unionized work force (which had tried to block
Clayton’s 1985 acquisition of AeroPuro) still enjoyed very generous benefits. For many years, the
plant’s high cost position was ma sked by political relationships that gave it an inside track on
government contracts. It was because of these relationships that Lazzaro refused to consider
permanent layoffs which were permitted in Italy only for “good cause” in firms with more than 15
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4199 | Clayton Industries: Peter Arnell, Country Manager for Italy
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employees. He even rejected using the Cassa Ingrazione Guardagni (CIG), a temporary layoff
provision that exempted workers coming to work in exchange for a significant pay cut, with costs
shared between the companies and the state.
This vulnerable cost position had put Brescia under threat in 2004 when Buis announced the
second phase of her plant efficiency drive. Focusing on efficient sourcing, she had insisted that all
plants become cost-effective European-scale operat ions. An early focus of the program was to decide
whether Brescia or Barcelona should become Clayton’s European source of commercial air
conditioning chillers.
In conversations with Carlos Sanchez who headed the Spanish company, Arnell learned that after
much political maneuvering, Lazzaro had convinced Buis to make Brescia the European source.
Barcelona was smaller and older than the Italian plant, and was able to build only 300 to 1000 kW
units compared to the 500 to 2000 kW units Brescia could make. So despite Barcelona’s 20% lower
labor costs and its more flexible work force, Buis fe lt that only the Italian operation had the capacity
to meet European demand. She committed $18 milli on to upgrade and expand its operation, which
eventually employed 203 people. But Sanchez told Arnell that he felt Brescia’s staffing levels were
still 20% to 30% too high.
Nonetheless, as Sanchez explained, with the support of labor, he had kept the Barcelona plant
open by licensing technology to manufacture spec ialized absorption chillers suitable for Spain’s
growing thermal industry.
1
Sanchez was proud that with growing exports, this line contributed $35
million to his company’s revenues in 2008, and with a 10% EBITDA, was already far more profitable
than compression chillers had ever been.
Arnell also wanted to understand why Brescia’s chiller penetration outside Italy was poor. Its 7%
European market share (well below the 21% Italy boasted) made Clayton a distant number five
behind competitors with shares of 36%, 23%, 16%, and 12% respectively. He spoke with country
manager colleagues in other major European markets as well as several major customers who told
him that the product was too expensive and also behind competitors in innovative features such as
variable speed technology. Furthermore, the Clayto n chillers lagged the operating efficiencies of
market-leading units by 15%.
Customers in some markets—particularly Scandinavia and Germany—told Arnell of a trend
toward “district energy systems” which produced steam, hot water, or chilled water at a central plant
and then piped it to buildings in the district for space heating, hot water, and air conditioning. Such
systems favored absorption tec hnology over the compression chillers Brescia produced. While
compression chillers still had 85% of the market , environmentalists emphasized that absorption
chillers were less carbon-intens
Jermaine Byrant
Nicole Johnson
OVER
RATING
YEARS
