When Kevin Hostetler took the reins of Rotork, a UK-based company that makes industrial flow-control equipment, he immediately launched a multiyear transformation to help the company benefit from trends transforming the industries it serves. In this episode of the Inside the Strategy Room podcast, he talks with Anna Koivuniemi, coleader of McKinsey’s work on growth strategy, about the progress Rotork has made and the challenges of changing the culture. This is an edited transcript of the discussion. For more conversations on the strategy issues that matter, subscribe to the series on your preferred podcast platform.
Anna Koivuniemi: The industries you supply are being buffeted by many shifts, from the Internet of Things [IoT] and digitization to concerns about environmental sustainability. How do you evaluate what shifts will be relevant to your business?
Kevin Hostetler: An extensive part of our organization is about capturing the voice of the customer. That means going out to see how customers work and understanding how they create value and how their business processes are changing. You mentioned digital and IoT, and we certainly see them as potential disruptors. Perhaps the most common way they are manifesting is in the use of data. I don’t mean data generated from processes and displayed in pretty charts but true disruption coming from augmenting that data with proprietary domain expertise.
Another element affecting our customers is the way operators interact with systems. As we recruit that next generation of workers who have grown up with mobile devices, they expect a similar user experience in their work environments. Our customers are increasingly adopting human–machine interfaces, and they want a real-time, seamless experience. That requires creative use of technology such as virtual and augmented reality.
The third disruption is around digitally enabling the adoption of new revenue models. Many of our markets have traditionally been late adopters of new business models. For example, while most industries have largely embraced software-as-a-service contracts, the uptake in what we call the “edge-device environment” is still relatively slow. We do see a broad range of service business models developing for things such as valve actuation or use of 3-D printers to create spare parts on demand. Our business-development teams spend considerable time on understanding how these new models can be deployed within our business.
Anna Koivuniemi: Our research on growth outperformers shows that these companies tend to look at all directions of growth: the core, new geographies, adjacencies, and value-chain disruptions. Entering adjacent businesses often represents 20-plus percent of the growth. How do you approach entry into adjacencies and resource these businesses differently?
Kevin Hostetler: A few elements need to come together to help accelerate those adoption curves. The first is ensuring that your engineers are spending time out in the field. When I first joined Rotork and asked how much time our engineering leadership team spends with customers, the response was, “Well, that is not our job. It’s the salespeople who do that work and then tell us what they need.” We have flipped that on its head. Not only have we reoriented our sales team, but we brought in a third party to train all sales-team members on how to create more compelling value propositions.
When I first joined Rotork and asked how much time our engineering leadership spends with customers, the response was, ‘Well, that is not our job. It’s the salespeople who do that work and then tell us what they need.’ We have flipped that on its head.
We then created a library of those value propositions. Now that we are oriented around submarket segments, when team members in Asia win an order on a new application, they have a global call with everyone working on submarket segments and explain how they won against competitor XYZ in this application: what was valuable to the customers, what they resisted, and how the team overcame that resistance. That is then documented and placed in a library. When sales-team members go to visit someone in a particular application, they can consult the database and get well educated on the language customers use, the key value propositions, and how we position our solution within the competitive landscape. That has been very helpful in driving adoption of those adjacencies.
We also launched a formal program last year that teaches our sales- and engineering-team members how to conduct primary voice-of-customer research: how to listen, ask three times more questions than make statements, and understand the value drivers at the end-user level. That comes back into the organization and gets fed through our product-development efforts. So it’s a combination of additional business-development resources, reeducating the sales team, and enabling our engineers to assist in that primary voice-of-customer work where they learn how to integrate adjacent products into ours.
Anna Koivuniemi: How do you prioritize your innovation ideas?
Kevin Hostetler: One of the benefits of our growth-acceleration program, which is what we call our transformation program, is that we have identified many work streams and initiatives and we manage the cadence. As we entered the pandemic and realized certain initiatives would be hard to fulfill given our inability to travel, we were able to quickly pull in other initiatives that we had already mapped out. Despite going through a global pandemic in the critical third year of the transformation, we were able to stay on track with our original goals, which was largely due to having many more initiatives in the hopper than we could do at one time.
Anna Koivuniemi: Can you give some examples of how you reprioritized initiatives during the crisis?
Kevin Hostetler: One initiative was reorganizing the back-end and front-end processes, which included looking at how we serve our customers and in how many locations we do order entry, customer service, application engineering, and other tasks. In the original cadence of our transformation program, we planned to fully integrate our IT-system deployment by year five, then begin consolidating some regional centers into centers of excellence for those processes. As we hit the pandemic and some consolidation efforts had to be delayed, we saw an opportunity to move on the back-office consolidation efforts, getting better leverage on the application engineering, customer service, and order entry groups.
Anna Koivuniemi: How many initiatives do you think is enough, and how many is too many?
Kevin Hostetler: At any one time, we have 14 or 15 initiatives that we are tracking in our program. The important thing is to understand how many initiatives and of what size and complexity you are taking on simultaneously. In the beginning, we worked on quick-hit, easy-to-get-done initiatives in order to build momentum and confidence and to buy time to bring in additional team members who had experience leading transformations. We got through those in the first year and began to demonstrate to the organization how we manage and lead through periods of change.
Next, we tackled more difficult projects. How do you revamp the product-development program from beginning to end? How do you restructure the engineering and innovation teams? Those were medium-size efforts which are all well in flight now. Then we had some more difficult decisions on additional facility consolidations. By understanding the size and complexity of each initiative, we could ensure that we had no more than three large initiatives running simultaneously.
A great example is our implementation of a new global IT system. When I came in, we were in the process of building a new global headquarters and engineering center. We recognized that these were two big and meaty programs and the IT program had many more benefits than having new, shiny offices. The steering committee makes these types of decisions on a regular basis.
Anna Koivuniemi: So your assessments combined the complexity and the impact of each initiative. How did you balance the top-down steering of what needed to happen with attention to a bottom-up embrace of the changes?
Kevin Hostetler: Initially, we listed all the initiatives and looked at their potential impact and the time and our ability to execute them. For some, we needed to bring in additional skill sets, such as a supply-chain adaptation or implementation of a lean manufacturing program. Then we broke down the multiyear journey into three phases.
The first phase was about cleaning up the business and preparing it for acceleration. That meant focusing on making it easier for customers to do business with us, simplifying our portfolio, and having the fortitude to exit underperforming businesses, product lines, and geographies. We did that work knowing that it would have a positive near-term impact on margins and would allow us to focus on operational improvements such as implementation of a global sourcing program and lean manufacturing, which would transition phase one to phase two.
Phase two was about accelerating our business. After the work cleaning up engineering, innovation, and product development, there is a longer cycle to fill that funnel with impactful innovation ideas. We are in that phase now, and we are reaping the rewards of the seeds we planted in phases one and two.
The third phase is what we deem internally as embedded excellence: driving the evolution to a culture of continuous improvement. We already see it when our teams propose new initiatives for our transformation program. They come to the steering committee and say, “We would like this resourced. We have a plan, and let’s begin executing.” For example, while the operations team was focused on improving the cost and resilience of our supply chain, they also recognized that we have certain cost-of-quality metrics. They came to the steering committee and said, “We want to start a new work stream that focuses on cost-of-quality improvement over the next three years.”
Anna Koivuniemi: It sounds like you started top down on themes to create that change momentum and now the bottom-up initiatives are bubbling up. How did you address resistance to change and some of the capability gaps?
Kevin Hostetler: We spent a lot of time understanding both the capability and the desire for change within the organization, and I certainly participated in that. We found that we had a senior team with considerable experience in driving change and, two organization levels below, we had a huge body of emerging leaders who longed for organizational improvement. Then we had this thick, stuck middle that had been at Rotork for a long time and saw no need to change. My job was to create a compelling vision. Once we did that, I spent much more time on the concrete of factory floors than the carpet of the boardroom, convincing the organization of the need for change. I traveled extensively for months, town hall after town hall, small group meetings, large group meetings, and my senior leadership team did likewise.
I spent much more time on the concrete of factory floors than on the carpet of the boardroom, convincing the organization of the need for change.
We then brought in third-party resources to help train the company on change. How do you effect a great change journey and what tenets will be core to it? We put those in place quickly, and that helped us maintain momentum. Those of us who do transformations for a living know that momentum can stall in the critical third year of the process. For us, blowing through the year-three stall—which, in our case, was made much more difficult by the timing of the pandemic—and maintaining momentum has been critical.
Anna Koivuniemi: In transformations, performance sometimes eats growth for breakfast because performance initiatives are easy to measure, whereas growth initiatives, because they have a customer angle, sometimes succeed and sometimes do not. How did you balance pruning costs with maintaining growth as part of the transformation?
Kevin Hostetler: Companies going through transformations need to understand that accelerated growth only comes from a period of investment. Accelerating your product-development expenditures and adding business-development resources, as we did in emerging markets—that costs money. While you certainly focus on optimizing the organizational structure, there has to be a balance between generating margin enhancement that shareholders are looking for with investing in growth. For us, that entailed frank discussions with the board and our shareholders that, yes, we will get that margin enhancement, but we will use a portion of it to drive growth in the outer years of our program. We enhanced margins through our lean implementation and by gaining control of logistics costs, but shareholders need to understand that they will not get all that money back, because we will take a portion of it to fund a growth engine.
Anna Koivuniemi: What leadership capabilities or cultural factors do you believe are critical to driving growth?
Kevin Hostetler: Agility comes to mind. Also, resourcefulness. When I joined Rotork, we began profiling the new executives coming on to help with the transformation program. Certainly, not all who started the journey are still here, so we have gone back to review the psychological profiles of those who did not make it and those who are thriving. What we found is that resourcefulness is important within Rotork. You need the ability to work along the entire strategy-to-execution continuum. One day, you are developing the strategy for penetrating an emerging market; two days later, you may be out in that market with a team, executing some of those initiatives. Our organization has a player/coach mentality: going to where the work is done, seeing the work done, and contributing to it is a key tenet of our leadership.
You need the ability to work along the entire strategy-to-execution continuum. One day, you are developing the strategy for penetrating an emerging market; two days later, you may be out in that market with a team.
Anna Koivuniemi: So you believe that growth should be linked to the company’s DNA and you need the right leaders to lead that growth?
Kevin Hostetler: There is no doubt. And that becomes self-fulfilling. When we are recruiting, it is a much easier sell when candidates know they would be part of a growth story. Despite the fact that we are doing major organizational changes and footprint consolidations, they understand that it is all part of a journey to create a growing, thriving enterprise.
Anna Koivuniemi: Did you have to introduce new processes or operating models to enhance that new growth trajectory?
Kevin Hostetler: The biggest thing was the introduction of a new performance element. Every employee in the company participates in a discretionary bonus program. Our challenge was that all employees got the same bonus, regardless of their effort or performance, so we knew early on that we had to revisit our compensation strategy. We put in place personal objectives that are linked to our strategy, and we began cascading them. We now have regular performance conversations, and the results bear on the compensation decisions.
Anna Koivuniemi: When you look five to ten years out, what additional changes do you expect Rotork to implement?
Kevin Hostetler: Improving customer communication and simplifying our product portfolio are the foundational pieces, but there are other areas we continue to stress. The first and probably most impactful is the geographical shift of fluidics toward Asia. We have put keen attention on that geographic expansion because over the next ten years, we expect a dramatic shift in our resources from the West to the East. This goes beyond sales and business-development resources. It includes things such as localization of product design and manufacturing and moving decision making closer to customers.
For example, historically, a large contract would come in and be sent to a legal team in the corporate center that would review it over a period of weeks. We recognized that to have higher customer-response speed, we had to localize our legal resources. The teams operate within a framework established at the center, but day-to-day, they are making decisions closer to customers and reviewing contracts in a matter of days.
The second priority is the increasing need for automation and digitization. It means integrating devices beyond those produced by Rotork that collectively can provide better insight into and control of our customers’ processes. The third element is building out of a robust field-services organization that supplements the capacity of our customers who are reducing the number of skilled workers they have on-site.
We have also focused on a suite of products that support the move toward a lower-carbon economy through reduced energy consumption and use of renewable energy. We are regularly launching products that eliminate harmful emissions and help us participate in those adjacent, emerging value chains such as biofuels and hydrogen. These lower-carbon alternatives remain fluidic-intensive and, as such, we have a right to play. To be clear, we still have a lot of growth ahead of us in oil and gas. As the world focuses on decarbonization, the extraction and refinement of natural resources have to be done in more environmentally friendly ways. Because our products are electric rather than pneumatic and hydraulic, they reduce emissions.
Anna Koivuniemi: One final question. What role do you see M&A playing in your future growth story?
Kevin Hostetler: It is very important. Rotork is a very cash-generative company, and there are many near-adjacent products that we could combine with Rotork’s to have a more compelling value proposition. We have a strong balance sheet and a history of using M&A effectively to drive growth. In the near term, very few high-quality properties are coming to market and those that are trade at incredibly high multiples. For those deals that we like, we will ensure that we pay an appropriate price.