CASE 16: LVMH The story of LVMH is significantly a story of the overarching ambition of one highly cultivated individual: Bernard Arnault, founder and CEO of LVMH, who strikingly combines artistic sensibility and business acumen. This is a case study illustrating how industries may be mature only by definition, and that the definition need persist only until such time as one creative individual bends his mind to the question “how can we create new value?” The case describes the revitalization of established but somewhat tired brands, with issues such as strategic leadership, image-driven innovation, market positioning, and related diversification all being to the fore.

LVMH is an example of a company that successfully combines size (46,000 employees; 15% of a global market worth $68bn) with coherence and autonomy of operation, mass production with luxury, diversification with market focus, continuity with change, conservatism with risk-taking, and financial success (value has grown 15-fold and profit 5-fold in 11 years) with free-ranging creativity. The analysis could begin by challenging students to explain how these contradictions are so successfully reconciled at LVMH.

An “Entrepreneurial Organization”

The characterization of LVMH as an “entrepreneurial organization” is the beginning of an answer. Such an organizational form succeeds in an environment that is simple and dynamic.

The simplicity is evident along a number of dimensions. The products—whether handbags or perfume, champagne or a watch—may be described simply as “superbly designed symbols of social prestige.” These brands are clustered into 5 “branches:” wines and spirits, fashion and leather goods, perfumes and cosmetics, watches and jewelry, and selective distribution. The simplicity of strategy formation is maintained by the manner of diversification (strongly marketing related, i.e., luxury brands), the vehicle for this (acquisitions, which prevent any given brand name from becoming over-exposed), and a straightforward logic (under-performing but with high development potential). Simplicity is further maintained through clearly defining synergies at the branch level (each brand in a branch shares support services such as purchasing, research, and distribution), exercising great care in the recruitment process on the basis of fairly simple criteria (entrepreneurial but with a sensitivity to luxury goods), and by inculcating basic values of creativity, product and service excellence, absolute respect for the brand image, and entrepreneurial spirit. Finally, there is a shared ideal for every product to contribute to a sense of “art de vivre” (living surrounded by the best you can find).

Dynamism is actively embraced by LVMH. The size of each brand company is deliberately kept small to enable quick reaction to changing demands of the market and to facilitate communication of issues and innovation around the brand. The case also demonstrates that a dynamic environment is something sought out by entrepreneurs to maximize the talents of both themselves and their favored organizational form, e.g., hiring of Marc Jacobs for Louis Vuitton.

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The Mintzberg reading in Chapter 13 argues that a coherent and imaginative strategic vision significantly is rooted in hands-on knowledge. This combination of macro vision and micro detail in one mind is achieved through involvement in work across all levels of the organization. This is the virtuous circle of the entrepreneurial organization: control permits involvement in the vision and the details, but familiarity with the vision and the details ensures control is automatic. Each constitutes and is constituted by the other. And as Mintzberg observes, “Such knowledge can be incredibly effective when concentrated in one individual who is fully in charge…so long as the business is simple and focused enough to be comprehended in one brain.”

The careful pursuit of diversification clearly allowed Arnault to at once maintain simplicity and, through integrating acquisitions with the LVMH systems and ideals, to also inject dynamism into the marketplace.

Consideration of the case could close by inferring the core competencies of LVMH. It clearly excels in marketing and product development, and in the management of the inter-relation between these functions. The company evidences a sustained commitment to these competencies rather than to any particular product. Its leadership position in its core market (luxury goods) has clearly shaped both its integration (the concern to build and maintain margin, quality, and leadership across all brands), and diversification (the lack of any reported problems in integrating acquisitions may be due to the acquired companies being both relatively small and targeting a core segment). Wrap-up could be around the question of what is to happen when Arnault (LVMH’s “prime coordinating mechanism”) departs?

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CASE 17: KAMI CORPORATION

Case Summary

Kami Corporation’s owner, Mrs. Lee, has assigned Mr. Olano to be its general manager with a mandate to “straighten out the mess at Kami.” Mr. Kee, the production manager, had been expecting to be promoted to this job. Kami is a contract producer of televisions for Aiwa and, hence, is a production-driven company. There are constant problems with meeting production schedules. Yet, Mr. Kee is blaming other departments for the problems on the one hand, but is resistant to Mr. Olano “interfering” in any production-related area, much less within the production department itself. Mr. Kee and the six key production engineers and managers had come from Mega Corporation, Mrs. Lee’s holding company, where they had worked, in its television-assembly operations. They lived, worked and socialized together. Mr. Olano is not an engineer and has no experience in production or in general management; he has less seniority at Mega than Mr. Kee, and is younger as well. Yet, despite this situation, Mr. Olano must improve the performance of Kami and fulfill his mandate.

Usage

This case would be appropriate for an international management course in the section of the course on management of change or executive authority.

Assignment Questions

1. What are the differences between the production operations of Kami and Mega’s other television-assembly operations?

2. What are the main problem areas in Kami’s operations? Why have they occurred?

3. Why is there friction between Mr. Olano and Mr. Kee? How could this friction be reduced? Should this be a priority for Mr. Olano?

4. What are the power relationships between Mr. Olano and Mr. Kee and the other engineers at Kami? Who has the power and why?

5. What should Mr. Olano do to improve Kami’s operations? What can Mr. Olano do? Give a step-by-step process for these actions.

The case analysis for this case is quite lengthy. This length reflects two factors. First, it reflects the complexity and richness of the case. Second, there is quite a lot of material on my perceptions, flawed though they may be, of certain aspects of management in Asia. This “Asian management style” is changing due to the pressures of international competition, increased formal management education in Asia, and as companies become larger and need more formal management. To my mind, however, Asian management is

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bound into Asian sociology and interpersonal behavior. I believe, these are different than in the West and they will remain so.

I should add words of caution. I have no training in sociology, psychology, or organizational behavior in Western or Asian. Over the past 30 years, however, I have spent about a third of my life living, working, teaching, and researching in Asia. So these observations may have some validity. Please take them, however, with a grain (or a cup) of salt.

CASE ANALYSIS

Objectives

Mr. Olano has been assigned as general manager of Kami Corporation to improve its performance, specifically to reach its production goals, both now and in the future. As a contract producer for Aiwa, Kami has essentially two goals: to meet Aiwa’s output demand at acceptable quality and to make as much profit as possible. This second goal entails cost reduction by efficient operations and by sourcing an increasing percentage of its components itself, at costs below those on Aiwa’s master component and price list.

Size Up (This “Size Up” Will Follow the Assignment Questions)

1. What are the differences between Kami’s operations and those of Mega’s other assembly operations?

There are several important differences between the operations of Kami and the other assembly operations within the Mega group of companies. These differences are at the root of the problems at Kami:

a. In Mega’s other operations, the OEM manufacturer is the one to schedule production in relationship to projected demand. Hence, there is no need (or expertise) for the production department to do “macro scheduling” of various models in relationship to projected demand. The OEM producer does this.

b. In Mega’s other operations, assembly is done from “kits.” The kits contain all the components necessary to assemble a complete television. Hence, there is no need (or expertise) for the production-planning department to take the macro production schedule and “blow it up” into parts requirements by date.

c. Following from this, there is no need (or expertise) to project inventory needs in relationship to scheduled production runs.

d. Finally, there is no need (or expertise) in placing orders in relationship to inventory levels, “supply lags” and usage needs.

2. What are the main problem areas at Kami and why have they occurred?

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At Kami, Aiwa gives a one-month firm order and a three-month projection. The production department must then take these demand figures and transform them into a “macro” production schedule: so many units of the two models to be produced on each day, along with the length of the production run. This macro schedule must then be “blown up” into components requirements day-by-day. Then, orders for these components must be placed in relationship to inventory levels, order costs (the cost of writing an order) and transportation costs as a function of volume and “supply lags,” the length of time between order and receipt of the component.

This type of production planning is far different and far more complex than anything with which the production managers have had to deal in their positions in Mega’s other assembly operations. Not surprisingly, the production managers and engineers have been overwhelmed by these new tasks. There have been frequent production delays and production below expectations and Aiwa’s demand. Hence, the major problems at Kami have been caused by insufficient expertise and knowledge in the production department given the demands for production expertise at Kami.

Moreover, there is a major problem of “face” involved. Surely Mr. Kee knows that there are problems at Kami. He may not be aware of the extent and the depth of the problems (or the magnitude of the task to fix them), as outlined above. He may not be aware that he and his managers do not have the expertise to fix them. But he does know that something is wrong and that he has not been able to fix it. Whatever Mr. Kee knows or does not know about the root causes of Kami’s problems, he will never admit that they could be related to him or his department—ever.

3. What has caused the friction between Mr. Olano and Mr. Kee? What can Mr. Olano do to reduce this friction? Should this be a priority for him?

Mr. Olano’s appointment as general manager of Kami, a production-driven company, by Mrs. Lee, has been a direct slap at Mr. Kee and his competence. To preserve his “face,” Mr. Kee and the other production managers have been blaming everyone else, not themselves. Specifically, blame has been attached to the inventory department for not having the components in stock. The manager of the inventory department has blamed the order department (at Mega’s assembly operations) for not placing orders, for mix-ups, and for delays. The fundamental problem is that Kami does not have a comprehensive production planning, scheduling, ordering and inventory control process. It does not have the in-house expertise to develop one. To make matters worse, since everyone is blaming everyone else, the atmosphere is not one conducive to calm analysis of the problems, much less their solution.

There are other factors that have intensified the friction: Mr. Olano’s age, relatively short employment at the Mega group of companies, lack of an engineering degree (formal educational qualifications), and lack of general management expertise are very important in the Philippines.

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Note that in all these causes of friction are objective facts that, to a major extent, cannot be changed: age, employment tenure, education, and management experience. Of course, the fact remains that Kami is not meeting production targets. Moreover, Mr. Kee feels (and appears to his immediate subordinates) he has been passed over for the general manager position. There is nothing Mr. Olano can do to change these facts. Fixing the problems at Kami does not involve modification of behavior or changing an organizational chart or reporting authority.

Hence, there would seem to be nothing Mr. Olano can do to reduce the friction. What’s worse, almost any action he takes will tend to exacerbate it for two reasons. Mr. Kee is resentful of Mr. Olano’s appointment and most likely would not be unhappy if Mr. Olano failed to improve the situation. Also, Mr. Kee will see almost anything Mr. Olano does as an infringement on his authority and as an implicit criticism of what he has been doing.

As a consequence, Mr. Olano should expect at least silent resistance to anything he tries to do. There is also a good chance that Mr. Kee may try to sabotage Mr. Olano’s initiatives, unite the managers and workers against him, and go running to Mrs. Lee with tales of Mr. Olano’s incompetence as a manager, both personally and professionally. Ultimately, the situation may devolve into a power struggle between Mr. Kee and Mr. Olano.

4. What are the power relationships between Mr. Olano and Mr. Kee? Who has the power?

Mr. Olano was appointed as general manager by Kami’s owner, Mrs. Lee, with the specific mandate to “clean up the mess at Kami.” This has three implications for Mr. Olano’s power and, hence, the constraints under which he must effect change. First, Mrs. Lee knows there is a problem and is upset by it. Second, she wants it fixed. Third, she has given him whatever power she has to fix it.

Unfortunately, Mrs. Lee’s perception of the problems is based on what she has been told by Mr. Kee and the previous general manager: the problems have been caused by stocking out of components when they are needed for production. Hence, she sees the problem as one of straightening out the ordering from suppliers rather than as a (much) more broadly based problem. Mrs. Lee has appointed Mr. Olano with the idea of his using his accounting and “paper shuffling” skills to fix the ordering problem, not to “straighten out” the production department.

The implication of this conclusion is that somewhere in the process, unless Mr. Kee gives in, Mr. Olano will have to inform Mrs. Lee of the root cause of the problem—Mr. Kee and his production managers—and get her support for changes in the production department. This is when power relationships will become crucial, both to fixing the problem and to Mr. Olano’s future as general manager. What’s worse, Mr. Kee knows that this time will come—and he will most probably try to “get his ducks in order” to prevail in the upcoming power struggle.

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Business is much more personal and less formalized in many respects in Asia than it is in the West. The head of an organization would expect, even welcome, personal appeals from all levels of the organization. Responding to personal appeals assists those at the top to cement and strengthen power-dependency relationships with those below them. Hence, there is a good chance that sometime in the future, Mr. Kee will appeal to Mrs. Lee for help against Mr. Olano. To do this, Mr. Kee will need two things: support from his subordinates and objective measures of continued or increased failure, which he can attribute to Mr. Olano, and Mr. Olano’s management.

The implication for Mr. Olano is that he must prepare for the probability of such an assault being launched.

In general, in Asia, the head of an organization has more power than he/she would in the West. To overstate the situation (but only somewhat), it’s like the joke, “What do you say to the 6' 9", 280-pound man with a whip?” Answer: “Yes, sir.” Note that Mrs. Lee simply called Mr. Olano into her office and told him, “You will be the new general manager of Kami.” End of discussion. So, on the surface, Mr. Olano would seem to have the power to make any changes he deems necessary.

This perception, however, is incorrect. Personal power is very important. Personal power must be acquired or passed on based on family, connections and past history. It does not automatically go with the job or the position. Hence, the ability of a new general manager (or CEO) in the West to “clean house” based on the power of his position/title in a company is not as obvious in Asia. In Asia, on the contrary, power must be earned and demonstrated. In part, it comes from the ability to reward and to punish—and from exercising power and conferring rewards over time.

Beyond power developed over time and attached to a position, in Asia, power also comes from age, experience and education. In the West, we use professional titles such as Doctor, Professor, Captain, and Judge; and for political positions, President, Congressperson, and so on. In Asia, people are often addressed as Attorney, Engineer, Accountant, Manager, etc. Even titles such as Electrician and Technician are sometimes used. Hence, education and training give positional power. Mr. Olano does not have this: he is not an engineer.

There are two other aspects of management in Asia that are germane to Mr. Olano’s situation. The head of an organization with the power can, and often does, intervene in every phase of the organization down to the minutest levels. It is not uncommon for the head of an organization to tell some manager exactly what to do, even if the head has no expertise in the area at all. On the other hand, management departments are often highly compartmentalized and “turf” is highly protected. In fact, one of the problems in general management in Asia is that managers of the same level in one department may be unwilling to “stray” into another department to offer advice or even information on problems of mutual concern that overlap departments.

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Mr. Olano must achieve and consolidate his power because any initiative he puts forth into the production department, Mr. Kee will view as an intrusion (and an unacceptable one at that). This would be true even if there were no friction between them and even if the problems at Kami did not arise in the production department.

Alternative Approaches to the Problems

Mrs. Lee, Mr. Kee, and Mr. Olano all recognize that there are problems at Kami. They do not have a common perception of the root causes of the problems, however. So the first step in a management of change process has already been made: problem recognition. The next step, problem identification, will be a “killer.” Mrs. Lee’s perception of the cause of the problems comes from Mr. Kee. Whether Mr. Kee recognizes that the root of the problem lies in his department or not, is not relevant: there is little chance that he will admit it or be forced into a position of accepting it. Yet, unless the problems within Mr. Kee’s department are addressed, Kami will still be in trouble and Mr. Olano will not be successful.

Given this situation, there are a number of ways that, in theory, Mr. Olano might address the situation.

1. Hold a series of meetings to “clarify” the situation.

This is standard practice in the West: clarify the situation to identify the problem areas, analyze the situation, formulate an alternative, choose an action plan, and so on. This procedure is not commonly followed in Asia. Typically when a problem is “clarified,” someone is also identified as having caused the problem or at least as having responsibility over the problem area. This is typically the last, the very last, thing that anyone wants since it will involve loss of face by the person involved.

In Kami’s situation, the problem is Mr. Kee, and he has done, and will continue to do, everything in his power to prevent this from happening: blame others and obfuscate the situation. This process is just not going to work. Moreover, if Mr. Olano tries to follow it, one of Mr. Kee’s actions will be to run to Mrs. Lee, blame Mr. Olano for everything, and precipitate a power struggle in which Mrs. Lee has to choose him or Mr. Olano. Mr. Olano is not yet ready for this confrontation.

2. Try to bring Mr. Kee “on side.”

This approach is somewhat better than alternative Number 1. Mr. Olano could try what I call the “little boy lost routine” to use his age, inexperience, and lack of an engineering background as advantages to seek Mr. Kee’s inputs on what is going on at Kami and what should be done to fix it. This could be combined with a “we’re all in this together, let’s pull together” approach. Inevitably, however, the problems that Mr. Kee identifies will be with components stock outs and the problems in the ordering department and, possibly, inventory control.

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This approach may assist Mr. Olano in addressing these problems, but at the same time, Mr. Kee will be showing Mr. Olano who is in charge and who knows what’s going on (Mr. Kee). Then, when Mr. Olano moves on to address the problems within the production department, he’ll be stonewalled and will have shown everyone that he is not in charge.

3. Deal with first things first, while at the same time gaining and consolidating power.

The reason why Mr. Olano has been assigned as general manager of Kami is due to his skills in accounting and, more generally, in “paperwork.” So, he can address the order problem first. To do this, he can move the actual order-placing function to Kami from Mega. This would have several benefits. First, it eliminates the “middleman” from the order process and should reduce mistakes and increase response time. Second, the personnel in the order department will be his responsibility, under his authority, and will be dependent on him. Third, if the problems with orders are corrected, then Mr. Kee’s rationale for production delays based on orders will be eliminated and the problems in the production department will be more clearly seen. Fourth, this action will begin to isolate Mr. Kee. Fifth, Mr. Kee can hardly object to what is being done, since he has been the one to identify this area as the cause of the problem.

As this is being done, Mr. Olano will have time to provide Mrs. Lee with information about his progress and his belief that the problems will not end with straightening out the ordering process by itself. He will also be able to show that under his management things did improve somewhat. Then, after he has an efficient order department, Mr. Olano can move on to the inventory department. He has the expertise to tie orders from the production department to inventory levels, to actual orders. He may get some resistance to this move from Mr. Kee. But, since Mr. Kee cannot point to an order problem, per se, as the cause of below standard production, he will be forced to point to a lack of components in inventory as the problem. Mr. Olano can address this problem.

As Mr. Olano is doing all this, he can generate and supply information to the production planners about order response times, inventory levels, etc. In this way, he can implicitly show the necessity of the need for co-ordination between production planning, inventories, and order response times. He may also be able to show how advanced production planning can help save costs in ordering (volume discounts, savings in transportation for larger lots, and savings in time in customs clearing).

All this information can be sent to Mrs. Lee in summary form as well as to all the managers in the production department. Mr. Kee, however, will see the tentacles of Mr. Olano’s power spreading around him on the one hand and his increasing isolation on the other; i.e., all these initiatives will increasingly isolate the problem into the production department and especially production scheduling, the heart of Mr. Kee’s domain.

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Mr. Olano should expect a counter-attack somewhere in this process. In addition to keeping Mrs. Lee apprised of both the results of his initiatives and the continuing problems, Mr. Olano needs objective data to combat the “black propaganda” that may be hurled against him. Before and after pictures of the inventory department might be a good idea. Pictures of the production floor as run by Mr. Kee would be helpful. Of course, Mr. Olano could not take them himself, but perhaps the Japanese advisers could do this. They have the same goals as Mr. Olano (on-time delivery) and must be feeling the same frustrations. So get them on side. Documentation of delays and their causes, and improvements in production, need to be kept.

Finally, Mr. Olano should identify replacements for Mr. Kee and his “good buddies” in the production department. If, as is likely, there is a confrontation, he needs to reduce the credibility of a threat by Mr. Kee to leave with his managers unless Mr. Olano is removed. This may seem to be extreme, but in the end, under this process, Mr. Kee is going to be “hung out to dry” unless he can get Mr. Olano removed. So, Mr. Olano should expect a power play and be prepared to meet it. Mr. Olano should delay this confrontation as long as possible in order to build a power base within Kami, to build his credibility with Mrs. Lee and to collect objective performance data. But if (when) the confrontation comes, Mr. Olano must be prepared.

Mr. Olano should also be prepared to the extent possible for sabotage. For example, Mr. Kee could consciously schedule production runs of one of the models when he knows some components are not available. To combat this, Mr. Olano could build excess inventories, or he could just document the causes of the situation by issuing memos of components availability and requests for orders from the production department.

This all seems rather Byzantine, but this is the situation, at least as I see it. I might add this situation is not uncommon in Asia. My experience has been that there is an incredible amount of time “burned up” in analyzing relationships, and trying to gain, preserve and utilize power. Obviously, some of this behavior exists in institutions (businesses among them) in the West. So it’s a matter of degree. The degree, however, is much higher in Asia.

4. Redefine the general manager’s job as short term with a mandate to fix the paperwork.

I would doubt that Mr. Olano’s ambition is to be a front line general manager in one of Mega’s subsidiaries. Taking this as a given, he might go to Mrs. Lee and “clarify” that his position at Kami is just a temporary one until Kami’s paperwork problem, which is seen to be causing the problem, is resolved. Under this alternative, he could then follow one of two paths: fix the order problem (the problem identified by Mr. Kee as the cause of the production problems), announce victory and go on to another assignment, or he could try to fix the entire paperwork problem and then go on to another assignment.

Under the first of these paths, Mr. Olano could (at least partially) diffuse his problem with Mr. Kee by telling the parameters of his assignment. Mr. Kee would probably then

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co-operate in order to get him out of Kami and, he would hope, into the position of general manager himself. The downside of this strategy would be that the order problem is not the root cause of Kami’s problems, performance would not improve significantly and Kami would remain a poor performer.

Under the second strategy, Mr. Olano would also inform Mr. Kee that he was just there as a general manager on a temporary basis, but that he was assigned to institute a complete “paperwork system” for Kami, including the production department. One nice feature of this path is that there are software packages available that would do all (or most of) the grunt work in production planning, inventory control and so on.

With these programs (properly tailored to Kami), once Aiwa had given its three-month forecasts and one-month firm orders, the computer could “blow” these orders into components requirements, match them against inventory, calculate minimum order quantities, and even do the paperwork for placing individual orders. To obtain the necessary information to tailor such a program to work, however, would require inputs of data from the production department.

This co-operation would likely be forthcoming for four reasons: Mr. Kee would see it as directly within Mr. Olano’s mandate and competence; Mr. Kee would want the project to be finished and Mr. Olano gone; Mr. Kee would probably be both interested and intrigued in instituting modern computer methods in production; and, in the end, these programs would be under Mr. Kee’s production department. In other words, by following this path, Mr. Olano would both enhance Mr. Kee’s position, and get the job done and get a gold star in his own copybook.

If Mr. Olano could pull off this razzle-dazzle, everyone would win: he, Mr. Kee, and Kami.

Recommendation

Try alternative Number 4. When pursuing this alternative, however, Mr. Olano should also build his power bases in Kami, inform Mrs. Lee of the true causes of the problems at Kami, and watch his back from Mr. Kee as outlined in alternative Number 3.

What Happened

Mr. Olano pursued alternative Number 3 (with a bit of Number 1 thrown in). The results were bloody. Mr. Kee took every opportunity to sabotage him. He knowingly scheduled runs of the model for which he knew there were no components (or insufficient components) available. He delayed orders to ensure stock outs. He made “poison pen” reports to Mrs. Lee. Eventually, he precipitated a showdown by organizing a mass signature petition to Mrs. Lee for Mr. Olano’s removal.

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Since Mr. Olano had also been working to enhance his power and credibility, the confrontation did not work out as Mr. Kee had hoped. Mr. Kee and four other production managers were fired (their resignations were accepted). Part of the “victory” was due to reports and photos by the Japanese technical adviser from Aiwa who was on Mr. Olano’s “side” in the confrontation. This was a case in which one picture spoke a thousand words—and there were many pictures. Mr. Olano immediately replaced them with five production managers from Mega’s operations in China, an arrangement that he had obtained before the confrontation.

As of mid-1997, Kami is well on track to meeting its production commitments to Aiwa. Everyone is happy, but Mega has lost five useful production managers, a significant loss to the company.

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CASE 18: STRATEGIC PLANNING AT THE NEW YORK BOTANICAL GARDEN

The case is a rich discussion of strategy formulation and organizational transformation in a not-for-profit organization. It is 1993 and a new 7-year plan, two years in the making, is about to be unveiled. The case describes the highly inclusive process used to produce the plan, and how it delivered on specific content in the form of three objectives: giving new vigor and focus to botanical research; bringing more visitors to the garden and enriching their experience; and achieving financial and managerial stability.

The garden is a major New York institution, with a world-renowned reputation and tri-partite mission in botanical research and education, and horticulture. Long, president of the garden since 1989, has spent four years doing the groundwork in turning the garden from financial crisis to financial security, and a renewed sense of its mission. On his arrival, it was an organization adrift, having had no recent major capital spending, with very limited operational resources, and perceived by the public as little more than a public park rather than as a “living museum.” The case describes how Long immediately set to work tackling operational issues that fed into a longer-term transformation, rather than waiting for the completion of the strategy-development process. For example, fencing the garden, banning dogs and cars, and charging admission all quickly sent the message that this was more museum than public park. Along with the staff reductions of about 15%, these actions also sent a clear message that the garden was in straitened circumstances. He also quickly recognized the need to move the garden away from dependence on particular sources of finance, such as the New York City annual budget appropriations, and towards more predictable and autonomous bases (such as increased reliance on philanthropic giving and revenue from operations).

To reinvigorate both the garden’s sense of purpose and its resource base, and building on his experience in similarly transforming the New York Public Library, Long launched in 1991 a 2-year strategy exercise. This exercise had at least three key characteristics: deep inclusiveness (all scientists at the garden presented on their work and “blue-sky” ideas for the garden on a weekly basis to the 85-member planning group over this period; open dialogue after these presentations; and regular presentation to the board); clear structure (proto-plan, program plans, master plan; four levels of participation, with the input of one level synthesized by the level immediately above it; fund-raising target set by consultants’ research; and sequencing of objectives); and adaptiveness (the weekly meetings built this into the process, so too did timely revision of objectives during the process: for example, the a crisis in the city’s finances and a local recession nine months into the process were adapted to by getting each area to work with a pro-rata reduction in its target for funds and to prioritize accordingly).

Some positive outcomes that could be expected from this process include an increased sense of commitment by both employees and the public (the latter were also involved, though to a relatively minor degree), and a clearer understanding of the purpose and priorities of the garden. Both of these outcomes could be expected to contribute to the

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achievement of financial and managerial stability through their impact on communicating with potential donors and on improving the quality of execution in day-to-day operations.

On the other hand, some negative outcomes of such a process include the time and energy it takes, the relative lack of involvement of outsiders building external resistance in a crucial constituency, and the potential for lack of coherence because of the very distributed nature of involvement (though this last was clearly recognized by the provision of staff support to help with presentations having a standardizing effect on these).

Could a similar process be used in a for-profit organization? Some students may argue no: the professional nature of the garden and the absence of close competitors lent a quality to front-line input and time to digest it that would typically be unavailable to the average for-profit firm. Moreover, the relatively modest size (in terms of employment numbers) allows for inclusiveness that larger organizations would not be able to match. Against this, it could be argued that the process could be applied in larger for-profits as long as the management of it was distributed among a corps of managers—for example, GE had a protracted change process (called “work-out”) that involved tens of thousands of front-line employees meeting in smallish groups with dynamics very similar to what is suggested for the garden process. It seems that this kind of change process—inclusive, structured, adaptive—is vital for the scope of change described here, regardless of the type of organization. Finally, the instructor should note that five years into the 7-year plan, virtually all of the ambitious goals set out in the plan had been achieved.

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CASE 19: NAPOLEON BONAPARTE: VICTIM OF AN INFERIOR STRATEGY?

Motivation

Napoleon Bonaparte’s life and times are well documented, as are his strategic and leadership skills. However, one does observe that despite the continued application of superior personal strategies and leadership skills throughout his lifetime, success eluded him in the end. We observe a meteoritic rise in the early stages (victories in the battle of Lodi, Marengo, and Austerlitz) followed by a downfall (Russian invasion and Battle of Waterloo). Can we find any reasonable explanation for his rise and fall? Exploring this question is the aim of this case.

Teaching Objective and Outline

This case explores the hypothesis that Napoleon’s deteriorating equality of interaction with his field marshals and generals led to inferior strategies that finally led to his downfall. Interestingly, throughout this period of decline and throughout Napoleon’s lifetime, his personal strategic contributions and leadership skills remained unquestionably superior.

One observes a visible change in his pattern of interaction with his field marshals and staff. Increasing non-cooperation, misunderstandings, and a lack of proper process during strategy formulation accentuated Napoleon’s interaction in the later half of his career.

Good strategy should reflect good content and good execution. Interacting properly with people, or more accurately, using a proper decision-making process, during strategy formulation is critical to crafting a good strategy. A proper decision-making process appeals to people’s intellect and emotions that in turn, promotes a voluntary knowledge sharing and fosters trust and commitment. Voluntary knowledge sharing increases the collective wisdom and ensures good content. Establishment of trust and commitment ensures early and voluntary cooperation for good execution.

“Our observations on the pattern of human thought and behavior can be summarized as follows. When individuals are treated such that their intellectual worth is recognized, they are willing to share their knowledge—in fact, they feel inspired to impress and confirm the expectation of their intellectual worth, suggesting active idea and con knowledge sharing. Likewise, when individuals are treated with emotional recognition, they feel emotionally tied and inspired to give their all.”

(Professors W. Chan Kim and Renee Mauborgne: Strategic Management Journal, 19, 1988, pp. 323-38.)

What is then a proper decision-making process? It must incorporate elements of procedural justice so that the dynamics of decision-making are considered fair, hence the name “fair process.”

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“Fair process profoundly influences attitudes and behaviors critical to high performance. It builds trust and unlocks ideas, with it, managers can achieve even the most painful and difficult goals while gaining he voluntary cooperation of the employees affected. Without fair process, even outcomes that employees might favor can be difficult to achieve…”

(Professors W. Chan Kim and Renee Mauborgne: Harvard Business Review, July-August 1997, pp. 65-75.)

So how should an executive incorporate fair process into his or her decision-making process? He or she should incorporate the following three criteria into de decision-making process: engagement, explanation, and clarity of expectations. All three should be practiced in tandem.

Engagement means involving relevant individuals in decision making by seeking their input and allowing them to challenge the merit of other’s ideas and input. Engagement ensures a consistent communication of respect for the individual and his or her ideas. This process also ensures voluntary contribution of unique ideas, experiences and learning as well as contributing to the enrichment of the “collective wisdom.” Engagement also promotes trust and commitment of the individuals involved and improves the success rate of the subsequent execution.

Explanation means that everyone involved and affected should understand why the final decisions were taken and why a particular individual’s idea was rejected. It also promotes the flow of ideas and knowledge sharing over a lengthy period of time.

Clarity of Expectation means that the affected individuals and managers have a firm context of what is expected of them and what their roles and responsibilities are in the context of the strategy. Exacting results, demanding conditions, targets and milestones are well understood when expectations are clear from the start. In clearly communicating them, it also motivates individuals to worry less about political jockeying and focus more on getting the job done.

It is worthwhile to note that violating fair process during the formulation of strategy will lead to tow direct outcomes: First, less inclination by individuals to contribute their knowledge and ideas, consequently strategic content suffers. Second, due to lack of fair process, voluntary cooperation, commitment and trust will deteriorate, and it will hinder the effectiveness of the strategic execution.

Continued violation of fair process can lead to a backlash by managers and employees.

“When individuals have been so angered by the violation of fair process that they have been driven to organized protest, their demands often stretch well beyond the reasonable to a desire for what theorists call retributive justice: not only do they want fair process restored, they also

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seek to visit punishment and vengeance upon those who have violated it, in compensation for the disrespect the unfair process signals.”

(Professors W. Chan Kim and Renee Mauborgne: Harvard Business Review, July-August 1997, pp. 65-75.)

Relating these points to this case, one can observe that during his initial rise, Napoleon always consistently practiced fair process, abiding by the three E’s already mentioned. However, during the latter half of his career, we can observe his decaying interaction with his people, a disregard for the three E’s, hence a consistent violation of fair process. This led to the deterioration of his strategy and ultimately, his downfall.

In summary, the following diagram positions fair process in the framework of a strategy and the decision-making process.

One can observe this deterioration of both content and effective execution, during the latter half of Napoleon’s career. While his personal contribution to the content was exemplary, the collective contribution and wisdom of his field marshals and generals had diminished. Also owing to the violation of fair process, Napoleon was not able to secure their trust and commitment, greatly reducing the execution’s effectiveness.

Even at Waterloo, Napoleon’s personal contribution to the strategic content in terms of battle preparations and planning was outstanding. However, due to violation of fair process during the stage of strategy formulation, his field marshals and troops did not contribute their ideas, and the collective wisdom suffered. This violation of fair process also prevented Napoleon from securing his field marshals’ and generals’ complete commitment and trust; consequently, the execution suffered.

To ensure good strategy, practicing fair process at the stage of strategy formulation becomes critical, and to consistently practice fair process, the three criteria of engagement, explanation and setting of expectation need to be followed. This is the key point of this case and the companion articles, “Fair Process: Managing the Knowledge Economy” (Kim and Mauborgne, Harvard Business Review, July-August 1997) and “Procedural justice, strategic decision-making and the knowledge economy” (Kim and Mauborgne, Strategic Management Journal, 19, 1998).

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Strategy Formulation

CONTENT

EXECUTION

Outcome

Proper decision-making process (Practice of “fair

process”)

Ensures good strategy (Content + Execution)

And delivers a successful outcome

It is important to highlight the role of knowledge environment here. Due to his innovative strategic thinking, namely the use of corps and time, Napoleon pushed his military machine into the domain of increased dependence on information and knowledge. When this transformation takes place, the role of fair process plays and even greater role in the formulation good strategy. (See the answer to Question #1)

Format for Class Discussion

This case and the concepts it emphasizes can form the basis for a single 90-minute class. Depending on the time available, one hour can be allocated for the case discussion and perhaps half an hour for discussing the companion article, “Fair Process: Managing in the Knowledge Economy.” The instructor’s strategy could be to let the class discuss and enjoy some of the historical aspects of the case along with the strategic lessons. You will find that some participants will have difficulty in distinguishing between the causes of failure. The “noise” surrounding Napoleon’s leadership is extremely strong, so it would be important to impress on the participants that Napoleon failed despite his leadership qualities, which he displayed on reclaiming the throne, and despite his superior personal contribution to strategy at the battle of Waterloo.

It should be an enjoyable case to teach and class participation should be high. Some participants will probably want to share additional historical facts.

Some Questions Around Which You Could Build Class Discussions

1. What are the fundamental building blocks of Napoleon’s war strategy? How does Napoleon’s war strategy differ from traditional war strategies? What are the implications for these strategies?

The fundamental building blocks of the new war strategy are (a) use of the corps system and (b) use of time. Both of these building blocks did not exist before Napoleon’s time. Prior to this, the army was really only a large number of soldiers charging ahead. Though divisions between cavalry and infantry existed; the refined form of a corps system had never been used before on such a large scale. Using time as a strategic weapon had been the dream of many commanders, but Napoleon was the first to successfully implement it with the use of corps system.

His “assembly-and-concentration” formations exploited both of the fundamental concepts. In this type of formation, Napoleon would move his armies within marching distance of the target battleground. This was the “assembly” of his troops within a 30 Km zone. On the eve of the battle or the day of, Napoleon used to “concentrate” this army at different places abased on the battle’s evolving situation. This powerful and dynamic method provided Napoleon with an enormous flexibility to change the army’s configuration, as it was not yet committed in the battlefield. He could easily change the composition and direction of his attack as long as his field marshals completely understood and were committed to what he was doing. By using these strategies, Napoleon was able to defeat much larger armies.

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When considering the strategic implications, it is important to underscore the knowledge environment and its role. Thanks to two fundamental innovations in his army, the corps system and the usage of time as a strategic weapon, Napoleon had unconsciously increased dependence on information content for his strategies’ success. This, in turn, increased his reliance on knowledge sharing with his field marshals. In today’s terms, this is known as a “ knowledge environment,” and fair process plays a critical role in it.

“Never has the idea of fair process been more important for managers than it is today. Fair process turns out to be a powerful management tool for companies struggling to make the transition (please see the diagram for a pictorial description of this transition) from a production-based to a knowledge-based economy, in which value creation depends increasingly on ideas and innovation.”

(Professors W. Chan Kim and Renee Mauborgne: Harvard Business Review, July-August 1997.)

2. Do you observe any significant change in quality of Napoleon’s leadership and strategic skills over the period of his rise and fall? If there are any other changes, strategic what are they? If not, what other possible things might explain his rise and fall?

Both his leadership skills and his personal strategies were still intact. We see his charm/magnetism and leadership that he displayed after his return from Elba. He managed to reclaim the throne quite easily. The majority of people still believed in him and wanted to follow him. We also see the interplay of his deadly “assembly-and-concentration” formation, his ruthlessness and stealth and his personal strategy during the Battle of Waterloo.

What changed was the effectiveness of his overall strategy. What this means is, while his personal contribution to the content of his war strategies remained exemplary, the collective wisdom of his field marshals contributing to this content diminished over time. Additionally, their commitment and trust also diminished, compromising the overall strategy’s execution. Why did these two things happen? Why did his field marshals’

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Corps army system(configuration)

Use of time as a strategic tool

Increased reliance on information and information exchange

Increasingly his field marshals resembled a “knowledge web” or “knowledge

Increased reliance on fair process in addition to leadership and strategies

A Display of the Strategic Implications for Information in Napoleon’s Strategies

contribution to content diminish? Why did their commitment, and consequently execution, of the overall war strategy diminish? Answers to this question are found in Napoleon’s disregard of fair process.

How can we demonstrate that fair process was, in fact, practiced early in his career and subsequently violated in the latter stages? Tracking the three key elements of fair process through his battle conduct can do the following: Engagement with his people on various decisions, Explanation of his decisions, and setting Expectations.

Lodi, Marengo, AusterlitzPractice of Fair Process

Russian Invasion, WaterlooViolation of Fair Process

Engagement Battle of Marengo: Early involvement of his field marshals, demonstrated via his willingness to accept contrasting input from field marshals.

Battle of Austerlitz: Sharing his battle plan with the troops on the eve of the battle.

Napoleon’s view: “The soldier is not a machine to be put into motion, but a reasonable being…loves to argue, because he is intelligent.”

Rejected his field marshals’ suggestions to halt the Russian invasion.

Stopped meeting his field marshals and from addressing him by “tu.”

Chief-of-Staff Berthier forms an additional layer for orders. Creating increased isolation of Napoleon. Reduced likelihood for interactivity and voluntary engagement.

Russian campaign: “…(Napoleon) heaped wild abuse for his (Berthier’s) frank advice…”

Napoleon’s letter to his brother: “…a king issues orders and does not beg…”

Explanations The purpose of each campaign and how it fitted within the grand scheme of the French Republic was always well explained.

His direct approach ensured that every soldier understood the reasons and objectives. This is demonstrated by the famous quote of anonymous soldier: “the emperor has discovered new way of waging war; he makes use of our legs…”

The Russian invasion and rejection of field marshal’s ideas were ill explained to both his field marshals and his soldiers.

Since all his orders were filtered through Chief-of-Staff Berthier, it was highly likely that his orders and the reasons behind were not well explained.

Lannes lack of explanation regarding the refusal to promote him to field marshal.

Expectations Battle of Lodi: “Do not deceive yourselves, you have achieved nothing because you still have everything to do…”

Battle of Lodi: Soldiers knew the rewards of victories “…rich provinces, opulent towns, all shall be at your disposal…”

Soldiers did not expect so much hardship during the Russian campaign, throwing away supplies.

Confusion as to the roles and responsibilities during the Battle of Waterloo: outdated formations were used without Napoleon’s knowledge.

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Evidence of the Three E’s

Battles Lodi Marengo Austerlitz Russia WaterlooEngagementY Yes Yes Yes No NoExplanations Yes Yes Yes No NoExpectations Yes Yes Yes No No

3. If you were in Napoleon’s shoes, what would you do differently in formulating and implementing various strategies? What could you do differently on a larger scale for formulating and implementing a political/economic/military strategy?

There are many angles to this. This question should form the bases of a class discussion where participants can share their experiences of either good or bad implementation of strategies. The focus of the discussion should revolve around the explanation of strategic content execution, and how they are combined to form an overall strategy.

Participants often mistakenly confuse strategy with strategic content. They also often believe, incorrectly, that execution is dependent of strategy. To illustrate this, use the following diagram from Kim and Mauborgne (Strategic Management Journal, 19, 1998, p.331).

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Napoleon’s rise and fall.

Lodi Marengo Austerlitz Russia Waterloo

Col

lect

ive

wis

dom

of

Nap

oleo

n an

d hi

s fie

ld

mar

shal

s

The overall definition of strategy includes A+B+C+D. “A” is the early stage of decision-making process. Fair process needs to

be practiced at the time of strategy formulation. “B” is the content of strategy. Usually, students mistakenly believe “good

content = good strategy.” But strategy includes execution as well as content.

“C” is how the strategy is executed. “D” is the performance.

So we can see that in the earlier stages of Napoleon’s career, he practiced fair process during (A) which ensured that collective wisdom of his field marshals was reflected in the content (B) and voluntarily commitment was secured for execution (C).

During the latter half of his career, Napoleon violated the practice of fair process in the early stages of his decision-making process by not engaging, explaining and setting expectations to is staff (A), thus missing out on the collective wisdom of his field marshals (diminished quality of B). It also lowered commitment and trust, leading to the low quality of execution (C). This resulted in a poor team performance (D).

Superior strategic content (B) does not necessarily mean good execution (C), for there are no guarantees of sustained success. To have continual good execution, trust and commitment are critical are founded on the practice of fair process (A).

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Napoleon’s contribution to content

Field marshals’ collective wisdom and contribution to content

The exercise of procedural justice in teams’ strategic decision making of teams

Field marshals’ voluntary cooperation and commitment to the content

Quality of strategic decisions

Knowledge sharing

Execution of strategic decisions

Voluntary cooperation

Team performance

DA

B

C

In the larger context of political/economic/military strategy, one might believe that Napoleon pursued ineffective political and economic strategies to conquer Europe. His foreign policy failed since his best foreign advisor resigned and his “economic continental” blockade was a fiasco. Napoleon could have used these non-military instruments to pursue his military strategy of ruling Europe in a more integrated way. Probing the participants’ contributions of historical facts and insights will enrich the discussion.

Other Issues

1) During the class discussions, some participants might raise the issue of “ethnical fairness.” Participants might claim that Napoleon’s soldiers looted Milan, pillaged Warsaw, or burned Moscow. Though factually they might be right, these points are irrelevant to the discussion of this case. The issue of fair process is limited to the decision-making process of Napoleon, his field marshals and soldiers. Fair process does not explore the wider dimension of whether or not Napoleon’s acts were ethical; it only addresses the management method behind the process of Napoleon’s conception and execution of decisions.

2) Some students might claim that Napoleon turned into dictator, god, etc., and this was the real reason behind his failure. To refute this, you could argue that if Napoleon was a dictator there was no need for him to implement fair process, as he would just have expected everyone to follow him blindly. So he would never have consulted his field marshals or soldiers during the decision-making process.

3) Yet another point could be raised in the class on the meaning of “fairness.” Some students might confuse fairness with being nice. Using fair process is the decision-making process implies firmness and not being nice. Fairness is measured against expectations and not against benevolence or sympathy. Fair process is a method of convincing people to achieve even the most painful and difficult goals voluntarily. Instructors can quote the article by Kim and Mauborgne (Harvard Business Review, 1997): “Fair process is not decision by consensus. Fair process does not set out to achieve harmony or to win people’s support through compromises that accommodate every individual’s opinions…nor is fair process the same as democracy on the workplace.”

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AmBev 1

CASE 20: HONDA MOTOR COMPANY

OverviewThis case takes the Honda Motor Company through a full life cycle transition from its initial entrepreneurial start, through its growth and diversification into automobiles, to its mature competition phase as the number three auto producer in Japan and number four in the United States (1994). The case focuses first on Mr. Soichiro, Honda's early entrepreneurial years, contrasting his actions with those typically envisioned as Japanese management styled. This portion of the case also brings into question the degree to which “Japan, Inc.” was responsible for Japan's success in foreign markets. Honda is constantly in conflict with Japanese authorities, regulations, and MITI directives. After describing some of the transitional events leading to Honda's international posture, the case profiles Honda's position in the U.S. and world markets and raises questions about what Honda's strategy should be in the 1990s, particularly in Europe after 1992.

The case goes well with readings on strategy formation, the entrepreneurial context, the innovation context, the mature context, and configuration. It allows an interesting discussion of the strengths and limitations of Japanese planning at the national level. If this case is used along with the Pascale article on “The Honda Effect,” one should use that experience primarily as backdrop for developing Honda's strengths and styles in discussing its overall 1994 strategy, and the organizational implications of this style.

Session Structure

Discussion of the Honda Motor Company naturally breaks down into three segments: (1) the entrepreneurial period, (2) Honda's move into the United States, (3) Honda's future strategy in the multinational markets of the mid-1990s. An excursion into Japan's national strategy for development of its industry and Honda's relationship to that can be undertaken at any of several points. If the Pascale article is used, one may wish to bypass this aspect of the case discussion. This case runs well in a tight 75-90 minute class period. It can be used early in the course as a strategy formulation case or later as a mature or entrepreneurial context case. Mr. Honda’s story, the Honda line of motorcycles and automobiles, and the myths and facts about the company’s development fascinate students. Honda provides an excellent example of ignoring the conventional wisdom about a maturing industry, reassessing all the rules about participation in such an industry, and changing those rules to create a distinctive new marketplace. It also provides an excellent vehicle for discussing global strategies, particularly entry into Europe and a mid-1990s European and multinational strategy.

Japan, Inc. and Japanese Management Style

One can open the discussion by asking the students to describe their perceptions of how Japan Incorporated operates and what their perceptions are of the Japanese management style. The former question quickly elicits responses of:1. Coordinated research and development supported by the government.2. Targeted investment with coordinated action by government groups.

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3. An emphasis on high technology in emerging markets.4. Serving a base demand in Japan first, then moving to international markets.5. Using a capital-intensive strategy, with access to Japan's lower cost of capital sources.6. Coordinated efforts through Japan's large vertically integrated supplier, producer, banking, and trading company groups.7. Strong trade preferences given to exporting companies.8. National coordination of investments in supplier industries to support the exporting group.9. Emphasis on non-energy intensive industries.10. Emphasis on industries with low transportation costs and high value added.11. Priorities given to manufacturing sectors not requiring controlled distribution networks abroad.12. Capital support to companies attempting to establish themselves abroad, and so on.

It is interesting to compare Honda's history with these presumptions. Honda breaks almost everyone of these stereotypical rules about what U.S. executives believe the Japanese advantage to be based on.

Another interesting opening for this case is to ask, “When you think of the Japanese management style, what does this style connote to you?” In response to this, one would typically obtain responses emphasizing:1. High degrees of cooperation between labor and management.2. Group or consensus decisions.3. Copy cat or replica design.4. Relatively slow decisions made with great consensus and certainty.5. An ultra-courteous-working atmosphere.6. High emphasis on quality circles and worker cooperation in decisions.7. Company songs and slogans.8. A strongly managed company identity and culture.9. A long-term low-risk outlook, and so on.

Again, it is interesting to contrast the early years of Honda Motor Company's actual history against these stereotypes. Honda breaks virtually every one of them. This allows one to ask, his there really a single Japanese management style? If not, how did we obtain the perceptions we have of the Japanese management style? Most of the early papers written on the Japanese management style dealt with relatively limited observations within some of the very large, more stable, integrated companies.

Only fairly recently have scholars begun to realize that there are at least three tiers of Japanese companies: (1) the inner group of large, well capitalized, high volume manufacturing companies associated with international trading companies and large Japanese banks in Keiretsu structures; (2) a second tier of supplier companies to this inner group which are substantially assisted and financed by the inner group; (3) a very large number of small third tier companies which operate very much like the U.S. or European fringe companies in sparse facilities, with little automation, with sweat shop conditions, and with little evidence of the job guarantees, high fringe benefits, and

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sociable work conditions generally found in the inner group. This latter group is not as efficient as the overall Japanese average, nor probably as efficient as the small suppliers to U.S. industry. However, Japanese people do work extraordinarily hard, they are well educated, and they do tend to identify with their employers because of the relatively limited social security and union protections available to them. ABC made an excellent program on this topic called, “The Other Japan”—videotapes may be available. William Davidson in his book, The Amazing Race, brings out some of the important questions this three-tier structure raises for Japan.

The Entrepreneurial Period

The entrepreneurial period of Honda Motor Company's development enjoys many parallels to similar start-ups in the United States. One can open this section of the discussion by asking, “What were the critical factors for success in the early (motorcycle) stages of Honda's growth? What made Honda successful in its early stages?” Several factors seem most important. These include, among other things, the following:A. Honda's personal expertise: The company was initially heavily dependent upon the individual mechanical expertise of Mr. Honda in repairing automobiles, inventing new processes, and producing quality parts.B. Doing things differently: Because of his unique personality, Mr. Honda tried to find new ways to do things better and differently. This allowed him to establish small niches, based upon inventions, which were protected from his larger competitors.C. Determination/fanaticism: Honda becomes a working hermit. He expends all of his savings, sells his wife's jewelry, etc. He studies his products in such detail that he knows them better than anyone else could. Despite frustrations caused by suppliers, the government, and his own technologies, Honda persists.D. An early cash flow: Soon through his repairs and his sale of automobile wheel spokes, Honda creates the cash flow that allows him further experimentation.E. Timing: Honda begins at a time when there was a great flux in the Japanese society. His eccentricities are ignored if his product works. He sells off his old business just in time to retain some assets at the end of the war.F. A genuine need: Honda matches a genuine need for low cost transportation, low cost and available fuels, and food gathering from the countryside. He does not have to build a market—it exists.G. Doing something unique: Honda does not copy existing solutions, but seeks new solutions, which give him a distinctive competitive advantage. His motors were always smaller, more efficient, and more powerful for their weight.H. Venture financing: Mr. Fujisawa financed the company uniquely, using its own customers as a capital base.I. A balanced team: Mr. Honda and Mr. Fujisawa were completely complementary in personality, outlook, and management skills. This amplifies the impact of each of their personalities.J. Innovation in all areas: Honda Motor Company did not just innovate in technology. It innovates in marketing/distribution, financing, and the very target market it chose (a substitute for the bicycle).

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K. Sweat capital: Honda and Fujisawa leveraged their limited capital by staying at work each day as long as it took to keep the plant going. This both lowers investment costs and increases the knowledge of the two key players.L. Maintaining flexibility: Honda avoids coalitions with its large competitors or the government, either of which could have constrained its actions significantly. This allowed the company to move rapidly and responsively in the marketplace.M. A dream: Honda had an overriding vision—which went beyond merely making money—the pursuit of technology, a grandiose dream.N. A distinctive superiority: Honda's products were demonstrably superior in performance characteristics, particularly the engines they contained. This gave Honda a true intellectual core competency that it could leverage against multiple products for many years.O. Distribution channels: From the beginning, Fujisawa built the strongest distribution channels for Honda both in Japan and in the United States. Again, this leveraged Honda's limited capital resources by a large margin.P. Risk taking: Both Honda and Fujisawa were willing to risk more capital than they owned (a million dollars for tools when they had $165,000). Yet they limited their risks elsewhere by substantial outsourcing.Q. Close to the market: Mr. Honda and Mr. Fujisawa stayed close to the market, modifying their product and entering new niches as technological capabilities or market demands changed. Honda constantly tried to expand the primary market rather than simply build share in a selected marketplace. This strategy eased his problems of increasing his volume. While his competitors continued to milk a single model, Honda adapted quickly to its changing marketplace.R. Obtaining scale quickly: By building a full-scale plant, investing heavily in its unique manufacturing equipment, outsourcing non-unique parts, and designing the motorcycle for simplicity of assembly, Honda lowered its costs enormously.S. Lowest total cost: By concentrating on intellectual economies of scale, simple design in non-critical items, high quality, and a strong distribution network, Honda lowers the system cost for its product. These factors also limited warranty costs, allowed more inexpensive distribution, and lowered long-term manufacturing costs.

In these early years, Honda created a classic niche or "focus" strategy. It focused all of its attention on high performance motorcycles, and worked on all elements of the value chain to lower its cost and create maximum value for its customer. One should inquire what the distinctive competency of the Honda Motor Company is. What is the common thread upon which the company builds its future? Interestingly, if one pursues this subject sufficiently, one finds that Honda's distinctive competency was its enormous depth in motor design and building capabilities. Once Honda realized that it had this distinct competency, it was easy to roll it out into automobiles, then outboard motors, lawn tools, and so on.

By his early experimental work in understanding gaseous flows and combustion in engines, by designing extremely lightweight high powered engines for racing motorcycles, and by searching for unusual solutions like the overhead cam engine, Honda built up a distinctive knowledge competency which could be maintained for an extensive

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period of time against even its largest rivals. Its traditions of manufacturing motorcycles in this low cost, cost conscious, quality observant market led Honda to build low cost management skills that would serve it well in other mass markets.

This is a good point in the case at which to pursue this question of a maintainable distinctive competitive edge. Many believe that the two factors that distinguish Honda are: (1) its depth of knowledge concerning internal combustion engines, (2) its low cost production techniques derived from competing in the small motorcycle field, and (3) its strong distribution network and its concentration of quality presentation and service to customers.

Honda's Entry to the United StatesAt its decision point the case asks, “How should Honda develop its U.S. presence? What should its advertising, pricing, distribution, inventory, product, and service policies be in the United States? Why?” If the Pascale article is used, this discussion should be kept very short or eliminated entirely. How should the Ministry of Finance on exports of Japanese yen relate these to its Japanese prices, production facilities, development activities, and the continuing restrictions? These questions provide an interesting transition from Honda's early development as an entrepreneurial Japanese company and its later positioning as a worldwide producer of motorized devices.

Honda's entry to the U.S. motorcycle market is a clear example of an emergent strategy. It was not clearly thought out in advance. It occurred as a series of fast responses to unexpected market conditions. In Japan, Honda's motorcycles had been basic transportation. In the United States, they entered an entirely different marketplace. They became a combination of a second car for the smart set and a recreational vehicle. Neither the motorcycle companies nor the U.S. consumer would have recognized this as a marketplace until Honda's actual offering appeared. Market research prior to entry probably could not have identified this niche. Distribution channels, advertising approaches, product concepts, and lifestyle features all had to be invented interactively. In essence, Honda became the off the road vehicle for city traffic. Honda's total approach had to be invented as it went along, and it had to be very different.

Honda Motor chose the U.S. market to attack first, believing that if Honda could be successful there, it could roll out that success to other parts of the world. At first Honda tried to sell its products through the traditional motorcycle distributorships and dealers. However, when Mr. Fujisawa saw his dealers at a motorcycle show wearing soiled overalls and dirty grease-covered hats, he began to question this channel of distribution. The Honda Step-through design was hardly what that marketplace wanted. Yet Honda wanted to maintain its access to the profitable black leather jacket set. Consequently, it decided to set up a parallel distribution channel. It marketed its Step-through designs through sporting goods stores and hobby shops. With the assistance of Grey Advertising Inc., Honda changed the image of motorcycle riding. It introduced a classic campaign based upon the theme; "You Meet the Nicest People on a Honda." These advertisements were run in the influential magazines of that day: Life, Look, Saturday Evening Post, etc.

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The Super Cub was positioned as a vehicle, not for delinquents, but as a smart means of transportation for the general public.

From the beginning, American Honda Motor Company had few Japanese in its ranks. Honda began its distribution on the West Coast for two reasons: California was the closest point of entry to the United States and California tended to lead the country in new living styles. Honda's approach—selling motorcycles to the general public—was so unusual, that Time, Life, and Look at first refused to accept its ads (which stated Honda was the largest motorcycle manufacturer in the world) because they didn't believe this statement. The magazines had never carried motorcycle ads. However, Honda had to back up the success of its ad campaign with a totally different approach to distribution. The middle class customers of Honda Cubs and Super Cubs could not maintain their own bikes like the traditional motorcyclist did. Consequently, Honda had to support its distribution channels with an extensive parts supply, training system, and point of sale merchandising.

The professor should point out that Honda had created a primary market that was expanding rapidly. Consequently, it was not up against the same competitive pressures it would have been in trying to wrest a higher share of the market from established competitors. Honda's entry to the U.S. market coincided with a substantial saturation of the U.S. automobile market. People were looking for new extensions of their love affair with motor vehicles, and the off the road vehicle was a natural extension.

In addition to its magazine ads, Honda also advertised on national network television using a unique humorous but classy style. These ads focused on an upscale, 16-24 year age group. Honda has continued its humorous approach to motorcycle advertising to date. Honda insisted that his franchised dealers have a genuine repair shop available. He developed high quality jigs and fixtures especially for Honda motorcycle repair. The engine was designed to be split horizontally for easier, less messy repair. Honda rejected the assumption that motorcycles had to be leaky and noisy, designing its vehicles to be slim, clean, and quiet.

The Honda motorcycle introduction campaign in the United States is an interesting example of expanding a very limited market (the black leather jacket set), by repositioning a product to access a majority population. Honda put together a complete Niching strategy with design, pricing, distribution, advertising, and after service tailored to its particular marketplace. Because of M.I.T.I.’s opposition and the freezing of Honda's access to the yen, the American company financed itself by borrowing from U.S. banks against its inventories. American Honda's capacity to build capital and grow in the United States was greatly influenced by its transfer prices from Japan. As the value of the yen rose against the dollar, it expanded its sourcing in the United States.

ENTRY INTO AUTOMOBILES

A major portion of the discussion can begin with the question, "Why was Honda's automobile entry successful in the U.S. market? Was this due to support or targeting by

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MITI? Why was Honda able to pick up market share so quickly in an industry that was so capital intensive, mature, and completely dominated by U.S. manufacturers?” These questions will lead to a number of responses, many of which depend upon the students' perceptions of Honda in the U.S. market. Some of these perceptions are based on fact; others on the image Honda carefully built up with its motorcycles and around its existing automobile line. Perhaps the most important factors leading to Honda's success are the following:

A. No U.S. competition existed in the subcompact area at the time of Honda's entry. U.S. automobile companies had systematically ignored this marketplace as being not profitable. They had not considered in their strategies the possibility that well managed companies could use this small car base to obtain the distribution, reputation, and experience curve advantages to take market share away from their larger cars.

B. The oil crisis in the early 1970s gave all Japanese auto companies a lift. U.S. buyers needed small cars quickly. No U.S. capacity was available to produce them. Distributors and dealers of U.S. cars could not sell the large U.S. cars and rapidly agreed to take on the lines of small car producers from Japan. The CAFE standards of the mid '70s mandated a market for the she of cars then most sold in the Japanese market, giving Japanese carmakers instant advantages over their U.S. rivals. Honda's superbly efficient motors gave it a special competitive advantage.

C. Distribution availability was crucial to Honda's success. Had quality U.S. car distributors been satisfied with their lines, it would have been difficult for Honda (or any other Japanese producer) to obtain the distribution that was absolutely essential to success. U.S. dealerships had been managed in an adversarial mode by Detroit, rather than as a partnership between producers and sellers. Consequently, dealers were happy to have another automobile with which they could bargain against Detroit.

D. High quality, low cost, and imaginative engineering distinguished Honda's cars from the outset. Honda used interior space well; paid attention to detailed features, which would add value to the car in customers eyes, yet not cost Honda anything extra in production. Honda produced very few variations on its basic models. Because of built-in quality, it did not have a significant after market warranty cost. This simplified as distribution and follow up problems in the U.S. market. Because the company's production traditions were based on the cost and quality sensitive motorcycle racing business, Honda did not build up large overheads or add frills to its cars which had high cost and offered little value added for the customer.

E. Non-dependence on the Japanese market helped Honda. Other Japanese producers had a large dedicated market in Japan. Consequently, they could not initially focus full attention on the United States. Not having such a positioning, Honda could give relatively more focus to U.S. sales. Honda was the first of the Japanese companies to produce in the United States on a significant scale, identifying itself with this marketplace and leaping over the quota barriers, which came into existence in 1981. Its timing in this respect was outstanding.

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F. A quality reputation had accrued to Honda through its earlier motorcycle and scooter products. Its clever advertising had positioned these products in the cost conscious, market leader; slightly upscale which was the identical market it chose for its early cars. People who had used Honda Cubs as motorcycles quickly began to look at Honda's small cars as possible second cars. Again, Honda's clever, humorous, quality advertising campaign hit its market very well. Honda carefully dodged direct competition with the large U.S. producers.

G. A distinctive competency for Honda existed in its motor design. By taking its experiences with lightweight, efficient, motorcycle engines, and applying this know-how to automobiles, Honda was able to come up with a clean, lightweight, efficient engine that could meet all EPA standards from the outset. This high quality engine gave Honda cars their reputation for low maintenance and satisfactory performance over the long term.

H. Honda's culture influenced all of these events. The dominance of engineering over marketing gave focus to the quality design of the car. Its attention to cost controls and details (dictated by successful competition in motorcycles) caused the design of the CVCC Fuel efficient engines, which by internal agreement had been designed to be externally efficient as well. This meant they had few effluents per unit of fuel, and used little fuel in the first place. Honda's production culture focused on low cost manufacture, participation by employees, close linkages between engineers and manufacturing employees, and an integrated concept of marketing, production, and design.

I. Innovative design was featured in Honda cars, particularly in the front wheel drive, CVCC motor, and gear train mechanisms. Focusing on these features gave the cars a stability and traction not available in U.S. cars, where manufacturers stuck doggedly with the rear wheel drive. In addition, the front wheel drive gave added room inside the cabin of the car, which created a sense of comfort and spaciousness along with vastly improved engine and technical performance. From the beginning, Honda's cars tested in the top quality rankings and best engineered rankings of all cars in the world.

J. Organizational innovation also supported the strategy. Mr. Fujisawa's flat or paperweight organization meant that engineering was close to the top of the organization, people worked in small teams which could communicate with each other, bureaucracies were not built up at the corporate level, and engineers could be rewarded for technical work, not just administrative positioning. Workers were expected to participate in design improvements. Marketing and sales people were intimately tied into the design process. Engineers were encouraged to think like customers, and sales, financial, and production staffs constantly reviewed their technical projects.

Honda stayed close to the marketplace by shortening its design cycle to 2-3 years as opposed to the 4-6 years commonly used in the U.S. This meant that its automobile designs could be more up to date in the eyes of customers. Workers moved laterally through the organization so that they did not have a myopic view, nor was their personal development squelched. Honda had relative labor peace, because it allowed the workers

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to analyze their own jobs and set reasonable work standards. Nevertheless, the work pace in Honda factories was very efficient relative to U.S. labor union controlled work paces.

Strategy Issues for the Mid 1990s

The final set of questions in the case has to do with Honda's mid 1990s posture and future strategies. Opening questions might be, “What are the critical elements in Honda's current posture?” Because of its history and the interests of its top managers, Honda has developed a rather unique posture in the automobile industry. It is considered the finest designer and manufacturer of small efficient internal combustion engines in the world. Because it lacked capital in the early stages of its development, Honda had to outsource a very high proportion of its components. Consequently, it developed a very efficient purchasing and logistics system that is applicable to its world operations. Similarly, because of its capital shortages and the cost cutting necessities of the motorcycle industry, Honda developed small-medium scale assembly techniques that are unparalleled in the industry. Honda's plants are much smaller than its competitors' plants, its design cycles are shorter, and it constantly updates its plants by incremental improvements rather than waiting (as the Americans do) to realign an entire plant for a new automotive line. Its plant and design policies have made Honda's overhead structures lower than as competitors, it has higher mobility, and it can focus on quality in a unique fashion. Its advanced technology culture allows it to take risks on plant and auto design innovations and thus to push such features as four-wheel steering which other competitors found more difficult to introduce.

In the mid 1990s, what important issues does Honda face? What should its future strategies be? There are, of course, many possible responses. In general, these may be clustered around 5 or 6 important categories. Some suggestions follow:

A. Positioning the U.S. Honda line. Honda's automobile line needs to be positioned uniquely vis-à-vis the U.S. car lines, European cars, and other Japanese producers. By doing a competitor analysis, one can see that the most likely future positioning for U.S. cars is toward the Large car, family, and special purpose vehicle markets. These include the broad centerlines of Ford Chrysler, and General Motors and the large car lines which only American manufacturers produce. Producers in newly industrialized countries like Korea are likely to go after the price conscious marketplace, with emphasis on smaller cars, standardized designs, adequate quality and high volume. Although these cars lack widespread distribution, U.S. distribution channels for automobiles are so varied and available that LDC producers can now find some suitable modes of distribution—including the automobile supermarkets that carry virtually any line.

Why should Honda try to expand in the United States? Honda is not as strong as Toyota or Nissan in Japan. Thus, it needs the U.S. market more—to drive down its costs and achieve the quality benefits of the experience curve than those two competitors. Further, exchange rates are making the cost of production in Japan very high. Because it was a late, import entry to the United States, Honda was stuck with very low quotas under the voluntary quota system. Consequently, it needed to expand production in the United

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States to gain on its major competitors. Because of its mode of entry to the U.S. market, Honda had an excellent quality reputation to work from. Distribution channels were available to Honda, if it positioned itself as a high value-added, slightly upscale (but slightly smaller than European or American cars) producer focusing on the smart buyer who sought quality and value, not luxury. Its position had to be a quality-high image position, yet with costs below U.S. companies or the Europeans and with the flexibility to keep the line up to date.

In order to produce in this non-generic—middle market—position, Honda had to do certain things extremely well. It had to keep its plant costs low ($250 million vs. $600 million investment for other Japanese producers), remain non-union (a $9 per hour advantage vs. others), focus its car lines to achieve volume and experience curve benefits on a limited segment of the market, keep its plants producing to capacity for full overhead absorption, and obtain very efficient, fast response distribution in the United States. All of these fit well with Honda's culture and past practice. In the early 1990s it enjoyed a $1500 per car advantage over competing U.S. car lines. It was able to ship cars back to Japan at a profit as exchange rates moved against the yen.

One should question how U.S. automakers might go after Honda in its markets. The initial response from students will be advertising directly against the Accord using comparative features and ads. However, some more sophisticated counter-positioning might be very interesting. Honda was able to take away a large portion of American manufacturers' markets (like the VW Beetle had earlier) because it represented a symbolic lifestyle shift for children away from their parents' big car, solid, past. As Honda becomes the accepted car of the U.S. middle class, a new market will emerge for the next generation of automobile buyers. U.S. companies can target the progeny of Honda owners by setting up Honda in their ads as the «stodgy middle class car of the past. At a minimum, this will force Honda to make model changes more rapidly.

If the U.S. auto industry can recognize new emerging lifestyles and position niche cars for the children of Honda owners, it may be able to grow for itself the next generation ofautomobile owners in the United States. Similarly, in Japan, there is a growing market for those with lifestyles not attuned to the uniformities of the past. By presenting the same young lifestyle cars in Japan, U.S. manufacturers may be able to create a market there for the next generation of U.S. cars. Such “lifestyle shift symbol” products are becoming increasingly popular for Japanese youths asserting their independence. However, of course, any such entry will have to have a very clear quality capability associated with it. There are some major psycho-demographic opportunities in these two positions.

B. Positioning the Honda line in Europe. European producers seem to be emphasizing high priced, uniquely styled, upscale, small volume marketplaces. Thus, the most likely opening for Honda would be a well styled, quality, less specialized, slightly smaller, automobile for the U.S. and world markets." It would be a niche below the Europeans and the large U.S. car manufacturers in price and above smaller U.S. and LDC autos in quality and price. This is a very delicate positioning to pull off. It requires very careful maintenance of quality, image, and costs. It also requires meeting the demands of the

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increasingly individualized U.S. and European marketplaces with a large number of choices in features, yet maintaining a high value/price ratio. Again this is clearly not a generic strategy.

In the European market, Honda has the potential of achieving scale, cost, and/or quality advantages over most individual car lines there. The exhibits show that one or two domestic manufacturers dominate each major European market. Yet each of those manufacturers has a significant vulnerability (in terms of total volume, costs of its domestic location, or quality). As a result, virtually all countries have left open the high quality/high value niche, for the smart buyer that is Honda's forte. The European market generally splits itself into high-end specialty cars with macho or sex appeal, vs. a low-end market that is fuel/cost efficient. The niche in between is the segment Honda is best qualified to attack.

Honda's main problem in Europe will be to avoid a coordinated government-company coalition providing a subsidized or policy-supported counteraction in each country. Because of the employment security arrangements in Europe, there could be significant pressures on individual automakers if Japanese cars displace workers and jobs. Some of the markets themselves are already controlled markets. There is a question as to how much these will be opened as the EEC develops. Spain, Italy and France are the main problem areas in this respect. Some of these countries have resisted British-Japanese cars, even when they contain 80% European content. Consequently, Honda's strategy has to emphasize what it can bring to each European country (in job and investment terms) to offset that country's potential displacements. This will mean a careful structuring of purchase arrangements in different countries as well as a location strategy for assembly plants.

Perhaps Honda can use its motorcycle divisions to help in this job offset. During the early transition of Eastern Europe to a more capitalistic form, motorcycle markets should boom, especially in East Germany. Honda's product line is ideally positioned to take advantage of this transitional shift. Thus, Honda may be able to demonstrate job growth for its host countries, even as it displaces some auto manufacturing there. However, each country will make sure that its dominating producer does not disappear. Honda's real strategy has to be the placement of component and feeder plants in its motorcycle and auto divisions to take advantage of Eastern Europe and EEC expansions. It must at all costs avoid being considered a foreign automobile company. This can lead to some very interesting discussions.

In this discussion, one can ask, "What countries are likely to lose share in the expanding European marketplace?" These would be ideal targets for Honda. Another question is, "Why did Honda enter a coalition with Leyland in Britain?" The probable answer is that Britain was a large market, with no national dominance, with high labor costs, lower productivity, and generally lower quality. This could be a demonstration of Honda's capacity to provide jobs, increase productivity, and become a national asset. Honda might feature its presence as being a defensive strategy for countries to avoid losing position in the new European marketplace. It could consider locating its three major lines in different

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portions of the European marketplace: high quality/price Acura (Britain), mid-market Accords (France or Belgium), low end Civic or Citi (Italy or Spain), motorcycles (Germany). This is a good point at which to introduce concepts of strategic groups around product, market, and cost considerations in coordination.

C. Multinational production. Honda must choose a manufacturing strategy, which optimizes its positions around developing new marketplaces, exchange rate shifts, market responsiveness, and lowest cost production. In the United States, Honda has some significant maintainable advantages. Its early move to producing in the United States gave it overhead advantages vs. its slower moving Japanese competitors. Honda is well established in the U.S. marketplace with a non-unionized workforce. This gives it important cost advantages vs. U.S. manufacturers. Because of its plant technologies, Honda's cost structure in Japan appears sufficiently lower than its competitors that it can both take share from those competitors and make more money per vehicle than they. Honda probably needs to continue emphasizing an increased volume strategy in Japan to obtain further experience curve benefits and to capture the knowledge and further experience its U.S. factories can offer. However, Honda needs a more significant presence in Europe. Should this presence be obtained by building a plant from the ground up or should Honda go into a joint venture with a European company? The latter approach is much more likely to get Honda around the restrictive entry problems in the European market. It must choose its partner well. Since it wants to differentiate itself from the luxury German cars, its best joint venture would probably be with a British, French, or Italian manufacturer, currently in trouble, but wishing to upscale its line. Several candidates suggest themselves.

Honda has also positioned itself well relative to the problems created by the strengthening Japanese yen. Its U.S. manufacturing capabilities give it significant protection from exchange rate shifts. However, Honda suffers compared to other Japanese producers using a Canadian base. Perhaps, Honda should move production of its new Acura line into Canada in order to gain both the concessions Canada will offer and the exchange rate differences there. An interesting question exists as to whether Honda should introduce its new mini-car, the Citi, into the United States. This would tend to put it into direct competition with LDC producers, and might trade down its image. The European marketplace, with its high priced cars, would tend to offer Honda an interesting quality-price niche, if it could produce there.

In the near future, Honda's biggest multinational competitive issue will be meeting Toyota's large volume, low cost, positions in the U.S. and Japanese marketplaces. Potentially, Toyota has the capacity to beat Honda on a quality-price basis worldwide. Honda therefore needs to position itself slightly upscale from Toyota and obtain a slight premium price for its products through more sophisticated product positioning, quality design, engineering, and performance. Its biggest competitive advantage in the U.S. market is its already established relatively low cost and non-unionized production facility. The biggest question for Honda is how Nissan, with its much larger financial capacities, may respond. Clearly, Honda needs to have a Triad strategy. It needs strong positioning in Japan-South East Asia, Europe, and North America. One should note that

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Honda to date is almost alone in not developing strong coalitions in non-Japanese marketplaces. (See K. Ohmae, Triad Power, p. 134, Exhibit 9-1.) It probably needs such coalitions in Europe, chosen with an eye toward their potential to move Honda upscale without government interference—into the luxury/specialty market should it choose to go that direction.

Another interesting question is whether Honda should begin to make lower priced cars in NIC or developing country areas. In time, these locations might provide some interesting subsystem supply potentials, especially in South East Asia. Such a supply strategy should probably be phased into Honda's strategy.

D. Diversification. In what directions should Honda attempt diversification? How will this affect its other activities? From what strengths should Honda attempt to diversify, if it does? These questions can open up several interesting avenues of discussion. In the past, Honda's core competency has been in engine design and manufacture. Each one of its products was premised upon a superior engine design. This is an area where Honda has extreme depth. Consequently, diversification should probably be based on this special competency. In fact, Honda centralizes all of its engine R&D in Japan and concentrates its sourcing and manufacture of key engine components there. By concentrating on this Core competency, Honda can leverage its capabilities worldwide. It might even use other small motor products to gain market recognition in countries where it is currently unable to have a significant automobile manufacturing capability.

In specialized situations, this immediately suggests other leisure products, like snowmobiles, outboard motors, and fall terrain vehicles. It also suggests the possibility of creating major markets in outdoor lawn and gardening equipment that requires efficient, light gasoline engines. In the U.S., Briggs and Stratton has a virtual monopoly over small 2-cycle engines used for household equipment. Honda is one of the few companies in the world that could take over this market from Briggs and Stratton. Should it sell its motors on an OEM basis? Should Honda diversify its distribution of leisure end products or feature them through its Honda automobile dealerships? How can it obtain mass distribution in this already competitive field? How can Honda develop a Family liner resemblance which plays off of its past quality successes in automobiles and motorcycles? These questions will open up an interesting set of issues for discussion. As is suggested in the Summary of Outcomes section, Honda has pursued some such diversifications.

E. Honda image. What image should Honda attempt to present? Probably, it should begin to present its distinctive competency (advanced, lightweight motor design) more in its advertising. Honda's customers tend to be quite similar to those for European cars—upscale, educated, sophisticated, and slightly older (30s and 40s) than low cost car buyers. Its positioning should probably be among the sophisticated, sporty, young executive set. The company should anticipate that some form of quotas are likely to be continued, offering it a chance to move slightly upscale in its U.S. product positioning.

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F. National policy considerations. As Honda builds its presence in Europe, the United States and Japan, this creates an interesting issue. Is Honda really a Japanese company? For example, shouldn't Honda U.S.A be considered an American company? It will certainly be exporting from its U.S. base to Japan and Europe. Should we therefore consider Honda U.S.A. as a U.S. company and support its exports to Europe? If we do, are we not supporting a Japanese company against the (U.S.) GM and Ford companies operating in Europe?

As Japanese companies become further based in the United States will they act as U.S. companies? If so how will they affect U.S. competitiveness? Will they improve levels of U.S. competitiveness outside of their own operations? How does this correlate with our fear of Japanese investment in the United States? One should compare the present tendencies of the Japanese to invest in the United States to the benefits obtained from European investment here in earlier years. Our U.S. production infrastructure was essentially built by European capital and technology. Not only does this help us with productivity but lowers demands on our own U.S. capital sources, and lowers average U.S. capital costs. One should begin to ask whether in ownership terms the Japanese companies are any different from American companies anymore? Their pension funds and our pension funds own both sets of companies. As there is increasing investment across borders in this fashion, which group of companies should U.S. policy support? One might even suggest that if exchange rates were allowed to float freely, and companies were not subsidized by government policy, competitiveness would take care of itself.

How should U.S. companies respond to the entry of Japanese auto manufacturers? Obviously, they should attempt to meet the quality, response time, and cost potentials of these manufacturers. Conversely, they should perhaps consider forming coalitions with lower cost country automobile companies (like Daewoo) and invading the Japanese market, where small price cuts could severely hurt the cash flows of major Japanese companies. A strong coalition entry in Japan (especially using an established Japanese manufacturer there) could potentially hurt Japanese manufacturers far more than countering their production in the United States.

A final point to develop is that with such coalitions, the automobile industry is developing as a new global oligopoly. Instead of national markets dominated by oligopolies, the network of coalitions built up among competing groups governs global competition. In the long run, there is a question as to whether companies can develop a distinctive competency in this kind of marketplace. National markets and national competitiveness issues may become moot. As technologies transfer across borders, can the companies, which produce in LDC or NIC positions, force wages and profits down to unacceptable levels in the developed countries? Will automobiles become such commodities that they will be treated just like minerals or agricultural products are today? Is it essential that nations maintain a transportation producing capacity for reasons other than market competition? If so, how should countries structure and compensate for such values received?

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From a national strategy viewpoint, it is probably desirable for countries not to resist the entry of manufacturing companies like Honda. If domestic manufacturers cannot beat them, it is better to assimilate such companies into the economy and gain the benefits of their economies of scale, design techniques, management techniques, and product cost and quality features. Although the Europeans are currently trying to do so, it is probably best not to differentiate between domestic companies and truly international companies producing domestically. In the long run, consumers, labor, and the domestic economy will benefit.

SUMMARY OF OUTCOMES

While a company's actions do not necessarily represent correct or incorrect responses to changing strategic issues, they may be helpful to the professor in bringing out different aspects of the discussion.

After Honda brought out its new Acura line, repositioning itself slightly upscale in the U.S. marketplace (but not as pricey as the Europeans), it established a separate marketing division and dealer franchises for the Acura cars. It extended its model options substantially, allowing some 30,000 combinations of features—as opposed to only 3,000 a few years before. It was able to use the Japanese market as a test market, since Japanese tastes increasingly moved towards slightly larger cars with highly individualized features.

Honda had introduced its mini-car (Citi and Today) products in Japan. But it had been reluctant to introduce these products into overseas markets where quotas applied. Its market share in Japan expanded with the Today and Acura Legends products. It expanded its number of models extensively in Japan, feeding the individualizing of automobile designs there. Its Acura line, with the Integra and Legend models, pushed Honda increasingly toward direct competition with European cars.

Like all Japanese manufacturers, Honda had exploited the price umbrellas created by the «voluntary quotas agreed to between United States and Japan. By selling higher priced cars in the United States, Japanese producers had created a pricing umbrella permitting Korean companies like Daewoo and Hyundai to move in with low cost, small car strategies. It liked to price its cars in the United States at 60-70% above the current exchange price in Japan. As consumer resistance developed to higher priced Japanese cars in the United States Honda's flexible production facilities, however, would allow it to expand its production in the United States if the yen remained too strong. Honda had attacked this problem by installing highly flexible manufacturing systems, welding was 90% automated, while final assembly was only 5% automated. This allowed the company to move quickly to expand volume, if necessary, as well as to individualize its cars. A recent Time article pointed out that Honda's changeover from one model year to the next was accomplished in a few minutes while in U.S.-owned plants, it might take days or even weeks of costly downtime.

To maintain its distinctive competency, Honda very carefully controlled engine manufacture and quality of all operations. Its U.S. operations often slavishly followed its

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Japanese ones. Before turning out the new Accord in the United States it flew 200 workers to its Japanese plants where they worked until they could teach their co-workers in the U.S. to produce in a similar fashion. It gave workers the same kind of group responsibilities in the United States as it did in Japan and had only two job classifications compared with as many as 100 in some unionized U.S. plants. Parking spaces were not allocated to executives, and executives were expected to eat in the plant with workers. While Honda had not been able to find U.S. suppliers willing to meet its quality and delivery standards in the mid 1970s, it worked with suppliers in the United States to achieve over 90% Domestic contents in the early 1990s.

Mid 1990s Developments

In 1995 Honda reached 30 million cumulated autos produced throughout the world, one-third of that coming in the last five years. It produced in 19 facilities in 14 countries. Its global structure represented Honda's long-time corporate philosophy of manufacturing in the markets where products were sold. Five million of Honda's cars had been manufactured in North America, 24 million in Japan, and 1 million elsewhere. Civic and Accord models accounted for 19 million units or 63% of all the cars it had produced.Honda's all new re-engineered 1996 Civic was classified as a domestic car in the United States. It expected to export 40,000 North American built Civics to more than 50 countries. American Honda led all U.S. manufacturers in automobile exports to overseas markets. In 1993 Honda became the top automobile exporter to Japan, capturing more than 20% of Japan's import car market. The Civic local content was now 92%, while Honda had exported over 300,000 cars since its first manufacture in the United States. Honda had a total U.S. employment of over 15,000 associates and had invested more than $3.8 billion in the United States since 1982. It also produced nearly 870,000 motorcycles, 1.1 million lawn mowers and 860,000 engines in the United States. It had developed an engine plant in Anna, Ohio, performing the same functions as seven different plants in Japan. The plant produced approximately 587,000 automobile and motorcycle engines in 1995. Its combined UK and U.S. auto production units increased sales in Western Europe by 8.9% in 1995, the only Japanese automobile line to increase European sales in face of a strong yen. Continuing its decentralization of production, Honda opened operations in Vietnam and was constructing an auto plant near New Delhi in India. The latter (Honda Siel India Ltd.) would be 60% owned by Honda and would begin production in 1997.

In July 1995, Honda announced an engine that would improve engine power and reduce fuel consumption. The new three-stage VTEC engine achieved improvements of 20% in fuel economy and 40% in power output, while reducing emissions. Honda's multi-matic transmission was the first continuously variable automatic transmission system designed for high output engines to be mass-produced. The 1995 Honda Accord ranked first among the 20 models in its class for customer satisfaction while its new four-wheel drive auto designed with Rover opened up new markets for Honda in the United States. R.L. Poke & Company's annual study of automobile owner loyalty had found Honda number one in owner loyalty among all makes for three consecutive years and number one in import owner loyalty for sixteen straight years. In a J.D. Power and Associates' 1993 study of vehicle dependability, Acura had ranked second only to Mercedes in a study of

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30 nameplates and 154 models. Its new 1995-96 Civic and Accord lines achieved great acclaim from the rating institutions, that said, "These cars carried two great designs to new heights."

The most ominous threat to Honda was the switch of Japanese buyers away from premium features and toward price. Ford and Chrysler had exploited this to enter the Japanese market.

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Honda Passenger Car Sales in the United StatesYear-to-date Comparisons as of 10/95

1995 1994 95/94 95 JO

Honda division total sales 556,486 556,492 0.0 87.5Civic 240,648 228,716 5.2 36.4Accord 283,368 313,851 2.8 42.8Odyssey 21,275 0Passport 22,821 20,078 3.4 3.4Prelude 11,195 13,925 -19.6 1.7

Acura division total sales 82,474 99,056 -16.7 12.5

Legend 16,720 31,878 -47.62.5Integra 52,383 58,878 -10.8 7.9NSX 621 451 37.7 0.1Vigor 250 8,024 -96.9 0.1TL 12,500 0

Honda's total U.S sales 638,960 655,548 -2.5

Industry sales total 7,363,915 7,629,006 -3.8Honda market share 8.7% 8.6%

Honda division import sales 145,533 164,466 -11.5Civic 66,179 58,980 12.2Accord 46,884 91,561 -48.8

Acura division import sales 82,474 99,056 -16.7

Honda's total import sales 228,007 263,522 -13.5

Honda U.S. domestic sales 410,953 392,026 4.8Domestic to total sales 64.3% 59.8%

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Retail Sales in Japan by ManufacturerYear-to-date Comparisons as of 10/95

All vehicles 1995 1994 95/94 95 mix

Honda 506,955 452,488 12.0 8.8Toyota 1,695,194 1,710,275 -0.9 29.4Nissan 933,148 857,758 8.8 16.2Mazda 309,354 335,683 -7.8 5.4Mitsubishi 696,001 626,814 11.0 12.1Fuji 288,530 290,413 -0.6 5.0Isuzu 125,334 117,458 6.7 2.2Dalhatsu 341,104 332, 024 2.7 5.9Suzuki 513,421 481,169 6.7 8.9Imports 274,710 203,193 35.2 4.8

Total 5,757,830 5,469,778 5.3

Passenger cars

Honda 352,171 295,818 19.0 11.8Toyota 1,147,818 1,198,195 -4.2 38.6Nissan 708,979 642,687 10.3 23.8Mazda 149,884 191,058 -21.6 5.0Mitsubishi 212,314 201,054 5.6 7.1Fuji 111,678 102,078 9.4 3.8Imports 253,325 181,493 39.6 8.5

Total 2,973,893 2,853,220 4.2

Notes: Imported Accords, Civics, and Crossroads are included in Honda sales instead of Imports. Passenger car figures do not include mini-vehicles.

Source: Honda Motor Company.

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CASE 21: THE ACER GROUP: BUILDING AN ASIAN MULTINATIONAL

Overview, Positioning, and Key Issues in the CaseThis case examines Acer’s development from humble beginnings, through a component manufacturer making most of its sales by supplying international brand names like Compaq or IBM, into a one of the leading global computer suppliers. This transition has not been without difficulties, but so far the results seem encouraging. By 1996 Acer was number 5 in the world in terms of total volume sold and the 7th largest computer brand (a subsequent case “The Acer Group: The Next Lap” extends this case to look at developments that were to propel Acer to world number three by the end of 1998).

The case can be used as a vehicle for students to explore one of more of three sets of issues:

1. The process of building a multinational from an Asian base and the hurdles that management successfully overcome in order to do so;

2. Strategy innovation: what it takes to successfully “break the orthodoxies” in an industry to create new and distinctive sources of competitive advantage;

3. Leadership of a multinational (especially with Asian roots) and the role of developing a strong vision and culture and a unique organization structure as drivers of success.

On the issue of building a multinational from an Asian base, the case discusses how Acer, as a Taiwanese company, through focus and perseverance, overcame the following hurdles to profitable international expansion:

An image problem, coming from Taiwan, until recently better known for low cost than sophisticated products; combined with the lack of an internationally known brand against competitors like IBM;

Lack of staff with international experience;

Lack of knowledge about, and experience of, global lead markets for computers like the USA;

The fact that while applications engineering was strong in Taiwan, the cutting-edge, base technology was being developed in the USA and Japan, not locally;

Long logistics pipelines to some of the key markets for an aspiring multinational: especially the USA and Europe (although with a logistics advantage in Asia).

On the issue of strategy innovation, the fact that Acer has successful “broken the rules” of conventional wisdom about how to compete in the global computer industry is worth considerable discussion. Strategic innovations include:

Acer’s “fast food” model of the supply chain,

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Its focus on building a base in the volume segment of emerging markets where most of its competitors believed their was only “niche” demand and using this base to mount an attack on more mature markets (e.g., pioneering the lo-priced, volume segments in Asia, Mexico, Latin America, Russia and eastern Europe);

Its extensive and innovative use of partnerships both with distributors, developers of new technology and component manufacturers to accelerate its learning and secure the necessary flow of technology;

Reconfiguring its value chain according to the “smiling curve” viewpoint about which activities along the chain were critical to control.

On the issue of organization structure, vision and culture it is worth discussing the way Acer combined aspects of traditional Asian business culture with Western management techniques and Acer’s “client-server” organization structure.

The case is designed for executive programmer or MBA use.

Suggested Questions in Preparation for the Class Discussion

When reading the case, students can be asked to consider the following questions:

1. What are the major hurdles Acer has to overcome in becoming a leading, global computer company? How did it overcome these?

2. How has it gone about the transition and where has it rewritten the traditional rules of the game?

3. How do you assess Acer as a competitor in the Asian markets? What are its strengths and weaknesses?

Suggested Teaching Approach

The approach may vary depending of which of the three main sets of issues (described above) that the instructor chooses emphasize. In general, however, it is useful to start by asking the class to think back to the early 1980s and ask what advantages and disadvantages Acer faced in becoming a global player in the computer industry against established competitors like IBM, DEC or Siemens. The catalogue of disadvantages is long: its has no brand and carries the “cheap” image of many Taiwanese products at the time, it has little international experience, it lacks access to the base technology, it has no distribution network, it is primarily a supplier of components to other makers and lacks experience and skills in producing and marketing a final computer, it lacks an international logistics system, it is short of finance, etc. Its one real advantage is that it has access to high quality, low cost engineers who are capable of taking base technology and designing and manufacturing products based upon those technologies. On

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balance, most students write off the company’s global ambitions and conclude that it is playing the poker game with a hand of 3’s rather than a hand of aces (despite its name) and that it should stick to being a supplier to OEMs with established brands.

The instructor can then ask how, from such a poor base, Acer overtook many of its better-endowed rivals to become the 5th largest computer company in the world. An interesting aspect of the case is the fact that in the USA, for example, Acer first attempted to emulate its rivals like IBM. It hired a senior IBM executive to build its American business and he set about creating a miniature version of what he knew. This strategy failed dismally. It was not until Acer started breaking many of the conventional rules of the game that it was successful. The moral is that you cannot hope to win by trying to out-perform your rivals following a strategy where thy set the rules (being a better IBM, than IBM doomed). Rather, you need to change the rules of the game to play to your own, unique strengths.

In exploring these issues students can be divided into four smaller groups to discuss the following syndicate assignments:

How Acer changed the “rules of the game” in the computer industry?

Group 1: In the area of brand building and marketing.

Group 2: In the way it has gone about expanding internationally.

Group 3: In the way it organizes its supply chain and operations.

Group 4: In the areas of organizational structure and culture.

In executive programs a second set of questions can be added: How has your company changed the rules of the game in your industry (if you have changed the rules in what ways and how did this happen? If you haven’t changed the rules why not and do you think this is a problem?); and what lessons do you draw from the Acer experience?

Since each group has been asked to look at a different perspective, they can be asked to report back on their findings in plenary.

Analysis and Teaching Points

In the analysis of how Acer has overcome the barriers in the path of building an Asian-based multinational and “changing the rules of the game” in the computer industry, the following points are worth emphasizing:

Lacking the big advertising budgets to compete with the major players, Acer found innovative ways to build its brand that avoided many of the problems of economies of scale in brand creation. These included being first to launch products using new technologies and thus gaining “free” press publicity for the Acer brand; emphasis on less scale sensitive, “point-of-sale” promotion; highly focused advertising that was tightly

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targeted at key decision makers (like taking advertisements on the luggage trolleys of major airports around the world; leveraging off government programs to improve Taiwan’s image).

Acer chose to build strength and volume through its OEM business as a supplier of components and private-label equipment to provide a solid base for the long-term development of its braded business.

In internationalizing, Acer targeted those markets that its major international competitors had tended to neglect, both geographically (e.g., Mexico, South Africa, parts of Asia, and Central and Eastern Europe) and in terms of segment (small and medium-sized business in emerging markets that competitors had largely dismissed or penetrating the discount retailer channel in the USA). In this sense, it built its global market position outside in” i.e. starting at the global periphery and using these positions to launch successive attacks towards more “mainstream” markets.

At the same time Acer structured itself to ensure maximum potential for learning new technologies, capabilities and market information. It learned through both a series of formal alliances and joint ventures, as well as less formal partnerships with distributors, designers and suppliers. Acer therefore accelerated its successful internationalization by leveraging the skills of these partners with relevant global or local knowledge, filing the gaps in its own capabilities base.

This learning concept eventually became embodied in its “client-server” organization structure where regional business units (RBUs) fed intelligence about consumer and technical developments in they regions to the SBUs who acted as a source of products and applied new technologies. RBUs also exchanged learning between themselves. Similarly technology and product knowledge was an exchanged between SBUs. Each node therefore acted as a both a “client” and “server” in the network at different times.

Acer’s “fast-food” model of the supply chain broke the traditional orthodoxy in the industry that production had to be concentrated in large-scale plants and new product introductions should be based on a successive launches. Instead, Acer realized that the final assembly operations were not scale intensive and therefore by distributing the close to the customer they could provided both enhanced value through customization and greater responsiveness, as well as reducing the quantity of inventory un the pipeline and cut down the write-offs on obsolete stock.

Acer also realized that the “bottlenecks” in the value chain were in component technologies and control of distribution/branding. The stage of computer assembly was a relatively less attractive, low margin business (hence the “smiling curve”). It structured its organization to maximize control over the bottlenecks in the chain. This allowed the company to maximize the global leverage to be gained from its limited resources.

Acer’s concept of “21 in 21” takes the idea of “think global, act global” its logical extreme. The idea is that, to maximize managerial incentive and return on limited capital as well as local responsiveness, the local subsidiaries of Acer should be independently

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listed, with possibly a majority of equity being held locally. This creates centrifugal forces in the organization, the prospect of which, most multinationals would find intolerable. However, when I asked Stan Shih about this, he claimed it had the advantage of forcing the central, global functions like branding, technology development and support to “continually justify their value-added” to the semi-independent subsidiaries. This is an interesting reversal of the traditional headquarters-subsidiary power relationship that has so often led to inefficiency and unresponsiveness amongst central functions.

Acer’s mix of “overseas Chinese” management culture (perhaps epitomized by tight networks, informal exchanges, the desire to prove its strength and capability, the use of “slogans,” the role of intuition, harnessing the entrepreneurial spirit of individuals) and western-style “scientific management” of the economic engine behind the company and its financing. These aspects are combined with an unconventional, rule-breaking flavor coming, in part, from Stan Shih.

Now that Acer has become a very significant global player, there are a number of important challenges facing the company looking forward. These include:

Questions of how the leadership transition will be managed when Shih passes the reins to someone else, and how dependent the company is on him personally?

Whether the company can successful grow beyond its personal computer and electronic component business into new areas the converge with consumer electronics, like “set-top boxes” and entertainment hardware where it will face new competitors, including powerful Japanese firms;

The volatility of its business in the USA which, while it has been a very rich environment for learning about both technology and consumer trends that Acer has leveraged elsewhere, has been loss making for extended periods.

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Additional Materials

The text of a speech by Stan Shih in February 1994 at the Asian Management Institute in Manila is attached.

EXHIBIT 1

GLOBALIZATION OF ASEAN HIGH-TECH COMPANIES

An Acer Experience

By: Stan ShihChairman and CEOThe Acer Group

Transition to Integration

The world today is full of exciting growth opportunities and unique challenges for business of all kinds. Modern communications have made the world much smaller, and the instant flow of information between all parts of the world has brought about a new borderless business environment. At the same time, the break up of the Soviet Union and the reduction of the military threat between East and West has left societies free to shift their attention from political to economic progress. With the radical changes in Eastern Europe and the formation of the European Economic Community, a global economic positioning and alliance-forming effort to increase competitiveness is underway. A trend towards economic unity is sweeping the world as preparations take place for a new era of regional and global economic cooperation to survive in the in the global marketplace. Acer’s ongoing transition to a globally based corporation is part of this trend. We believe that since the economies of the Asia-Pacific Newly industrialized countries are among the fastest growing in the world, the time is ripe for the regional integration and globalization of Asian businesses.

Why Globalize?

High-tech industry remains the unchallenged leader of all the world’s businesses, and the high growth potential of this industry is amazing. The well-known marketing research form Arthur D. Little estimates annual production revenue in the Information industry to reach over US$900 billion by the year 2000. Given the current world trend towards regional alliances and global business operations. Acer believes that by achieving globalization, companies can poise themselves to bite off a bigger piece of this pie. Globalization can help local companies acquire more room at home and abroad. Greater recognitions will give added value to a company’s products and increased revenue will result. By making the most of resources around the world, companies can expand their product development capabilities, enhance management strategies, and take advantage of interdependence by forging international partnerships. It is my pleasure to describe for you Acer’s experience in globalization and pass on some information, which may help you plan for the future.

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Acer’s Globalization Approach

Acer has strived globalization over the last five to six years, and we have developed a strategy which we feel will secure our long-term survival in the new information age. The thrust of our efforts have been aimed at superior R&D to produce leading edge penetrate, at first we had very little understanding of what was needed to establish a solid presence overseas. We also lacked trained staff with internationalization experience, so it was rough going in the beginning. Many challenges resulted from cultural differences and a lack of knowledge about legal systems in various countries as well. These and other problems as well ended up costing a great deal more then we had anticipated. Our many years of business experience finally paid off, however, and we have enjoyed many breakthroughs and gained valuable experience during our globalization process.

Highlights of Acer’s Experience

The key steps Acer has taken in its price to create a strong brand name image have been the development of a string Corporate Identity System (CIS), image cultivation and globalization. Acer started out as a Multitech, a name that communicates the technical nature of the business but was eventually changed due to the length of the word. In addition to being difficult to remember, the fact that many multinational firms incorporate the sound—tech as a suffix or prefix made the name hard to register in many countries. The change of the Multitech name was due in part to the company’s desire to adopt a suitable name for expansion into the international marketplace.

In 1987, an entirely new name and corporate identity system were established—Acer. The name Acer originated in the Latin word “acer”, meaning “active, sharp, clever, incisive.” Acer has built its corporate culture on a combination of these qualities, and desires to stand out from amongst fierce competition as a company that has established world-class quality and recognition. Just as “ace” carries the meaning of “winner” in a competition, the Acer brand name is a mark, which will forever show the company to be victorious in its ability to supply products of world-class quality.

Acer’s corporate signature contains two primary elements—the corporate logotype and the corporate symbol. They are never used independently in order to ensure maximum recognition. Acer is just two syllables on length, ad very easy to read and remember. Also, since it begins with an “a,” it usually appears at the very front of lists shown in alphabetical order, the four-letter name fits easily into media films or photography, an its shortness makes the Acer name exceptionally well-suited to promotional events of all kinds.

The Acer name was designed to pave the way to new corporate identity for the firm, a tool by which the firm would rise up and be recognized as a high-tech international computer company with a strong sense of purpose. An important factor in the selection of the Acer brand name was the fact that it was easily registered in over 100 countries around the world.

We also had to make sure there were no negative connotations associated with word in any of the countries targeted.

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The next stage in Acer’s brand name development involved promoting our brand name image, and due to limited resources, we relied on innovation, quality and consistent planning to establish Acer’s brand name. By designing innovative products, providing high quality merchandise and focusing on presenting a consistent corporate image, we were able to cultivate a world-class brand name. Effective medium- and long-range planning for future business development was very helpful in achieving this goal, and we also developed internal and external promotion efforts aimed at drawing the attention of consumers and the media.

Acer Today

The Acer Group is now the largest computer designer and manufacturer outside North America, Europe, and Japan. We operate 55 branches in 19 countries worldwide goods for the world market, emphasis on marketing Acer brand name products instead of OEM supply, setting up extensive marketing channels, and maintaining our emphasis on quality. At the same time, we have spent a lot of time promoting the international image of Taiwan and globalizing personnel recruitment and fund raising activities. Globalization is a challenging and difficult process, but we at Acer believe this to be a good way of securing a lasting place in the future international business community.

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CASE 22: AMBEV: THE MAKING OF A BRAZILIAN GIANT

The case concerns the recent creation by the merger (of two historic rivals, Brahma and Antarctica) of a large multinational and diversified Brazilian drinks firm (focused on beer and its home market where it has a dominant market share). The merger took place in the context of a trend toward global mergers and acquisitions to build scale in an industry where firms have historically focused on their domestic market, and a liberalizing Brazilian economy that had led to a considerably increased presence by non-national firms. Revenues of the combined firm ranked Ambev 3rd in size globally, after Anheuser Busch and Heineken (see Table 1 in the case).

Both of the merged firms are over 100 years old. However, beginning in the early 1990s Brahma had become a much more aggressive, productive, and entrepreneurial company after having been taken over by a group of investors; in 1998 it even bid to acquire Anheuser Busch. Antarctica, on the other hand, was only about half the size of its new partner and had remained a highly conservative company. Both companies had since the 1980s been challenged by Kaiser, a brewer that had been founded by Coca-Cola franchisees and that had a partnership with Heineken.

Integration, Consolidation, InternationalizationThe case identifies the following as major issues for the merged entity: integrating the two companies, consolidating its position in the Brazilian market, and international expansion.

The issue of integration is always salient in mergers, and the case does point to cultural differences. However, there are several mitigating factors. These include a history of informal top-level cooperation, despite the wider corporate rivalry; relatively recent successful changes in Brahma from a conservative to an entrepreneurial style should help inform necessary changes in Antarctica; strong competitive pressures to accept change (Kaiser; a globalizing industry); there being strong basis on which to build success from such changes (Ambev is third internationally); and finally, Antarctica preserves some distinctness within the combined entity due to measures to preserve a degree of internal competition: while this could conceivably institutionalize a split internal identity, it also preserves a sense of connection with what Antarctica has done in the past which could be counted on to make people open to integration-driven changes.

The issue of consolidation has several aspects: coping with the competition (but attention to integration will significantly address this), raising per capita beer consumption (the case merely suggests this is low; Table 3 gives comparative internal figures but these are not per capita and so are of limited value); and coping with retailer bargaining power. The Porter reading in Chapter 4 could usefully be applied to an analysis of this last point; however, there is limited information in the case and such analysis would remain speculative.

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The final issue is internationalization. It seems clear that Ambev has close to saturation in terms of local market penetration. The case also notes that the broader Latin American market is highly attractive because of its relatively good margins on high and (unusually) growing consumption levels. Geographic proximity and shared cultural understandings suggest this should be a prime avenue for growth. And with increasing foreign penetration in the continent (e.g. Anheuser Busch has a 37% stake in the Mexican brewer, Model, which is ranked 10 th internationally), Ambev will need to move soon to seize this opportunity. The most likely avenue would be acquisition of local national brewers to capitalize on established brands and distribution relationships; transport and storage costs would make it uneconomic to serve international markets from Brazilian facilities.

A timely move on these issues is crucial. In his regards, the story of the U.S. brewer, Coors, is an cautionary lesson in the lock-out costs (the best distributors got locked up by fast-moving rivals, whose brands also got better established in the minds of consumers) that result from procrastinating in the face of expanding rivals (Coors was a super-efficient and highly profitable brewer with a dominant presence in the Southwest United States. As rivals nationalized, Coors focused its attention on making its single huge brewery even larger, leading to capacity under-utilization and ballooning transport costs).

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CASE 23: WIPRO CORPORATION

The case discusses the Indian conglomerate, Wipro Corporation, as it confronts increasing international competition in its domestic market, and the implications this has for the management of the firm.

Growth Through Organic Diversification

Over the 10 years to 1994, Wipro has enjoyed an enviable track record; with sales and profits growing at percent annual compound rates in the mid-20s. It has eight product divisions, several of which rank in the top three in market share in India. Wipro Consumer Products manufactures and sells edible fats (i.e., vanaspati and accounts for 50% of division turnover), toiletries (an increasingly important product line), and leather products. A reputation for quality and strong links with the retail channel had served the toiletries business well, but required a substantial advertising spend. Wipro Fluid Power was the initial diversification move (in 1973) away for the edible fats business. This market-leading business (#3 slot) was built from the ground up, with a strong emphasis on R&D and customer service, and has recently moved to serve export markets.

The strategy of diversification was advanced by the 1977 move into the mini-computer market and the setting up of Wipro Infotech. Known for its after-sales service network, this is another market-leading business (#2 slot). Growth of this unit drew significantly on an alliance with Intel, supported by internal R&D, and later branching into other product segments to become a broad-line player through separate alliances with the likes of Tandem (mission-critical servers), Apple, and Sun. However, developments in the industry globally have blurred these previously distinct product segments and saw the restructuring of this division into nine distinct and competing business units, and an increased commitment to an R&D capability of international caliber based in India focused on serving the needs of select corporate customers internationally.

Wipro Systems, set up in the early 1980s, has had a spotty history, focusing first on original software applications, running into difficulties with this due to piracy, suffering a “revolving door” in division leadership, before settling into a strong focus on professional services to relatively few large clients in the early 1990s. For example, it has a team of 140 software engineers who work exclusively on software development, conversion, and maintenance assignments for GE. Wipro GE, the medical systems division set up in 1988, has an even closer relationship with General Electric, being 51% owned by it. Crucial to this joint venture was the two parties’ recognition of the compatibility between their corporate values. Again, for this unit Wipro emphasized increasing its value-added contribution: manufacturing, component-sourcing, and ultimately development for export and global sourcing for GE were all to be eventually located all in India. Wipro Biomed was also formed in 1988 to tackle the health-care market. Starting as a distribution and service business for the U.S.-based Beckman Instruments, by 1994 it was setting up a plant for the manufacture of diagnostic re-agent kits. Wipro Financial Services, formed only in 1992, provides medium-to-long-term finance for the purchase of capital equipment, with an emphasis on hi-tech products. In 1994 it had the best performance of all Wipro units, and despite being a late entrant in the business, had aggressive expansion plans. Wipro Lighting was the most recent diversification move but was already suffering from having

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misjudged the strength of incumbents and the nature of access to appropriate distribution channels.

Integrated Diversity?

All of these businesses emphasize a shared set of beliefs and leadership values (set out in Case Exhibit 10). While 75%-owned by the founding Premji family, the company has been careful to repeatedly develop, recognize, and support talented executives: almost every one of Wipro’s businesses had been built by the people who presently head them. However, people do not move much across divisions, with inter-divisional communication largely occurring through the office of the chairman who, for example, every year travels across the country to personally discuss plans for the coming year. Wipro was a leader in India in its employee stock-ownership scheme, which is available down to middle-management level. The company has a strong planning and review culture, with each business assessed annually in terms of six objectives (two of which are at the discretion of division heads with the other four—speed, customer satisfaction, financials, and employee morale—defined by corporate. There are also strict and demanding financial criteria for project approval.

Through its recent PRIDE initiative, the company has sought to motivate cross-functional knowledge sharing. This is part of a broader re-thinking that includes evaluation criteria for joint ventures that re-iterate its emphasis on succeeding through in-house efforts, with joint ventures only for clearly meeting needs that could not be fulfilled in-house. The tension between this desire for control and achieving growth was, however, made evident by the turnabout in agreeing a partnership with Acer of Taiwan to do work that was previously done in-house. There is also some on-going tension in how strictly planning controls should be applied, with some believing that inflexibility in this regard would drive out “unintegrated diversity” that is inherent in the very different conditions faced by the various business.

Like the Unipart case (#36) this case can be used to direct attention to how the corporate office adds value in a diversified business. Unlike Unipart, Wipro’s growth has been almost entirely organic, and it has a much longer history of diversification than Unipart. The current case therefore better facilitates a discussion focused on the role of the corporate office over time. Unipart, on the other hand, facilitates a discussion on transformation in practices that is driven by corporate management, with a time dimension de-emphasized. However, some of the insights offered by the Unipart case could also form the basis for student assignment and class discussion of how Wipro might do things differently.

In some ways, Wipro looks very much like an Indian GE, an impression reinforced by its close ties to that company. Thus, like GE Wipro emphasizes leadership in whatever business it is in (though unlike GE this does not appear to have resulted in divestment of under-performers). Wipro similarly appears to be able to create unity out of diversity: businesses that are very different in a product-market sense are “related” through shared, rather qualitative performance criteria, values, and management processes. Wipro demonstrates that in a diversified company corporate office has an important role to play in setting the context for value creation and capture. That is, corporate builds coherence across the businesses by focusing on what gets done in terms that are relatively simple to understand and relevant across a wide range of business contexts (e.g., high value-added content and quality) and not how it gets done (appropriate given

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the very different nature of the businesses). Consistent with this is the content of communication from corporate: communicating broad objectives (e.g., market leadership and high value-added content) and then letting divisional management get on with the job, and its role in setting incentives that reward results deep down into the organizational hierarchy (e.g., employee stock ownership). As each new business was added beginning in the mid-70s, we can see a consistent re-iteration of this role of the corporate office.

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CASE 24: TV ASAHI THEATRICAL PRODUCTIONS

This is an international strategy case that can be taught from a variety of perspectives. They include differentiation, diversification, organizational structure, core competencies and resource focus, as well as head office/subsidiary control. This teaching note focuses on several of these issues (i.e., diversification management, core competency management, and head office/subsidiary control management). These issues are considered within the context of the business decisions facing TV Asahi and its subsidiary TV Asahi Theatrical Productions, Inc. The critical explicit decisions are: should Asahi close or continue to support the Theatrical Productions Division, and how should Kenji Sudo and Asahi manage these subsidiary/head office business situations as they evolve? The critical implicit issue is how large organizations deal with outliers.

Teaching Objective The teaching objective of this case is multifaceted as was described in the introduction. However, in particular, this case focuses on issues of diversification management, core competency management, and head office/subsidiary control management.

Assignment Questions

1. From both a strategic and organizational perspective, how well understood is the Theatrical Productions Unit within the overall Asahi organization?

2. What would you recommend that Asahi do with the Theatrical Productions subsidiary? Why?

3. What would you recommend Asahi do to manage its decision regarding this subsidiary? What would you recommend Kenji Sudo do not only to effectively manage his personal career situation, but to manage the relationship with Asahi head office?

Teaching Process

This case is taught in a relatively straightforward manner—but has a twist. The twist is to ultimately bring the students to understand that Kenji Sudo’s greatest value to the entire Asahi (Japan) organization is in his ability to bridge the two cultures. This is an enormously important talent for an organization, which needs to internationalize if it is to survive. We suggest you start the class with the initial assignment questions. As detailed below, there are a number of follow-up questions which we pose, but for which we do not seek immediate resolution. The second question discussed is what Asahi should do with the Theater Productions Division. Students will usually delineate three potential alternatives open to Asahi. They are: to close the subsidiary, to do nothing, or to reinvest and grow the subsidiary. Then the question of what Kenji and Asahi should do about their respective situations is considered.

Analysis1. How well understood is the Theatrical Productions Unit within the overall Asahi

organization? We suggest that instructors quickly sketch out Figures 1 and 2 (with the

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appropriate input from students) in order to set the context for subsequent discussion. Specifically, we ask about the fit with core strategy, and the fit between the Japanese parent organization design (as per Figure 2) and the way things work in New York. As both figures suggest, the Theatrical Productions Unit lies well outside TV Asahi’s core business, and the way it traditionally organizes its activities. It is not a tidy fit. In terms of both product and market, it is outside the corporate mainstream. In such a context, we tend to be provocative with the students by posing the three questions that follow, but not really addressing them until later in class. What value does the Theatrical Productions Unit contribute? Isn’t it little more than an historical anomaly? What do you do with outliers, particularly international ones?

2. What alternatives exist for the Theatrical Productions Division? What are the advantages/disadvantages of each alternative?

Close the SubsidiaryThis appears to be a viable option because the company is not deriving a great deal of tangible benefit from the operation. Furthermore, the subsidiary is requiring considerable resources in the form of money and top management time (i.e., they have to decide several times a year whether they should be making an investment in a new musical among other things. These decisions are probably all channeled to the top managers because of their financial significance). The following is a list of the advantages and disadvantages of this approach.

Advantages Disadvantages Saves on resources (i.e., management

time and money). The company may not have any

aspirations to get involved in the U.S. market in a major way.

The company appears to have little ability and “know how” related to controlling and managing Kenji in his business.

The entertainment world is quite an unusual industry that demands very specialized management skills such as recognition, ability to pick winners, contacts. This personal aspect of the business means that its skills are quite specialized.

Other competitors could take over the unit and thus gain any potential competitive advantages that are inherent in developing this business (see next option).

The subsidiary does provide some recognition for TV Asahi—this occurs through recognition by other companies’ executives asking for tickets etc. (the young female market is particularly taken with this type of entertainment).

The company may be passing up an opportunity to develop its international and global presence. (Note this may be very important in the future of this industry just as it is occurring in the newspaper business in the English world.)

The company may be passing up an opportunity to enhance its core competencies (see below).

This alternative really takes an unrelated diversification perspective which is that TV Asahi should stick to its knitting. In other words, the Theatrical Productions Unit is taking valuable resources away from the principal business of Asahi, news broadcasting, and it is not giving anything valuable back in return. Furthermore, this argument is suggesting that there are no natural synergies between the two businesses.

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Reinvesting in the Subsidiary

Reinvesting in the subsidiary would be a commitment to growth both internationally and in new business opportunities. Furthermore, it would be a commitment by Asahi to develop an understanding of the theater business and develop its skills more broadly so that it could take advantage of its already substantial investment. A commitment to further develop this entertainment and creative management skill might produce tremendous opportunities for Asahi. It would be one of the first Japanese companies to demonstrate such a management skill. Such creative management abilities would provide them with a tremendous “first in” advantage (or core competency). It might also be able to broaden its application of this type of investment and entertainment management capability to other Asian countries. This would give Asahi greater economies of scale and more ability to purchase broadcasting rights.

Advantages Disadvantages Could build a considerable

competitive advantage in this business as discussed above.

Prevents competitors from getting the skills of Kenji.

How do you get Kenji, as well as Yasu Kata, to quickly and methodically develop protégés, etc. This is probably going to be quite difficult to do in a formal sense.

There is a fundamental issue of management control over the Theatrical Productions Division. This is an issue that Asahi and the students are going to have to revisit if this approach is selected.

There is considerable uncertainty about how large and how easily this subsidiary could be grown and what risks must be taken.

Ultimately, reinvesting in the subsidiary is a recognition that the subsidiary may contribute significantly to the core competencies of the broadcasting company over the long run, if not sooner. Some of the potential core competencies involve the management of creative talent, and the development of creative talent. These capabilities are skills that Japanese companies have found it particularly difficult to develop because of their team, cooperative and generalist (non-individualistic) approach. If Asahi found a way to intrinsically develop these capabilities and then integrate them into its broadcasting capabilities, it might prove to be a very effective core competency for the company.

It must also be noted that Asahi is essentially a news corporation. For it to grow and compete in the new broadcasting environment, it may have to become a multidimensional broadcaster; that is, if it wants to remain as one of the big players. Otherwise, it may become simply a niche player as a news broadcaster. Developing and integrating some of its skills in the Theater Development Unit may provide it with an opportunity to learn skills to broaden its broadcasting creative abilities before the market gets really competitive and before many of the competitors learn these skills. The single biggest question facing Asahi is whether it can effectively develop these skills into a critical mass, and then somehow integrate them back into its broadcasting capabilities.

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The fundamental argument of this alternative is that core competencies are developed not only in the same niche business, but important core competencies can originate from ancillary businesses that force the company to stretch and master new capabilities that might be important to its businesses in the future. In the Japanese broadcasting business, creative program development may be critical for future growth. In addition, having an international focus may also help a Japanese broadcaster, because it would allow the company to effectively gain access to good international programming that is suitable for the audience and it would allow the Japanese program developers to understand foreign markets better, something which would be important if they wanted to further develop their international programming capability. There is some potential that the Theatrical Productions Unit’s capabilities could be developed and expanded to offer some of these “stretch capabilities.” Furthermore, TV Asahi seems to realize that creative programming is a capability that it could improve upon. The question then becomes whether it should take the normal route of hiring internal creative talent and trying to develop a standard creative TV programming capability, or might it also try to incorporate this new creative potential? It is something that may differentiate it from the competitors in the long run.

For further reading on this issue, see: Hamel and Prahalad, (1990), The Core Competence of the Corporation. Harvard Business Review, May-June and Hamel and Prahalad, (1993), Strategy as Stretch and Leverage. Harvard Business Review, March-April.

Do Nothing

This alternative is perceived as the “safe” alternative and is in keeping with conservative values and possibly Asahi’s Japanese values. It does not confront anybody, yet it will probably get rid of a subsidiary nobody quite knows what to do with. A summary of the advantages and disadvantages of the alternative are as follows.

Advantages Disadvantages It eventually will cap the resources

directed at this particular business. Asahi’s top managers do not have to

actively make a decision regarding the division.

It does not utilize the past investment to the maximum.

It does not take advantage of a potential opportunity in the future, something that could differentiate the company within the industry.

If a decision is not made, somebody may commit money to theater projects that are then not managed effectively.

These projects are long-run investments and it would be best if someone was looking after them over the long run.

If Asahi takes this approach, inevitably the Theater Division will dissolve because all of the important resources will retire or transfer from the division. This may be exactly what the top managers in Japan want to happen because nobody then has to make the difficult decision of whether to support or close the division. Anyone negatively affected by the eventual demise of the division could be transferred into other divisions within Asahi. Therefore, from an implementation perspective, it represents the easiest solution.

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However, the potential downside of this approach is that Kenji gets dissatisfied with Asahi’s involvement and possibly begins to search for alternative investors or opportunities. In so doing, Kenji may divert his time and effort away from the investment management decisions constantly confronting the Theater Division. This may lead to some bad investments simply because his mind is occupied by other things. These investments are made for long-term gain and, over several years, many millions of dollars are committed. If several years’ worth of poor investments are made, then Asahi could take a considerable financial hit. In other words, this may be the worst business decision to make given the lack of control and the lack of knowledge that the head office has over the situation. If Asahi is not going to try to gain in terms of core competencies then it should probably make the decision to get out of the business and sell it—or at least the investments that have been made up to that point in time.

It should be noted that it is quite easy for students and for the professor to take any one of these perspectives. The key to this initial part of the discussion is to bring out the fundamental issues confronting Asahi. The professor should allow all approaches to remain viable for as long as possible.

Implementation Issues

There are two questions that can be asked in this section. What should Asahi do and what should Kenji do?

Teaching this part of the class is possibly the most difficult part. However, the students must answer the simple question: “What actions should the various parties take given their situations?” The discussion evolves around what Asahi head office and Kenji should do, sometimes switching back and forth. Ultimately, the students have to understand that although the problems appear to be created mostly by Asahi, Kenji is ultimately going to be the key in solving this situation. It is really a problem in subsidiary/head office relationships.

Below is a brief outline of some of the important points related to this discussion.

a) What should Asahi do given its decision to either support or close the division?

Asahi is going to have to decide quickly what to do with the division. Either it continues to support it in some way or it closes it. To make this decision someone in Asahi is going to have to make the decision. Historically in Japan, this type of decision has been a “joint” management decision, involving persons at several levels in the organization. Unfortunately, only Kenji is in a position to make this decision at the moment. A further obstacle to this decision is that Japanese management approaches tend not to impose solutions from the top. Therefore, Kenji is probably going to have to facilitate any decision-making process by cultivating key relationships in Asahi. If Kenji is not forthcoming, a manager in Asahi could attempt to forge a closer relationship with Kenji, and if the relationship does not quickly build some trust, then the subsidiary is probably in trouble. Ultimately, from a head office perspective, it is trust that will count in the short term (Kenji’s old boss may have to be brought in on a consultative basis in the

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short-term to aid with the initial assessment). In the long-term, skills and knowledge can be developed so that Asahi can more appropriately understand the theater business; yet again they are going to have to develop a relationship to facilitate this learning process. A great deal of the long-term success of this subsidiary depends upon Kenji’s cooperation with Asahi.

b) What should Kenji do?

At this point Kenji probably should try to influence Asahi’s decision to support the division. He could do this through a variety of approaches.

He should attempt to build a relationship with top managers in Asahi. This could be done by inviting top managers over to the United States. for prestigious situations such as the Tony Awards, Broadway play openings, and other business related events. During these visits Kenji should introduce them to his network of theater business associates. This may aid in developing an appreciation for the capabilities that are present in the Theater Division, in particular the skills Kenji offers. It may also build some trust.

In addition, Kenji is going to have to spend more time in Japan. At present, he goes to Japan at most once a year. This does not give him time to build relations with top executives in Asahi.

One of Asahi’s problems is that it has no basis upon which to make a decision whether to support or close the division. Kenji could do several things to rectify this situation. First, after developing a relationship with an appropriate and interested top manager, he could keep him carefully informed of the potential opportunities.

Kenji might also invite the top managers of Asahi to send over a “trusted” businessperson to evaluate the potential of the division. This person would probably be transferred from Japan to a position in, or associated with, the Theater Division. It would be Kenji’s task to demonstrate to this individual that the Theater Division has unique competitive advantages and that they can be integrated into the core competencies of Asahi in an effective manner. A key objective in managing this task is to demonstrate how the theater business can help the broadcasting business.

Ultimately, Kenji must attempt to integrate his business into the Asahi Broadcasting business wherever possible. One of the issues that must be confronted is the issue of joint decision making with head office. If it develops “trusted” and knowledgeable managers, head office is going to expect more joint decision-making. Kenji must somehow encourage this without interfering with the fundamental entrepreneurial decision making process (i.e., speed and personality) that has probably been critical to making the business what it is today. This is going to be hard, but it may be possible to get head office involved in long-term decisions that do not require speed and he can concentrate on the day to day decisions.

Kenji would be best served if he could devise a plan that delineates what resources (people, money, and skills) the Theater Division requires, and what opportunities this type of resource support would create. Part of this process must involve a clear delineation of the opportunities that the Theater Division has both independently and as an integrated operation

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with Asahi Broadcasting. In particular, Kenji must start focusing on opportunities and links to the broadcasting industry.

Kenji must develop a plan for passing on his (as well as others’) skills to a new set of managers. He must start bringing in managers and passing down responsibilities to them. This is going to be particularly difficult to do because Kenji is so accustomed to operating independently. However, if Asahi decides to invest in the future of this business, it is going to want some guarantee of continuity.

Kenji must actively find a replacement for his Japanese cohort. This individual is absolutely key to the short-term survival of the division and he or she must be brought into the function as soon as possible. Kenji should not wait for Asahi to decide what must be done, but he must attempt to find a viable solution. The solution may involve an individual(s) coming in with some training, or contracting the function out to an appropriate company.

In conclusion, Kenji knows the most about the business and has a good relationship with Yasu Kata. All of these factors would enable him to make the best decision. Asahi may not be making a decision simply because it has no idea what to do.

If Kenji is not willing to help Asahi understand the business, and in fact, if he is not willing to become less entrepreneurial and independent, then the Theater Division is probably doomed. This is because the Japanese are not going to understand the business, they are not going to be able to integrate the operation into their broadcasting business (i.e., create new core competencies), and they are going to feel very uncomfortable trying to manage an entrepreneur (i.e., the trust factor is not there).

Update

As of January 1998, the Theatrical Productions Unit continued to exist in a form similar to that of April 1996. According to Kenji Sudo, Asahi has been “very quiet” in the 21 months subsequent to the time of the case.

Sudo had continued to invest in (packages of) theatrical productions that, in total, were profitable. With the late 1997 financial crisis in Asia, and the weakening of the Japanese yen, imports to Japan (such as theatrical tours) were becoming pricier and hence more difficult to arrange.

One positive development from Sudo’s perspective was that head office in Japan had agreed that as long as they did not need to supply “new” funds from Japan, Sudo could invest funds already in the United States as he deemed appropriate.

Sudo continued to act as an informal advisor to many managers from TV Asahi to help them bridge the Japanese and American cultures.

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FIGURE 1

WHAT IS THE RELATIONSHIP OF THE THEATRICAL PRODUCTIONS UNIT IN NEW YORK TO CORE STRATEGY EMPHASIS OF TV ASAHI JAPAN?

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TV Asahi Japan

TV Asahi New York

Theatrical Productions New York

Emphasis

Japanese News

Foreign News as Relevant to Japanese Viewers

Foreign Entertainment

Figure 2

TV ASAHI (JAPAN) ORGANIZATION DESIGN

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Staffing Structure

RewardSystems

InformationSystems

life time employmentsenior career path via (news) sidestable

conservativespan of control (16 direct reports to president)formal, bureaucratic; hierarchicaldivisionalized

pay not based on performanceseniority matters

after hours socializingformal reporting and systems

Note: How does this existing organization design impact any proposed changes in this strategy?

CASE 25: SELKIRK GROUP IN ASIA

Synopsis

Selkirk Group is an Australian company that exports clay bricks to Asia from a domestic manufacturing and marketing base. This case has been written to discuss and analyze the company’s export strategy and organization for the Asian region. As background, it provides information on the competitive situation in Australia and the export licensing arrangements in the company’s largest export market: Japan.

The Selkirk Group in Asia case provides a counter-intuitive example of what it takes to be a successful exporter. Conventional export marketing wisdom suggests that high value-added, low transport cost products are best suited to international trade. “Elaborately transformed” products (requiring a high degree of specialized knowledge and technology to design and manufacture) are commonly identified as the types of products that should form the exporting base for most manufacturers in the future. Yet here we have a “smallish” family-owned business in a low value-added, normally high transport cost business managing to build export sales to one of the most demanding markets in the world, Japan. In five years, exports have risen from 0-10% of Selkirk’s total sales.

Position in the Course

This case has been written to allow and facilitate discussion across a number of areas, including: export marketing strategy and organization, competitive strategy in Asia, industry and competitive analysis in Australia, international strategy choices, and licensing arrangements in Japan.

We would envisage the case being used in the following programs:International Business/International Marketing: As an introductory case examining the current export strategy, organization and performance of a small company competing in the international marketplace and identifying the broad international business strategic choices available to companies.Competitive Strategy and Business Policy: As an example of the strategic choices facing small, family-owned businesses in a low-tech manufacturing arena, facing large companies in their domestic industry and in an economy exposed to global competition.

Suggested Reading

Is Selkirk typical of successful exporters or the type of exception that helps clarify the normal situation? To answer this question the case can be taught in conjunction with an article that examined the export strategy and organization of 185 medium and large Australian exporters. It found that firms that made a commitment to support exports

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through the formation of a separate export unit within their organization, significantly outperformed firms that treated exports as just a part of their domestic business. Even if the article is not used, this issue should be explored in class.

Beamish, Paul W., Lambros Karavis, Anthony Goerzen and Christopher Lane, 1999, “The Relationship Between Organizational Structure and Export Performance,” Management International Review, Vol. 39, No. 1, p. 37-54.

Assignment Questions

1. What is your assessment of the company’s current competitive strategy and position, both in Australia and across Asia?

2. How well does the current export organization and approach to managing export operations support the existing strategy for Asia?

3. What are the company’s current strategic options in Asia and what is your assessment of the prospects for different options?

4. What recommendations would you make to Bernie Segrave, the managing director of Selkirk Group, with respect to the company’s competitive strategy and organization for the Asian region?

5. (For use with the reading) How does Selkirk Brick benchmark against the largest Australian exporters and what are the implications of the article for the company?

Analysis

1. What is your assessment of the company’s current competitive strategy and position, both in Australia and across Asia?

Clay bricks and pavers are heavy products with a relatively low price to weight ratio. Transportation costs are usually quite high. Clay is also a material that is fairly abundant around the world and, therefore, easily sourced compared to other materials. Consequently, competition tends to be contained geographically by the availability (or absence) of transportation modes (rail, truck, and water). Clay bricks are also typically a high cost item in building terms requiring high labor inputs to build walls and feature walkways. Increasingly, builders are shying away from brick construction in walls and moving to fiberboard-related or concrete construction materials in order to reduce construction costs.

A quick look at The Australian Clay Brick Manufacturing Industry in 1998 (Appendix 2 in case) indicates that the top five competitors accounted for 85% of industry sales. Selkirk is a second tier company, in the strategic group identified as primarily a regional competitor. How is Selkirk surviving in the local competitive arena? The evidence is not strong but we can see that Selkirk has a very strong base in the regional centers of

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Victoria (Ballarat, Bendigo, Shepparton and Stratford) and has company-owned sales outlets in metropolitan Melbourne.

The prospects for expansion are limited and one suspects that Selkirk would have been bought out had it not been a family-owned company. Its best hope for continued expansion in Australia is to buy out small local manufacturers in regional Australia and string together a series of markets in which it is locally dominant and protected by transportation cost barriers to trade.

The one attempt at related diversification into the construction materials industry (Hicks Timbers in Altona) was initially successful but the growth of hardware superstores (e.g., Bunnings) servicing the construction trade forced Selkirk to retreat from the business and close the operations down. The purchase of concrete brick and paver companies is the acquisition of a form of related product rather than related business diversification.

The company’s position in Asia is very hard to judge. It has successfully exported to Japan on a continuing basis but it is too early to judge its success elsewhere. Periodic purchases from agents are a positive sign but not a firm indicator of continued success. Selkirk may be able to build a long-term platform for success by establishing a brand name for a quality product to be used in “expatriate-style” residences based on Australian-sourced product but progressively licensing its technology and providing technical support to local Asian domestic manufacturers of clay and concrete products. At the extreme, its success may eventually come from exporting services in the long run rather than exporting products. Whether Selkirk is in a better position to do so than other Australian and global competitors (e.g., Midland Brick) is another matter altogether.

Selkirk is vulnerable in the longer term to domestic companies developing the necessary technical skills and expertise in making clay pavers in the region. The C.I.F. price is $5,000 per container. Fully $1,500 of this is the cost of transportation from factory gate to port of destination. To this must be added domestic freight charges from port to final destination. That is a lot of margin that could be captured locally if the local companies had the product range and quality, or the domestic market was big enough to support a high quality competitor. In one of the anomalies of international trade which many students do not (but need to) understand is that shipping rates to Japan from Australia are low given the availability of back freight space to Japan. (Australia exports raw materials to Japan and imports manufactured goods that require different shipping).

2. How well does the current export organization and approach to managing export operations support the existing strategy for Asia?

The purpose of this question is to initiate a discussion of the relationship between strategy and organization. By way of background, Bernie Segrave, the CEO, is currently directly managing the export business. Peter Blackburn is the export manager but also market manager for Western Victoria. Clare McGuinness deals with export correspondence, documentation and communications. Steve Banks ensures that product meets export specifications (i.e., the special arrangements detailed in the distributor sales agreements).

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These amount to a small-specialized export sales function rather than a company oriented to competing in the global marketplace.

Could the export organization be improved given the current strategy? Does Peter Blackburn have the skills to become a proactive export manager? It appears that he has no special training or expertise in export marketing or the management of export operations. He is learning through the experience of traveling with Bernie Segrave on the visits to overseas markets and agents. There is no active involvement of Selkirk Brick in training the staff of agents to sell their products (nor any indication that it would make a difference in the marketplace). There is no explicit program of developing market knowledge and expertise in order to take a more active role in understanding the sales channels and process in different countries.

Selkirk’s export business appears to be very profitable and, therefore, quite capable of supporting a specialized export operation. Export sales were running at above 10% of total sales in 1997/98. Sales revenue in that year is shown as $27.8 million. Industry cost data suggest that overheads and profits account for 42 per cent of revenue. On a marginal cost basis, this gives $1.2 million to recover costs and profits. Unless there has been substantial price discounting of export orders, there is a lot of money that can be dedicated to building an export organization.

The cost of a dedicated export organization unit would be considerable but certainly far less than $1.2 million. Assuming a full-time staff of one export director, one technical advisor and two fully dedicated administrative support staff in Ballarat, the salary costs could be less than $200,000. The overseas market development trips have cost between $15,000 to $25,000 each. Allowing six trips per annum adds another $100,000 but there are Australian government market development grants that may apply here. It’s hard to build up a total cost of more than $400,000 on this basis. The following tables/calculations should be developed on the board.

Existing Possible Implication

Management Time

Blackburn 5-20%

Segrave 15%

Blackburn or new hire 100%

Segrave 5-10%

Dedicated effort now.

Segrave available for other corporate issues.

Cost

Portion of Blackburn and Segrave’s time.

Small support staff

2-2 ½ trips/year

All of Blackburn but less of Segrave’s time.

More support staff

5-6 trips year

Incremental cost is real, but even total cost is less than A$300,000.

More than double the trips.

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Selkirk Export Sales (10% of total) $2.78 millionOverheads/Profits of 42%. (See appendix 2) 1.17 millionIncremental salary/travel (<$400,000) - say .17 millionContribution to Export Overheads/Profit-Before Increased Asian Sales 1.00 million

Incremental Asia-Pacific Sales Required to Recover $170,000 in expenses (on a Breakeven basis) with 58% fixed costs? (~ .29 million or 11 % increase.)

The question to ask students is, “As Peter Blackburn, do you think you could generate sufficient new export revenues to justify the incremental cost associated with a dedicated exporting office?”

3. What are the company’s current strategic options in Asia and what is your assessment of the prospects for different options?

Discussion of the strategic options for Selkirk Brick in Asia provides an opportunity to explicitly discuss the differences between the various forms of market engagement/entry (i.e., exporting/agency agreements, licensing/technical support, joint ventures and foreign subsidiaries).

The case discussion can be directed in a number of different ways here depending on the extent of prior reading and theory knowledge assumed. One approach is to present a mini-lecture on the different forms of market engagement/entry and when they are most appropriately used (perhaps utilizing a market attractiveness and competitive position framework) prior to this case discussion. The discussion in class can then be directed less at understanding the different forms of engagement and more to the class’s assessment of Selkirk’s strategic position.

Currently, Selkirk is using a “one strategy fits all of Asia” approach to the region. It is locked in to using agents and supporting them using technical manuals and occasional market development visits. Is this an appropriate way to manage the region? The answer very much depends upon the analysis provided. We suggest the class assess the market attractiveness of each country (e.g., Japan, Hong Kong, Taiwan, etc.) and the degree of competitiveness that Selkirk has against both local and foreign competitors in each country. This analysis is likely to lead to an understanding that different market engagement strategies are required in different countries.

This is a significant exercise and one that experience suggests is unlikely to have been done by class participants unless specifically requested through the case assignment questions. Since this will take some time to do in class, be prepared to spend much of the class time on this exercise and the consequent discussion.

Our own assessment of the overall situation on an Asia-wide basis is that the market attractiveness is “unknown”, and that generalizing about “Asia” is not appropriate, given our lack of current market information. Selkirk’s competitive position is high against

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domestic competitors but appears to be low to medium against foreign competitors. This suggests a continuation of the strategy of developing local agents but also identifies the need to establish an agenda of identifying local companies where strategic partnerships could be established.

4. What recommendations would you make to Bernie Segrave, the managing director of Selkirk Group, with respect to its competitive strategy and organization for the Asian region?

Exports have been booming and it’s very tempting to adhere to the maxim “if it isn’t broken, don’t fix it.” Yet, at some stage in a company’s export evolution, someone must make the decision whether exports are a marginal contribution that absorb current excess capacity or whether they are a fully loaded product that is part of the fundamental production mix of the company. Under the first scenario, one can and does use a “borrowed” organization to do the job of exporting. Under the second scenario, one is more likely to develop a specialized export organization or think carefully about moving to a foreign joint venture or technology/brand licensing arrangement.

The trouble is we don’t know enough about the various markets across Asia (be they defined as cities or countries or regions) to make a reasonable analysis-based assessment. That, in fact, leads to the first recommendation to Bernie Segrave: invest in gathering market intelligence to determine what your longer-term competitive position is likely to be in different markets. This requires a disciplined effort at collecting local market information, codifying and then analyzing it. It means more than collecting interesting anecdotal data about the market; it means seriously building a database of knowledge about the industry across the region as well as factoring in exchange rate movements and back-freight rates.

The reason for doing this is not only to develop projections of future growth. What is required from the analysis is building an understanding of why (and how) Selkirk has been successful in exporting to different markets. With this material one can build an understanding of the competitive reactions that could be faced by Selkirk from both local and international competitors.

Basically, the concern is that Selkirk has been astute enough to develop a technical manual to support its sales drive through local agents but has not (to the case writer’s knowledge) developed a similar in-depth understanding of the market itself, both from a consumer and competitive perspective.

This leads to another question: “How sustainable are the factors that led to Selkirk’s success, particularly in Japan?” At this stage, one suspects that Selkirk products are sold on the basis of product quality, price and technical support. But Selkirk is unlikely to be building a brand image that can lift itself out of the commodity end of the export/import business. At present, especially with some pavers not branded as Selkirk, the export operations are unlikely to be building business intangibles such as brand recognition, integrity and attributes. This leads to the second recommendation: commence the

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process of brand building as seriously as the task of selecting channel partners across Asia.

Without this brand recognition, Selkirk is actually building a reputation for Australian products and other foreign products. Brand reputations are always being built and Selkirk must tackle that explicitly. Ways that Selkirk needs to do that will inevitably vary. In Australia, this would involve features in architectural, home building, renovation and gardening magazines. It would involve development of brick and paver display and technical support centers. It would also involve a technical accreditation and sales qualification program that must be taken by distributors. In Asia, we simply don’t know enough to recommend how it should be done but we certainly can recommend what should be done.

Selkirk has expressed a commitment to developing the Asian export market over the longer term despite the current economic downturn across the region. While there are likely to be enormous economies of scale in the production of bricks and pavers, there are likely to be even greater transportation diseconomies associated with centralization of production in Australia to serve the Asian market. At this stage, exports can be handled as a special case in manufacturing by selecting the right product in the finished goods yard. This leads to the third recommendation: develop a globally/regionally aware and competitive organization. Exactly how this needs to be done will be determined by the international market strategy chosen.

Option A: If the analysis shows that a centralized production unit can competitively and profitably supply the Asian markets, then the whole organization (throughout the whole value chain) must become aware of the changing competitive boundaries and the performance requirements.

Option B: If the analysis shows that licensing/technical support of Asian manufacturers or the development of a foreign joint venture is the better approach (i.e., a decentralized manufacturing approach), then it is not simply the sales and marketing function that must actually go overseas but all functional areas must develop the resources to be sent overseas to support the operations.

This then raises the question: Which is the best organizational approach to support the recommendations? Can the existing organization cope with these issues or does a new specialized export department need to be created to pursue these recommendations? That is probably the more critical decision that needs to be faced. It does depends to an extent on whether Selkirk is prepared to invest in building a market in advance of demonstrated market need.

On thinking about the export organization, the question needs to be raised whether the unit is to be export-focused, business development-focused or both. Option A suggests an export-focused organization that is responsible for sales and delivery to markets only. Option B suggests a business development-oriented export department, which continues

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to manage export sales but concentrates as much on broader market development and strategic alliance partner selection.

5. How does Selkirk Brick benchmark against the largest Australian exporters and what are the implications of the article for the company?

The sales revenue of the Selkirk Group of Companies is between A$25 to A$30 million and is a minnow among the whales in terms of size and export characteristics (refer to Table 4 in article). Compared to Quartile 4 companies, it has 64% of the average revenue but only 13% of the average export revenue. The growth of Selkirk Brick has been very high through to 1997/98 but that is from a zero base start in 1992.

The nature of clay brick and paver manufacturing would characterize the company as being in the Simply Transformed, Non-Agricultural industry category (refer to Table 1 in the article). Total Corporate Sales revenue is about 3% of the average for Australia’s largest exporters in that industry category. Export Revenues are only 10% of corporate revenues, i.e., about $2.5 million, which is less than the 35% industry category average for export intensity. While 73% of the larger exporters in the category have a separate export division, Selkirk does not. Industry category profiling suggests that Selkirk has a long way to go.

Categorizing Selkirk by Stage of Internationalization is interesting (refer to Table 2 in the article). While it has overseas agents, they are still very much middlemen in the process. Consequently, it is tempting to categories Selkirk as predominantly a domestic business. It is very much a small and relatively insignificant exporter in this category.

What does this all mean? It is difficult to confidently draw conclusions from the statistics in the article because Selkirk really falls outside the range of the Top 500 Exporters. One could argue that if Selkirk were to continue significant export growth, then organizationally it should consider strengthening both the export manager’s role by establishing a separately accountable export unit and driving the agents harder across Asia. However, the concern would be that Selkirk does not have a strong understanding of its Asian markets (i.e., from an industry structure, market channel and end-user needs perspective). The export strategy right now appears to be driven as much by relationship building with agents as with learning about the marketplace. It is unlikely that export growth and market sales can be sustained in this manner.

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What Happened

The tour in October 1998 to Singapore, Thailand, Hong Kong and Taiwan was considered a success in terms of establishing new contacts in the marketplace. Thailand was looking promising with agents there indicating a large potential. In fact, a second trip had been made to Thailand. To date, however, no new business had actually been signed up. In fact, business across Asia declined over the previous six months and exports were tracking at 55 per cent of the previous year’s sales.

Bernie Segrave and Peter Blackburn were planning to go to Japan again in May 1999. Sales to Japan had declined through the existing agent network. However, a large number of agents were now contacting Selkirk and expressing interest in carrying Selkirk products as part of their range. As a consequence of these two factors, Bernie Segrave was seriously considering expanding Selkirk’s network of agents again in Japan. The current agreements only required 90 days’ notice on either side to terminate.

Because Selkirk sold to many architects and designers in Japan (the people who specified projects), it was essential to work with them, even during economic downturns such as the Asian Flu. While development/construction projects in Japan might be delayed or downsized, they were not all going to be permanently cancelled. Spending the time during an economic downturn with the specifiers could provide a huge uptake in sales 12 to 18 months after economic conditions improved.

Overall, Bernie Segrave was quite confident that sales would increase again in Asia. A big export order for two million paver units was being discussed in Japan. The market in South Korea was showing some interest and the appointment of an agent was being considered. (The market in South Korea was for bricks rather than pavers.) Increasing the portfolio of possible export orders in the pipeline was seen as the best way of gaining greater export sales.

The balance between export sales and domestic sales had shifted quite dramatically in the past twelve months. Whereas export sales had been high in 1998, the slump in 1999 had taken export sales to a low point. Conversely, while domestic sales had been slow in 1998, they had increased significantly in 1999 to a new high. The Australian housing market had experienced significant new housing approvals in 1998. While these had slowed down, market analysts were indicating that housing renovations would power the building industry into 2000 in anticipation of the GST (value-added tax) being approved by Parliament later in 1999.

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CASE 26: SPORTSMAKE: A CRISIS OF SUCCESSION

The case describes the corporate aftermath of the death of the founder-manager, Jim Claymore, of a publicly listed medium-sized sport-equipment company. He had been an inspiring, through also somewhat intimidating, hands-on manager. The company is marketing and design oriented and targets a “serious non-athlete” niche desirous of high-performance and durable products. A recent development in the firm’s strategy has been the acquisition of retail operations, and the firm is facing integration difficulties with a very large such acquisition (“Winter Sportsworld”). The doubt and challenge contingent on the transition from being an owner-run relatively informal organization to a diversified professionally managed firm crystallizes in the selection of a new CEO following the departure of Claymore’s son after only a year in the job.

There are two candidates for the position: the VP of corporate marketing and the VP of finance. The former, Tony Petroski, is a lifetime employee of Sportsmake with a strong track record in innovation in the winter-sports segment. In contrast to this “company man” and marketing background, the alternative, Marcia Davenport, is very much the professional manager and a relatively recent hire. Sportsmake has traditionally promoted from within, with Claymore heavily involved in the process. Davenport, however, had made a considerable impression on Claymore, and been significantly responsible for the listing of the company, its acquisition strategy, and the much discussed and delayed reorganization consequent upon Sportsmake’s growth.

The case could usefully serve as a vehicle for issues of strategic change, and how the position of CEO can be made to embody such change. More specifically, it illustrates the transition between organization forms that typically accompanies the growth of a firm (from simple start-up through functional form to diversified form). The case could therefore serve as a sampler of the forces that shape organizational form (see the Mintzberg reading in Chapter 8).

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CASE 27: S.A. CHUPA CHUPS

PART I: CASE SUMMARY AND SUGGESTED APPLICATIONS

Issues in the Case

S.A. Chupa Chups provides an excellent illustration of corporate expansion from a small, family firm to a major multinational. The various stages of expansion are described in detail, including the company's early growth to dominate its home market; its subsequent expansion into Europe, the United States and Japan; and Chupa Chups' more recent expansion into lesser-developed countries including Russia, China and India. The case also defines the systems and policies adopted by the company to facilitate its growth. The problems confronted by the company during the various phases are described in the first half of the case, along with Chupa Chups' resolution of these issues. These can be summarized as follows.

I. Early Days & Achieving Domestic Market Dominance

The case begins with the proposal by Enrique Bernat Fontlladosa, General Manager of the Spanish confectionery manufacturer S.A. Granja Asturias, to reduce the company's range of products from hundreds of sweets produced for one market to a solitary item aimed at several markets. The Board rejects this proposal, but by 1957 he acquires a majority share of the company and begins to implement his plan. The single product was a lollipop, introduced in 1958 under the brand name "Chups," from the Spanish verb chupar, which means to suck. (Chupa Chups is pronounced "Choo-pah Choops.") The company achieves recognition for this product and the brand through radio commercials with a musical slogan featuring the brand name. Early problems include finding appropriate wood for the lollipop stick. Even though Spain was still largely closed to foreign trade in the 1950's. Bernat decides to import wood from Central Europe.

As product demand grows, Bernat realizes he has to produce large quantities of lollipops at a low cost. Chupa Chups buys a machine manufacturer (Confipack) to design and produce factory equipment exclusively for Chupa Chups. This acquisition assures Chupa Chups' capabilities for both low cost mass production and product innovation. The company then implements several marketing techniques which were unusual for Spain at that time: media campaigns and intensive point of sale advertising, coupled with their own innovative distribution system. The company hires a manager from a well-known company experienced in distribution to manage their own system. Through the 1960's, Chupa Chups experiences strong domestic growth to the point where their brand name becomes synonymous with the product: in Spain, a lollipop of any brand still is called a Chupa Chups.

II. Foreign Expansion

Faced with domestic market saturation, Chupa Chups begins to look at foreign markets during the mid- to late-1960s. The company decides to maintain its narrow product focus

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but implements Enrique Bernat's original plan to aim that product at multiple markets. The company encounters problems with its growth plan, for example, with the lack of integrity of its French and American distribution partners. Management patiently waits and establishes alternatives in France—acquiring a plant in Bayonne for its common market production—before cutting off its French partner. In America, Bernat himself acts swiftly to replace the original distributor with another. Chupa Chups begins to eye Asian markets at this time, as well. The political turmoil in China prevents entry there, but Chupa Chups successfully enters the Japanese market.

Two other serious problems require resolution during this expansionary period. First, the company's dedicated distribution network grows too large and becomes a burden that is inconsistent with its internationalization strategy. Distribution is spun off as a subsidiary (Diversificación), managing both Chupa Chups products and third party distribution in the Spanish market. Second, sales flatten, leading to some discouragement within the company. Growth in the USA and Japan buoys the company through this time until the late 1980's when the company undertakes further expansion.

III. Entering Emerging Markets

Still committed to a single product strategy, Executive Vice President Xavier Bernat, eldest son of Enrique Bernat, champions the company's expansion into lesser-developed countries. While continuing to search for the right opportunity in China, the Soviet market begins to liberalize. Chupa Chups opens Neva Chupa Chups with a Russian partner on the day of the 1991 Russian coup and begins its roller coaster ride toward eventual profitability in this market in 1995. The problems and solutions to functioning in an emerging economy are chronicled in detail. Most importantly, Chupa Chups manages by rotating through the appropriate management teams and establishes reporting systems and relationships between headquarters and the joint venture. The lessons Chupa Chups learns from this first joint venture in a non-traditional market form the basis for its plans for similar ventures underway in China, as well as for India, Mexico, and soon Brazil, all countries with exploding birth rates and large market potential for a product still largely consumed by children.

IV. Management Process and Philosophy

The second half of the case describes the clearly articulated policies that have guided Chupa Chups' expansion. Financial reporting between headquarters and subsidiaries, and its global purchasing system are defined first. Then its marketing and advertising briefs and the guidelines for the company's selection of distributors in foreign markets are described. The final section covers the company's general management approach and philosophy, including the role of the Bernat family, the management decision process, and the company's commitment to staff recruitment and development

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Potential Audiences for the Case

Business students at the graduate level or participants in executive education programmer can analyze Chupa Chups' international growth. The case provides the opportunity to examine how companies grow internationally versus, for example, presenting issues/problems encountered by established multinationals.

The pitfalls, and potential solutions, associated with a steady expansionary approach are presented for analysis and discussion. These lessons can be usefully applied by MBA students who seek employment either in industry or with consultancies advising corporations on growth into multiple markets. Participants in executive programs can gain insight into potential problems and solutions that could develop as their corporations expand. Additionally, executive program participants from established multinationals might develop better insight into any of their competitors, which are expanding into their companies' markets.

Potential Uses of the Case

The Chupa Chups case may be used in a course or short program on international management/strategy. As stated, this may be used for a lecture or session on how to grow internationally. Therefore, the case might best be presented early in a course on international management to provide insight into problems and solutions, which can arise during corporate growth.

Suggested Student Assignments

The teacher may consider assigning the following questions in association with the case. Students may be asked to prepare slides in advance on each of these questions and to present them during the case discussion.

1. Identify the phases of development of S.A. Chupa Chups. What are the significant problems that arose during each phase, and how did Chupa Chups resolve them?

2. What have been the major factors that have contributed to Chupa Chups' success, especially in the first phase of internationalization when it focused on developed markets? What were the sources of its competitive advantage?

3. What is different about building businesses in non-traditional markets such as Russia, China and India?

4. What can we learn from Chupa Chups' approach to entering these markets in the second phase of its international expansion?

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Suggested Additional Readings

It is strongly urged that students be assigned the following readings [both of which are included in the textbook] in conjunction with this case to facilitate the class discussions described in Part II of these notes.

1. Christopher A. Bartlett and Sumantra Ghoshal, "Managing Across Borders: New Strategic Requirements," Sloan Management Review, Summer 1987.

2. John Stopford and Charles Baden-Fuller, "The Crescendo Model of Corporate Rejuvenation," Chapter 4, Rejuvenating the Mature Company, Harvard Business School Press, 1994.

Proposed Session Plan

For a 90-minute session for MBA or other graduate students, or for a 90-minute executive program session:

0 - 5 minutes Introduction. Fit of the case into the course or program. 5 -10 minutes Video clips (optional).10-35 minutes Case Discussion Question #1 and discussion of the

Stopford & Baden-Fuller chapter.35-75 minutes Case Discussion Question #2 and discussion of the Bartlett

& Ghoshal article.75-85 minutes Case Discussion Question #3.85-90 minutes Wrap-up.

By the end of the session the students should be able to:

- understand how a company manages growth.

- be able to apply this understanding to other companies, either in a purely analytical sense or in actual management.

Notations on the blackboards should facilitate the flow of students' thinking. Beginning on the left hand board with Question #1, note the actions, which had been taken by Chupa Chups during its different growth stages. These can be grouped under the headings (1) simplify, (2) build, and (3) leverage. The sequence of these then can be plotted on a graph adapted from the Stopford/Baden-Fuller model of stages of corporate renewal.

The discussion then flows to the middle board for Question #2 for the discussion of Chupa Chups' competencies, and how they were managed and transferred globally and locally by the growing multinational. These competitive advantages can be diagrammed in the format developed by Bartlett & Ghoshal to depict the importance of the interplay of (1) global efficiency, (2) national responsiveness, and (3) world-wide learning in

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building multinational competitiveness. The discussion will focus principally on Chupa Chups growth in traditional markets, but also can touch on these points with reference to how the company has set up its JVs in non-traditional markets.

Finally, the class concludes with a discussion of Question #3. Using the right hand board, develop a list of the key problems encountered in non-traditional markets, which are different from those arising in traditional markets. Simultaneously list Chupa Chups' responses to and resolution of these problems. This final discussion should focus on citing quite practical issues and solutions versus building a conceptual model for functioning in these markets.

During the wrap-up the teacher can reinforce the key learning points of the case and reiterate its fit into the overall course/program objectives.

PART II: ANALYSIS AND SEQUENCE OF DISCUSSION

The sequence of the analysis is intended to be iterative:

Begin by simply listing the events that mark the growth of Chupa Chups. These can be aggregated and analyzed via a modified Stopford & Baden-Fuller model, comparing Chupa Chups' development with the precepts for success defined by their model.

Students then analyze these actions to discern the competencies developed by the company to achieve its strategic objectives. The students are led to delve deeper and develop an understanding of how competencies were parlayed into global success by analyzing these competencies according to the Bartlett & Ghoshal model.

Finally, the students are asked to identify the practical difficulties and differences between operating in traditional and non-traditional markets and to cite the measures adopted by Chupa Chups to overcome these difficulties.

By the end of the session, students should arrive at an understanding of both conceptual models and of practical difficulties and solutions in managing international growth.

The videotapes can be used with the case as optional adjunct teaching tools. They may be used at the beginning of the discussion or as a conclusion.

Question #1: Identify the significant phases of development of S.A. Chupa Chups. What are the major issues that arose during each phase, and how did Chupa Chups resolve them?

Following a general introduction by the professor describing the fit of the Chupa Chups case within the course, a good opening question might be to ask the students the above question. A chronological review of the company and a discussion of the issues associated with its growth into traditional and non-traditional markets begins to elucidate the first goal of the case analysis, i.e., to examine how a company has grown

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internationally, and what were the management decisions taken at various stages of expansion. The answers to this first question also lay the groundwork for a deeper analysis later in the class.

The model for unlocking the answer is adapted from the Stopford and Baden-Fuller chapter. The teacher perhaps should point out that while this model was described by the authors as a pattern for corporate renewal, it can be a useful to understand and plant strategy for initial corporate growth.

In the Chupa Chups case, the Stopford/Baden-Fuller four-step model can be pared down to three stages: (1) simplify, (2) build, and (3) leverage. (The initial step in the Stopford and Baden-Fuller model—building and galvanizing the management team—actually has been a part of Chupa Chups management philosophy from the outset, and its dedicated management team has been a potent tool, which has been leveraged to contribute to the company's success world-wide.) Students can present prepared slides, while the teacher can write the points under the headings (1) simplify, (2) build, and (3) leverage, and can augment the information they have provided by encouraging further discussion. The teacher can then graph these points along the lines of the Stopford & Baden-Fuller model. The points raised could be listed as follows:

Simplify Leverage Build

Cut back to just one product, Process & technology JV skillsthe lollipop (Confipack): -standardized system

- high volume, high quality -continuous learning production & standardized

Product development—the stick products Flexibility- low cost–product variety - product differentiation

- distribution methods

Build brand: Risk management- advertising & point of sale - financingpromotion - JV contracts

Distribution: - self-distribution - unique system

Characterized by: Characterized by: Characterized by:strategic commitment improved product quality, vision, persistence,

branding, mgt. recruitment mgt commitment(e.g., from Coca-Cola).

The teacher may then connect these points to a modified version of the Stopford & Baden-Fuller model, which looks like:

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leverageStrategic and Corganizationalcomplexity build quick fix

B Asimplify

Business complexity

A: multi-product domestic confectionery companyB: single product domestic company C: single product global company

The first diagram shows a sequence of action that begins in the lower right box. Chupa Chups began as a multi-product confectionery company operating only in Spain (as Granja Asturias). Enrique Bernat radically simplified the product range to one item—the lollipop and transformed Chupa Chups into a single-product domestic company, as shown in the lower left box. Chupa Chups grew to saturate the Spanish market by building its process and product innovation technologies (Confipack), its branding and its distribution. It also built its management before venturing abroad into many traditional markets. It has been able to leverage its capabilities to become a global product producer/distributor, indicated in the upper right hand box, trading in 130 countries including, increasingly, non-traditional markets via its joint ventures.

Finally, the teacher should emphasize two points. First, these phases are neither so deliberate nor so discrete as the drawing implies. For example, Chupa Chups learnt from its mistakes as much as it followed a pre-conceived path, while for most companies these phases frequently overlap. Second, this process requires long-term commitment. Stopford and Baden-Fuller emphasize that the direct route from the lower right to the upper right box—the "quick fix"—usually leads to disappointing results. Competencies must be built over many years, and experience shapes the company's ability to understand and fully leverage its abilities.

Question #2: What have been the major factors which have contributed to Chupa Chups' success, especially in the first phase of internationalization when it focused on developed markets? What were the sources of its competitive advantage?

The class discussion then can be led deeper by using the Bartlett & Ghoshal model to analyze the interplay of these strengths as Chupa Chups built itself into a multinational. Again, students may present slides with their analysis of Chupa Chups' competitive advantages. The teacher can then elicit further points via class discussion and can illustrate the Chupa Chups' effective management of the interplay of these points along the dimensions of (1) global efficiency, (2) national responsiveness and (3) world-wide learning according to the tripartite Bartlett/Ghoshal diagram.

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A Local Global Company

Looking back over the growth of Chupa Chups from 1957, two dichotomies become apparent: how can a company be at once global and local as well as focused and diversified? Chupa Chups has managed to tread the middle path, which has potentially been the key to their success. How have they done this? Effectively, Chupa Chups has leveraged the three dimensional facets of:

-global efficiency -national responsiveness -world-wide learning

Chupa Chups apparently understood the forces, which were driving it to be both global and local. Once the decision had been made to concentrate its efforts on one product, it is evident that there were forces driving its globalization, namely:

- economies of scale in manufacturing and R&D—the capital intensity of the production process mandates this;

- similarities in use—Chupa Chups are usually "sucked."

- shared/common distribution.

- low transportation costs—it does not cost much to transport tens of tons of Chupa Chups.

At the same time, there were forces impacting its national responsiveness namely:

- cultural factors—these manifest themselves in product taste preferences and the acknowledgement of the need to have some tailoring of advertising campaigns to local tastes.

- trade barriers—which resulted in Chupa Chups setting up production plants in Russia, China and India through joint ventures, with additional facilities planned for Mexico and Brazil.

These forces have created a tension, but Chupa Chups has demonstrated its ability to simultaneously manage both globally and locally and to manage this tension across distances and across cultures. The specific capabilities, which are managed simultaneously by Chupa Chups, are analyzed utilizing the Bartlett & Ghoshal model and include:

Global Efficiency

Chupa Chups has worked to achieve global efficiency, and the following are the outputs achieved through the management of this dimension:

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- all components used in the production of Chupa Chups with the exception of sugar and glucose are sourced centrally in Spain.

- production of the complex lollipops (i.e., everything except the "Chupa Chups Classic") has been retained within the Spanish and French plants thus ensuring critical mass. Only in the face of huge market demand and after developing worker experience was the decision made to produce the sophisticated products in Russia.

- Chupa Chups' distribution network distributes products for third parties thus enabling the amortization of the fixed costs across a larger volume of goods.

National Responsiveness

The dichotomy between national responsiveness and global efficiency is managed well at Chupa Chups. The company has a clear understanding of those factors which demand adherence to local conditions and this is reflected through:

- the writing on the wrapper of the lollipop reflects the language of the local country. This is particularly true of those lollipops, which are more of a “game” nature, and instructions have to be followed (e.g., application of a tattoo).

- the flavors and colors of the lollipop reflect local preferences (e.g., salted licorice lollipop in Finland, lighter colors in China, etc.).

- Chupa Chups has adopted marketing communication to local market conditions and selects the "best" distributor for each market.

- multiple nationalities represented among the staff.

With respect specifically to non-traditional markets:

- production planned around local worker skills.

- joint venture partnerships & financing are arranged appropriately for each country.

World-wide Learning The organization of the company has facilitated world-wide learning. This has manifested itself through:

- open plan offices which foster lively debate and resolution of queries between teams, particularly within the marketing department as well as between the Bernats and staff.

- frequent direct communication between headquarters and subsidiaries.

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- teams are transferred between subsidiaries as well as between headquarters and subsidiaries, thus facilitating the cross pollination of best practice, ideas and corporate culture.

- sharing of information on successful advertising/promotion campaigns to ensure the cross insemination of best practice.

- Confipack plays a major role in meeting production needs (e.g., designing equipment for new products) as well as in setting up new production lines and advising on machine maintenance.

All of these points may be depicted during the discussion along the lines of the diagram on the following page.

Global Efficiency: · plants with minimum efficient scale· standardized products· processed technology· distribution and brand· centralized purchasing

National Responsiveness: · product & packaging modification· marketing & distribution re: non-traditional markets add· JVs· financing· production according to worker skills

World-wide Learning: · central marketing team· Confipack· career path: management deployment· multiple nationalities· office design and philosophy· investment in communication

As a final point in this discussion, Chupa Chups' distribution of activities and tasks along these same dimensions can be grouped as shown below. The short arrows indicate that global experience and responsiveness to local market needs leads to integrated learning. In turn, this learning contributes—via a process of continual renewal shown by the arcing arrows—to further global efficiency and local responsiveness.

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Global Local· Process technology · Product adoption· Purchasing · Distribution & marketing· Brand management · Facilities management· Product strategy · JV relationship· Financial strategy · Financing

Integrated Learning· Family: ambition, values, and commitment· Confipack· Financial systems· Brand control· Marketing team

Question #3: What is different about building businesses in non-traditional markets such as Russia, China and India? What can we learn from Chupa Chups' approach to entering these markets in the second phase of its international expansion?The teacher may pose this last question as a means to conclude the discussion on a practical note. A brief discussion of the problems encountered by Chupa Chups in non-traditional markets, and the differences in operating in these—versus traditional markets—along with the company's responses to these issues, will provide students with a real life example of successful international management. The issues/responses can be written on the right hand blackboard as follows:

Problems/Differences Responses

trade restrictions local JV operations, including production

lack of local knowledge partner choicerisk JV contracts, financingtaste/market differences local adaptationneed for persistence proven and trustworthy GMs

Wrap-up

The teacher can conclude by summarizing the key points from each of the three questions, pointing out that both conceptual models for growth and practical solutions to problems in non-traditional markets have been analyzed. The lessons learned from the Chupa Chups case can be applied by graduate students or executive program participants to real situations encountered by other growing multinationals.

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Supplementary Audio Visual Materials

Two videotapes are available for purchase along with the case as adjunct teaching tools:

1. Spain Means Business series produced by the British Broadcasting Corporation, 1993: "Made in Spain" is one chapter in the series that features S.A. Chupa Chups. Includes extensive management interviews along with footage of manufacturing, market research techniques, and consumers of all ages enjoying Chupa Chups products, including football star Cruyff and members of the Barcelona football club and their fans.

2. Leck Mich: Music and images from Chupa Chups' advertising footage for its German market.

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CASE 28: MOUNTBATTEN AND INDIA

Overview

Usually we use the Mountbatten case as the last case in the course. It summarizes many aspects of strategy formulation, strategy formation, organization, and implementation. It is an exciting case that plays on a world scale. Students and executives tend to identify with the players and the historic events depicted. The case involves a negotiation strategy in which Mountbatten is the facilitator as well as one of the key players. Mountbatten is given “plenipotentiary” powers by the prime minister of England to negotiate the release of India from the British Empire. The case is a summary of the strategic events and interactions, which ultimately lead to that goal. Through the movie “Gandhi,” students have a vague sense of the events surrounding these decisions. But the movie did not bring out Mountbatten’s role or any of the crucial interactions involved. An excellent documentary by PBS, the Public Broadcasting System, did go into these events somewhat more. However, since this was a very long series, few participants will really know the history.

Session Structure

The overall structure of the session involves first understanding some of the political and power interplays that preceded Mountbatten’s departure for India. Second, one can look at the strategy itself and analyze how one can design a “win-win” strategy for Mountbatten and England in this complex environment. Next, one can look at the various steps in the management of this negotiation process. It is helpful to break the process down into three stages: (1) the actions Mountbatten undertakes soon after coming to India, (2) his actions in dealing with the four principal negotiators, (3) his management of the overall process and the understanding one can draw from his methodologies for other situations. Then, it is helpful to evaluate the process and its outcomes from the viewpoint of all the major parties. Usually, students and executives praise Mountbatten elaborately.

About 25 minutes before the class is over, one can hand out Mountbatten and India (Part II) contained in this note. We allow about 5 minutes to read this very quickly. Then we ask “What do you think of Mountbatten and his negotiation process, now?” The Part II note sets forth the horrors that occurred as India fell apart after its partition. Usually, there are some comments, which mildly change the evaluation of the management process derived above. Then, as a final shocker, we hand out Mountbatten and India (Part III), also contained in this teaching note. The students are then put in an active mode and asked, “OK. What do you do now if you are Mountbatten?” Having critiqued his actions and found them brilliant, or somewhat wanting, the students are asked to take action themselves. Now, one can move on to a direct strategy involving action of major forces in a complex and unknown situation. This note will cover the handling of all three parts of the case.

PART I

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This session opens by asking, “What should Mountbatten have done before he left England? Why did he do the things he did?” This brings out some very interesting political points. Chief among these are the following:

A. Why does Mountbatten accept? It is clear he is risking both his life and his reputation. However, his values and his sense of noblesse oblige require that he take on the challenge. There is no greater challenge for his career than this. If successful, it will be an even greater capstone than his World War II successes.

B. Why does Attley select Mountbatten? Students usually respond, “Because of his knowledge, because of his sympathy with the movements in Southeast Asia, because he is very able and could handle this difficult process, etc.” All of this is true. But, Attley is also setting up a win-win situation for the Labour Party. If Mountbatten is successful, Attley wins. If Mountbatten fails, Mountbatten (not the Labour Party) fails. Attley can say, “If Mountbatten couldn’t do it, no one could have.” This is a common methodology used by political figures. They select a person of high rank from the opposing party to represent the country on its most complex negotiations, thus insuring the party’s own security.

C. Why does Mountbatten make these particular demands? Many of them are simply symbolic. He wants to establish a relatively higher profile so that he can increase his bargaining leverage with both Attley and the Indians. The establishment of a precise date for the break is a very powerful symbol that England will, in fact, act this time. Discussions have been going on for a long time, and there is much distrust on the part of the colonial leaders. To have any hope of success, Mountbatten had to signal a clear break with the past. Several of his moves were designed with this in mind.

D. Why does he ask for plenipotentiary powers? Students will usually respond, “To have the authority he needs to negotiate.” One can then ask, “Does the government give up anything in this process? Does it actually gain by this delegation?” Students tend to be perplexed at first. Then they slowly realize that the government can keep enough controls over Mountbatten to protect its own interests. Both Mountbatten and the government gain by the plenipotentiary powers. Mountbatten gains flexibility in negotiations. He gains apparent power in the negotiations. Yet, he still must refer back to London for final approval. This “double approval” process is useful in most negotiations to add leverage to the powers of the negotiating party.

E. What strategic controls does the government need? What strategic controls does it have? The most important controls it has are “goal controls.” By making sure that Mountbatten understands and identifies with the goals it wishes to achieve, the government has its strongest control over the process. If Mountbatten does not share these goals sincerely, he will unconsciously undermine the government’s position and perhaps destroy its very purposes in the negotiation. Whenever one has a representative negotiating at a long distance, the goal identity of that person should be carefully assured. Selection of the person to represent England is the second strategic control the

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government has. By selecting a person of stature, skill, understanding, and values appropriate to its goals, the government has the greatest possible insurance that its own purposes will be well served.

Approval control is another important level of strategic control. Although Mountbatten has “plenipotentiary powers,” he cannot actually commit England. The government has the ultimate control by approving any treaty that he may come up with. Organizational control is another powerful strategic control. The government controls the appointments Mountbatten may make to his team. It also has the right to remove Mountbatten from his post. These two powers also insure that Mountbatten cannot make commitments that the government would not wish to honor. Open communications are an important strategic control. The government must make sure that it has a way of understanding what Mountbatten is doing in time to use its other controls. This portion of the control system is not specified in the case write-up. However, the Prime Minister would insist on periodic communications and, if wise, have independent channels of communications to check on what Mountbatten’s team might be saying.

Coalition power is another form of control. By having the capacity to offer or withhold Commonwealth status, presumably a large bargaining chip, the government can control to a large extent whether a coalition takes place and the terms of that coalition.

Commitment controls are another major strategic control. Mountbatten cannot call on military resources, fiscal resources, or other implied resources of the government, without its own vote or approval. Again, these implicit constraints bound the realm in which Mountbatten can really negotiate or cause the British government to move in directions it may not desire. One should note that these tie in very well with the concepts of “grand strategy” developed early in the course. Corporate level or grand strategies tend to involve setting major goals, setting controls on operations, establishing communications systems, motivations systems, overall organization structures, key appointments, etc.

Strategic Analysis and Strategy Formulation

Before Mountbatten leaves for India, what kinds of strategic analysis should he have undertaken? How does one determine strategy in this kind of situation? This is a good point at which to introduce some ideas about world-scale strategic analysis. In this type of situation, one first looks at the major forces and movements in the world with a view to aligning strategy in congruence with these forces and movements. If a nation (or large corporation) does not align itself with such forces, it will either surely lose, or have to use such inordinate amounts of resources to resist these forces that it will become exhausted. It is interesting to ask the students, “What were the most important forces at play in the world at that time?” Clearly, the following are among the most important: anti-colonialism, the revival of religious movements, nationalism, socialism, restructuring of the less developed world, emergence of the “Third World” as a political force, Britain’s decline as a military and industrial power, the emergence of the East-West conflict, the Cold War confrontation between the United States and Russia, the emergence of China (a

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next-door neighbor) as a communist state, the attempt by Russia to subvert the governments of neighboring nations and convert them to Stalinist communism. Britain must recognize these great forces and position itself in a way that it can “win” in the long run. The forces are too powerful for Britain alone to resist.

Next, one analyzes the major interests representing some of these forces in this particular negotiation. In this case, the most powerful interests involved are: (1) those of the Congress Party, (2) those of the Maharajas, (3) those of the major religious movements (Hindu, Moslem, and Sikh), (4) those of the extreme left political activists looking to destabilize India, and (5) those of the professional civil service and army in India. Each of these interests represents a power base that Mountbatten must deal with. He must analyze the nature of that power base and how important it is to his most important goals. He must assess the possibility of coalitions and counter-coalitions among these interests.

The next factor he must analyze is the actors who will lead these “interests.” Key among them are of course Nehru, Gandhi, Patel, and Jinnah. Not only must he analyze the interests they represent, but also their own peculiar relationship to these power bases. Such a multi-level analysis of forces, interests, and actors is essential in any world-scale negotiation.

Finally, Mountbatten must analyze any potential constraints to reaching his goals. These may be provided by the powers described above, or they may come from other forces within his own establishment. He must find a workable coalition among forces, interests, and actors both within his own power base and those of opposing parties. This requires an assessment of his own options and those of the opponents. By keeping his opponents separated in the early stages of the negotiation, he can increase the leverage of his own coalitions and help prevent coalitions from forming among his opponents.

As a portion of the strategic analysis, Mountbatten must determine what goals provide a feasible focal point around which the needed joint coalition can form. The key elements in this appear to be: (1) establishing a British Commonwealth of multi-racial nations with India in it, (2) maintaining the influence of Britain in world affairs, (3) avoiding bloodshed if possible, (4) moving as rapidly as possible to avoid undue risk and expenditure of resources, (5) making sure that the world feels that the Indians are responsible for whatever outcome occurs, and (6) obtaining a broad-based Indian agreement which gives legitimacy to whatever outcome does occur. In such a complex situation, Mountbatten must know that the ultimate outcome is “unknowable.” Consequently, he has to establish a flexible posture relative to each individual goal to ensure that Britain wins regardless of how forces may combine to produce extraordinary later outcomes.

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Managing the Early Process

At this point, the professor can begin to build whatever process management model he or she prefers. However, certain aspects of Mountbatten’s management of the early stages of his process seem clear. These are briefly outlined below:

A. Understanding what goals are feasible. This is one of the purposes of Mountbatten’s early inquiries with his own staff and the power centers in India and Britain.

B. Understanding the system constraints. Again, Mountbatten uses multiple information points to help him understand the constraints of timing, key personalities, and powerful interests.

C. Building personal credibility. Mountbatten’s early actions in India in meeting with Indian leaders, being more visible, making a speech at the coronation, etc. build his personal credibility and help him bypass the power base of others.

D. Changing the flux of the decision process. Mountbatten has to send signals that something has changed radically, and that he is the focal point of that change. This causes diffuse powers to focus on him and increases his leverage.

E. The use of symbols. Mere words will not make this point. Consequently, Mountbatten changes a number of symbols, painting the austere offices of his palace, riding through the park, inviting Indians to his table, having Indian aides de camp, etc.

F. Building his information base. Through Ismay, Abell, the provincial governors, his own intelligence services, the police, etc. Mountbatten quickly builds his information base by using multiple channels of information.

G. Building a power base. Crucial to any movement in the negotiations is the perceived power base of Mountbatten. He improves this first by obtaining “plenipotentiary” powers, and forming tacit coalitions with Nehru, Gandhi, and Patel. He extends his power base by bypassing those of the key players and obtaining identity with the Indian people. All of these elements help him gain flexibility and bargaining leverage.

H. Forming coalitions. By forming coalitions both in Britain and in India, Mountbatten helps to define the zone within which decisions can be made and to predispose various parties to these decisions.

I. Controlling the sequence of events. By controlling the sequence in which he sees the key players, reveals his intentions to the Indians and English, allows interactions among key players, and deals with critical issues, Mountbatten can control the process and possibly its outcome.

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J. Splitting opponents. By keeping his opponents separated, Mountbatten avoids counter-coalitions or the building of their information base to a level that is higher than his own. He tries to use whatever small differences exist to leverage his own positions.

K. Isolating key issues. Mountbatten quickly isolates those issues which are under his control and those which are not. He then concentrates on those which he can possibly control—i.e., the issues of timing, partitioning, and joining the Commonwealth.

L. Moving through zones of indifference. By finding those areas where there are common interests or his opponents are not overly concerned, Mountbatten can build a more powerful apparent coalition than may really exist. He holds off on those issues which are most likely to split his coalition, until after the coalition is heavily committed.

M. Setting few targets. Mountbatten does not lay out a complete program or try to deal with all of the issues faced by the major parties. Instead, he focuses on the few strategic goals described above. This keeps Mountbatten and his opponents from diffusing their efforts and helps to achieve a higher result in the end.

N. Maintains multiple channels of information. To avoid becoming isolated—and to have more information than anyone else in the negotiations—Mountbatten purposely keeps multiple channels of information open to his governors, staff, police, intelligence units, etc. Nehru himself becomes a crucial element in providing Mountbatten with information which is useful in managing the process. His “private conversations” with key players ensure that he increases his information base without necessarily sharing it with all players.

O. Choosing a few crucial action points. Mountbatten is a master at using bluff, threat, cajolery, etc. to achieve a series of partial movements forward. He does not waste effort on things he knows he cannot deal with or control.

P. Obtaining incremental agreement. Through the steps above, Mountbatten first obtains agreement “in principle” from most of the key players. He then tests the limits of these “principles” by raising specific issues as they come up. He does not try to get detailed agreement until the very last moment. In fact, he withholds the details of the plan until the famous scene in which he slaps the plan down on the table in front of the group.

Q. Controlling timing. Crucial to the entire process is controlling the timing at which the various key elements must be decided or when key players come together. After understanding the nature of the partial coalition he can create between Nehru, Gandhi, and Patel, he moves to try to bring Jinnah into this as far as he can. In doing this, he realizes the ultimate constraint of Jinnah’s position. He uses the partial agreements already made to force detailed agreement. He does this by controlling deadlines and the possibility of public embarrassment of key players.

R. Maintaining flexibility. Since he cannot know either the sequence of events in detail or the outcomes which may be possible, Mountbatten maintains his own personal

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flexibility and the flexibility of his positions as long as possible. Even at the last moment, he is willing to rewrite a thoroughly drafted proposal in order to accommodate what he perceives as a disastrous level of opposition from Nehru. He does not dwell on defeats, but works on those elements over which he can maintain some control.

S. Focusing on programs. When Mountbatten cannot get full agreement on the goals of releasing India from the Empire, he shifts over and concentrates on the program itself. He can get the key players to agree on release of India, although they would violently disagree on the specific goals (i.e., a separatist Moslem state, etc.).

T. Forming strategy dynamically. Although the broad outlines of Mountbatten’s strategy are clear at the beginning of his trip to India, the ultimate nature of the strategy cannot be worked out in advance. It must be created interactively as events and powerful forces interplay with each other. Note that the ultimate strategy which is adopted was not one which Mountbatten would have accepted at the beginning of the processes analyzed above.

U. Being lucky. One should also note all of the results achieved were not acts of intellect. Mountbatten was clearly lucky on a number of occasions when events turned in his direction. He could easily have been killed at a number of different points in the process.

Evaluating Mountbatten’s Actions

At this stage it is interesting to ask whether Mountbatten “was a good manager.” Generally, everyone thinks he did a superb job. One can then ask, “Why is he a good manager? What makes Mountbatten a good manager?” Typically, the answers come back in terms of Mountbatten’s personal style—i.e., he is said to be:

A. Confident.B. Charming and charismatic.C. Persuasive.D. Flexible, not hung up by mistakes.E. Courageous, optimistic, dramatic.F. Patient, a workhorse, a leader.G. He is an organizer, he chooses people well, uses them well, and relates to individuals.H. He is decisive, accepts reality, and deals with what he can affect.I. He understands politics and deals with the politics of the situation.J. He gives credit to others rather than seeking it for himself (i.e., the Gandhi plan).

At this point one can raise a series of other questions. For example, one can ask, “Was there clear planning at all stages? Was everyone well served by the solution? What about the Sikhs? Did Mountbatten really understand the situation? Was his Balkanization plan realistic? Did he deal with the politics more than the real facts of the situation? Was he overwhelmed by the personal information received on his visits? Did he use his power to go directly to the people? Should he have done something about

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Jinnah? Eliminate him? Destroy Jinnah’s credibility? Bypass his power base? Why had he not selected a date for freedom in advance? Did he do the kind of detailed planning that would have helped with the transition? Did he really involve the new leaders in such planning so that they would know what they were getting into?”

One should not overdo these criticisms. However, raising a few of them leads well into the next section.

PART II

At this stage, one can hand out copies of the Mountbatten and India Part II case contained in this note. This should not be handed out in advance. Otherwise, the students will second-guess the entire process. It undercuts the drama of the presentation. The professor should allow about 5 minutes to read this short “case.”

Usually the students are a bit stunned and confused. They may be a little defensive because of their effusive praise of Mountbatten. Consequently, the professor should ease them into the next discussion by saying, “The book, Freedom at Midnight, continues with 150 pages of such atrocities. What should Mountbatten have done? How could the process have helped prevent some of this? Was the process itself at fault?”

Usually the students add a few items to their earlier critique. Some better transitional planning could have taken place. Some more involvement of the leaders in detailed planning would have helped. Reorganizing the armies to help in the transition might have facilitated matters. Perhaps the process of dividing his opponents also kept Mountbatten from creating the unity they needed to make the result succeed. And so forth.

However, usually the students then conclude that there was very little—given the strong antagonisms held by the different interest groups—that Mountbatten could have done. This kind of result seems to have occurred in numerous other areas when local nationalist groups took over upon the withdrawal of colonial power. The antagonisms were so great that atrocities continue even today.

PART III

Leaving about 10-15 minutes for discussion, the professor should now hand out the Mountbatten and India Part III case.

This little “one-page case” poses the student with still another dilemma. What should (can) Mountbatten do now? Why does Mountbatten say, “OK, I’ll do it.” What are the critical factors he must deal with and how can he handle them? By promising the support of Britain and the Commonwealth when needed, Mountbatten had no choice but to accept this particular task, no matter how difficult it may seem. The more relevant question is,

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“Strategically what should he do? Can he really have any effect?” The following steps summarize—very briefly—what is needed and what happened. Mountbatten must:

A. Create a power base—Mountbatten first asks the three Congress Party leaders Patel, Nehru, and Gandhi to create an Emergency Council. Jinnah is not available for this purpose.

B. Avoid betrayal of leaders—Mountbatten immediately warns the leaders that their supporters “will never forgive them” if he (Mountbatten) is found to have been put back in power after Independence. Consequently, all of the parties agree that none of them will talk about what happens in this meeting until the last of them is alive. By a quirk in history, Mountbatten is that person. To keep the formalities of power in place, he recommends that the Council ask him to be its advisor. He then says, “As your advisor I suggest to the Council....” And he very strongly acts to keep the Council making the formal decisions while he merely is an advisor.

C. Build an information base—Since the situation is in great confusion, Mountbatten immediately establishes a command center into which all information can flow. This helps him and the leaders understand the situation in the best manner possible.

D. Avoid British exposure—In order to avoid subverting the carefully laid position that “the Indians must be responsible for whatever happens,” Mountbatten does not want to commit any British forces. He can commit British aircraft without substantial exposure, as long as they do not engage in significant military actions. Otherwise, British troops must be used as little as possible.

E. Identify resources—Mountbatten begins to look for whatever forces are available. A few of the military units are still moderately intact. Some local police forces still have some control. Most of the bureaucracy, however, is beginning to collapse. Fortunately, some of the Maharajas have their own local fighting forces or armies. Can the new government strike a deal with the Maharajas to stabilize the situation without risking their takeover of the country?

F. Concentrate at key points—Even with the limited forces at hand, Mountbatten must concentrate these forces in a few crucial places. What are they? Students usually conclude: Delhi, Calcutta, the border area, and the trains. Mountbatten tries to concentrate his forces in these positions and uses his aircraft to provide the appearance of protection above the trains moving people north and south toward or from Pakistan. He tries to provide an armed force on the trains, where the worst atrocities have often occurred.

G. Build an organization—As quickly as possible, the Emergency Council tries to reform police forces in each of the critical areas. However, this occurs relatively randomly.

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H. Use the leaders’ power—Gandhi volunteers to go to Calcutta to try to calm that crucial city. He gets a leading Moslem to agree to live in the same house with him. Gandhi says that he will make his life forfeit if the Hindus kill Moslems. He asks that the Moslem leader agree to give up his great wealth if Moslems kill Hindus. The two men stand together—despite great skepticism—and slowly calm the Calcutta area. Gandhi begins one of his great fasts to attract attention to the need for people to stop their slaughter. Slowly, Calcutta calms down as people move out of Calcutta into Bangladesh and from Bangladesh into India.

Once Gandhi feels that Calcutta is secure, he moves to Delhi to try to work the same miracle. Again, he undertakes a fast, saying it will be a fast unto death unless the country stops its madness. A few days into his fast, he is assassinated in his garden after saying his prayers. The people around Gandhi immediately call Mountbatten and begin to say, “It was the Moslems who killed Gandhi.”

Final Conclusions

Mountbatten rushes to the garden where Gandhi has been assassinated. He immediately calls out, “Stop, you fools! Don’t you know it was a Hindu?” At that moment Mountbatten does not know that in fact an extremist Hindu sect gunned down Gandhi. However, this is a gamble, which once again pays off for Mountbatten. While the police and security forces look for the assassins, Mountbatten and the Indian leaders use Gandhi’s death to mesmerize the nation and tranquilize it. Throughout the country there is mourning for the funeral. Throughout the country Gandhi’s death and funeral preparations are covered in detail by radio and cinema. In the meantime, the trains carrying people north across the Pakistan border and bringing them south into India and those moving people into and out of Bangladesh continue the giant exodus. The great leaders from all nations come to India to honor Gandhi. The relative calm that the funeral creates assists greatly in the massive movement of millions of people from their homes to new abodes. Despite many more horrible incidents, Gandhi’s death pushes the transition steadily toward its conclusion.

Telling this part of the story makes a dramatic ending to the case and puts the students in an action mode, rather than merely critiquing the actions of another person. We strongly urge that the professor collect all copies of Parts II and III of the case so that they do not get into the “fraternity file system.” The drama of these two additions makes the case lively and relevant year after year.

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MOUNTBATTEN AND INDIA

Part II

It would be unique, a cataclysm without precedent, unforeseen in magnitude, unordered in pattern, unreasoned in savagery. For six terrible weeks, like the mysterious ravages of a medieval plague, a mania for murder would sweep across the face of northern India. There would be no sanctuary from its scourge, no corner free from the contagion of its terrible virus… Everywhere the many and the strong assaulted the weak and the few… Communities that had lived side by side for generations fell upon one another in an orgy of hate. It was not a war; it was not a civil war; it was not a guerrilla campaign. It was a convulsion, the sudden shattering collapse of a society. One act provoked another, one horror fed another, each slaughter begot its successor, each rumor its imitator, each atrocity its counterpart, until, like the slow-motion images of a building disintegrating under the impact of an explosion, the walls of society crumbled in upon each other.

The Punjab, August-September 1947

The disaster was easily explained. [The partition] line had left five million Sikhs and Hindus in Pakistan’s half of the Punjab, over five million Moslems in India’s half. Prodded by the demagoguery of Jinnah and the leaders of the Moslem League, the Punjab’s exploited Moslems had convinced themselves that somehow, in Pakistan, the Land of the Pure, Hindu moneylenders, shopkeepers and amindars (aggressive Sikh landlords) would disappear. Yet, there they were in the aftermath of independence, still ready to collect their rents, still occupying their shops and farms. Inevitably, a simple thought swept the Moslem masses: if Pakistan is ours, so too are shops, farms, houses and factories of the Hindus and Sikhs. Across the border, the militant Sikhs prepared to drive the Moslems from their midst so that they could gather onto their abandoned lands their brothers whom [the partition’s] scalpel had left in Pakistan.

And so, in a bewildering frenzy, Hindus, Sikhs, and Moslems turned on one another. India was ever a land of extravagant dimensions, and the horror of the Punjab’s killings, the abundance of human anguish and suffering that they would produce would not fail that ancient tradition. Europe’s people had slaughtered one another with V-bombs, howitzers, and the calculated horrors of the gas chambers; the people of the Punjab set out to destroy themselves with bamboo staves, field-hockey sticks, ice picks, knives, clubs, swords, hammers, bricks and clawing fingers. Theirs was a spontaneous, irrational, unpredictable slaughter. Appalled at the emotions that they had inadvertently unleashed, their desperate leaders tried to call them back to reason. It was a hopeless cry. There was no reason in that brief and cruel season when India went mad… The gutters of Lahore ran [literally] red with blood. The beautiful Paris of the Orient was a vista of desolation and destruction. Whole streets of Hindu homes were ablaze while Moslem police and troops stood by watching. At night, the sounds of looters ransacking those homes seemed like the crunch of termites boring into logs. At his headquarters at Braganza’s Hotel, the Gurkhas’ top officer had been besieged by a horde of pathetic,

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half-hysterical Hindu businessmen ready to offer him anything, twenty-five, thirty, fifty thousand rupees, their daughters, their wives’ jewelry, if only he would let them flee in his jeep the hell Lahore had become. In nearby Amritsar, broad sections of the city, its Moslem sections, were nothing but heaps of brick and debris, twisting curls of smoke drifting above them into the sky, vultures keeping their vigil on their shattered walls, the pungent aroma of decomposing corpses permeating the ruins. [340-342]

For hundreds of thousands of Punjabis, the first instinctive reflex action in the cataclysm shaking their province was to rush toward the little brick-and-tile buildings that offered in each important town a reassuring symbol of organization and order—the railroad station. The names of the trains that, for generations, had rumbled past their concrete platforms were elements of the Indian legend and measures, as well, of one of Britain’s most substantial achievements on the subcontinent… Now, in late summer 1947, those trains would become for hundreds of thousands of Indians the best hope of fleeing the nightmares surrounding them. For tens of thousands of others, they would become rolling coffins. During those terrible days the appearance of a locomotive in scores of Punjabi stations provoked the same frenzied scenes… In a concert of tears and shrieks, the crowd would throw itself on the doors and windows of the cars. They jammed their bodies and the few belongings they carried into each compartment until the train’s flanks seemed to expand from the pressure of the humans inside. Dozens more fought for a handhold at each door, on the steps, on the couplings until a dense cluster of humans enfolded each car like a horde of flies swarming over a sugar cube. When there were no handholds left, hundreds more scrambled onto their rounded roofs, clinging precariously to their hot metal until each roof was lined by its dense covering of refugees . . ..

[For untold thousands, the refugee trains became horror chambers]… After waiting for six hours for their train to leave the station of the little Pakistani town in which he had taught for twenty years, Nihal and his family finally heard the shriek of the locomotive’s whistle. The only departure it heralded, however, was that of the engine. As it disappeared, a howling horde of Moslems swept down on the station brandishing clubs, homemade spears and hatchets. Screaming “Allah Akhbar” (“God is great”), they charged into the train, lashing at every Hindu in sight. Some threw the helpless passengers out of their compartment windows to the platform, where their colleagues waited like butchers to slaughter them. A few Hindus tried to run, but the green-shirted Moslems pursued them, killed them and hurled them, the dead and the dying, into a well in front of the station. The schoolteacher, his wife and six children clung to each other in terror in their compartment. The Moslems battered their way inside and began to shoot… [354-355]

The Moslems, September 1947

India’s machinations were not the real threat to Pakistan. The new nation, like its Indian neighbor, was about to be engulfed by the most massive migration in human history. The violence racking the Punjab was producing its inevitable result, the result sought by the desperate men behind it on both sides of the border. From one end of the Punjab to the

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other, taking whatever possessions they could carry, by car, bicycle, train, mule back, bullock car and on foot, terrified people were fleeing their homes, rushing in headlong flight toward any promise of safety. They would produce an exchange of populations, an outpouring of humanity on a scale and of an intensity never before recorded. By the time the movement reached flood tide in late September, five million human beings would clog the roads and fields of the Punjab. Ten and a half million people—enough to form, if they joined hands, a column of miserable humans stretching from Calcutta to New York—would be uprooted, most of them in the brief span of three months. Their unprecedented exodus would create ten times the number of refugees the creation of Israel would produce in the Middle East, three or four times the number of Displaced Persons who had fled Eastern Europe after the war.

For the Moslems of the Indian town of Karnal, north of Delhi, the word was announced by a drummer marching through their neighborhoods, thumping his drum, proclaiming in Urdu: “For the protection of the Moslem population, trains have arrived to carry them to Pakistan.” Twenty thousand people left their homes within an hour, marching off to the railroad station to the beat of that drummer. A town crier informed the two thousand Moslems of the Indian town of Kasauli that they had twenty-four hours to leave. When they were assembled at dawn the following morning on a parade ground, all their belongings except one blanket apiece and the clothes they wore, were taken from them. Then, a pathetic gaggle of people, they started to walk toward their Promised Land…

No one was immune. The Moslem patients at the Lady Linlithgow Tuberculosis Sanatorium in Kasauli were ordered out of the clinic by their Hindu doctors. Some of them had only one lung; others were recovering from surgery, but they were taken to the sanatorium’s gates and told to start walking to Pakistan. In Pakistan the twenty-five sadhus of the Baba Lal ashram were driven out of the buildings where they had devoted their lives to prayer, meditation, yoga and Hindu study. Wrapped in their orange robes, their saint, Swami Sundar, on the ashram’s miraculous white horse at their head, they marched off chanting mantras, while behind them a mob set their ashram ablaze… [350-351]

Each day at dawn as reconnaissance pilots took off to pick the columns up again, refugees emerged from under the mantle of night to crawl a few more miles toward safety. The sight spread out below their wings on those September mornings was a spectacle such as no human eyes had ever beheld. One pilot, Flight Lieutenant Patwant Singh, would always remember “whole antlike herds of human beings walking over open country spread out like cattle in the cattle drives of the Westerns I’d seen, slipping in droves past the fires of the villages burning all around them.” Another remembered flying for over fifteen breathtaking moments at 200 miles per hour, without reaching the end of one column. Sometimes, slowed by some inexplicable bottleneck, it bulged into a thick cluster of humans and carts, and then became a thin trickle a few miles on, only to coagulate once more into a bundle of people at the next roadblock.

By day, pale clouds of dust churned by the hoofs of thousands of buffaloes and bullocks hung above each column, stains along the horizon plotting the refugees’ advance. At

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night, collapsing by the side of the road, the refugees built thousands of little fires to cook their scraps of food. From a distance, the light of their fires diffused by the dust settling above the columns merged into one dull red glow…

It was not just a brief trip to another village those helpless Indians and Pakistanis were making. Theirs was the trek of the uprooted, a journey with no return across hundreds of miles, each mile menaced with exhaustion, starvation, cholera, attacks against which there was often no defense. Hindu, Moslem and Sikh, those refugees were the innocent and the unarmed, illiterate peasants whose only life had been the fields they worked, most of whom did not know what a viceroy was, who were indifferent to the Congress Party and the Moslem League, who had never bothered with issues like partition or boundary lines or even the freedom in whose name they had been plunged into misery. [376-377]

Delhi Riots

In Delhi, capital city of India, it began with the slaughter of a dozen Moslem porters at the railroad station. A few minutes later, a French journalist, Max Olivier-Lecamp, emerged into Connaught Circus, the commercial heart of New Delhi, to discover a Hindu mob looting its Moslem shops and butchering their owners. Above their heads, he saw a familiar figure in a white Congress cap whirling a lathi, beating the rioters, showering them with curses, trying by his actions to arouse the dozen indifferent policemen behind him. It was Jawaharlal Nehru, the prime minister.

Those attacks were the signal for commandos of Akali Sikhs in their electric-blue turbans and the R.S.S.S. with white handkerchiefs around their foreheads to unleash similar attacks all across the city. Old Delhi’s Green Market with its thousands of Moslem fruit and vegetable peddlers was set ablaze. In New Delhi’s Lodi Colony near the marble-domed mausoleum of the Emperor Humayun and the red-sandstone tomb of Akbar’s greatest general, Sikh bands burst into the bungalows of Moslem civil servants, slaughtering anyone they found home. By noon, the bodies of their victims were scattered about the green expanses ringing the buildings from which England had imposed her Pax Britannica over the subcontinent.

The riots sweeping Delhi, however, threatened more than just another city. They threatened all India. A collapse of order in Delhi could menace the entire subcontinent. And that was exactly what had happened. The City’s Moslem policemen, over half its force, had deserted. There were only nine hundred troops on hand. The administration, already reeling under the impact of events in the Punjab, was grinding to a halt.

Early in the evening of September 4, with more than a thousand people already dead in Delhi, V.P. Menon, the man who had prepared a final draft of Mountbatten’s partition plan, called a secret meeting of a handful of key Indian Civil Servants. Their conclusion was unanimous: there was no effective administration in Delhi. The capital and the country were on the verge of collapse. [368-369]

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MOUNTBATTEN AND INDIA

Part III

On that historic September 4th [after independence], the caller to [Governor General] Mountbatten’s cool Himalayan mountain retreat in Simla was V.P. Menon. There was no one in India for whose advice and counsel Mountbatten had more respect. “Your Excellency,” Menon said, “you must return to Delhi.” “But, V.P.,” Mountbatten protested, “I’ve just come away. If my Cabinet wishes me to countersign something, just send it up here and I’ll countersign it.”

That was not it at all, Menon said. “The situation has gone very badly since Your Excellency left. Trouble has broken out here in Delhi. We just don’t know how far it’s going to go. The Prime Minister and the Deputy Prime Minister are both very worried. They think it’s essential for Your Excellency to come back. They need more than your advice now,” Menon said; “they need your help.”

“V.P.,” Mountbatten said, “I don’t think that’s what they want at all. They’ve just gotten their independence. The last thing they want is their former chief of state coming back and putting his fingers in their pie. I’m not coming. Tell them.”

“Very well,” replied Menon, “I will. But there’s no sense in changing your mind later. If Your Excellency doesn’t come down in twenty-four hours, don’t bother to come at all. It will be too late. We’ll have lost India.”

There was a long, stunned silence at the other end of the phone. Then Mountbatten said, very calmly: “All right, V.P., you old swine, you win. I’ll come down.” [370]

The Return of Power

Three people were present at the meeting in Delhi: Mountbatten, Nehru, and Patel… “You must grip [handle] it,” said Mountbatten to those who had called him.

“How can we grip it?” Nehru replied. “We have no experience. We’ve spent the best years of our lives in your British jails. Our experience is in the art of agitation, not administration. We can barely manage to run a well-organized government in normal circumstances. We’re just not up to facing an absolute collapse of law and order… We’re in an emergency and we need help. Will you run the country? We’ll pledge ourselves to do whatever you say…” “Yes,” seconded Patel at Nehru’s side, “he’s right. You’ve got to take it.”

Mountbatten was aghast. “My God,” he said, “I’ve just gotten through giving you the country, and here you two are asking me to take it back!” Mountbatten thought a moment. He loved a challenge and this was a formidable one. His personal esteem for Nehru, his affection for India, his sense of responsibility left him no out. “All right,” he said, “I’ll do it, I can pull the thing together.”… [370-371]

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CASE 29: SAATCHI & SAATCHI

Case Synopsis

In 1986 Saatchi & Saatchi became the largest advertising agency group in the world. The corporation also owned a sprawling portfolio of communication services companies and consulting firms. Its share prices had skyrocketed from £25 in 1980 to more than £500 by 1987. Boldly Charles and Maurice Saatchi attempted to acquire two British banks, but at this point the company started to unravel. Within three years the company was at the brink of insolvency and Saatchi & Saatchi's entire strategy was being reevaluated.

This case ends in 1991 with two key strategic questions that need to be answered. First, does Saatchi's “one-stop communications shopping” concept make sense, or is there little added value to having a wide range of communication services within one corporation? Second, does Saatchi's “global marketing” concept make sense, or are there too few customers that are really in need of global campaigns?

Teaching Objectives

The Saatchi & Saatchi Worldwide case can be employed to meet the following teaching objectives:

Identifying the pressures for global standardization, coordination, and integration. The case describes that the Saatchi brothers believe that their clients will increasingly demand cross-border standardization and/or coordination. In other words, as Saatchi's clients globalize, so must Saatchi—however, the question is whether there will be many companies that will feel the pressures for global standardization and/or coordination. The case therefore allows for a discussion on globalization pressures felt by both Saatchi and its clients.

Identifying the pressures for local responsiveness. Likewise the case can be used for a discussion on the pressures for local responsiveness felt by Saatchi and its clients.

Discussion on the balancing of globalization and localization. Once the pressures for a global approach and for local responsiveness have been determined, the case can be used to discuss how these conflicting demands can be reconciled in an international strategy.

Discussion on the management of international organizations. One of the most difficult strategic issues in the international context is finding an organizational form that will work. The Saatchi case is a good example of an international firm struggling to find the organizational configuration that will give it the best balance of globalization and localization benefits. The case therefore allows for a discussion on the advantages and disadvantages of various alternative organizational forms.

Teaching Guideline

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The Saatchi & Saatchi case is a fairly accessible case for almost any group because most people have a relatively good understanding of the advertising service and the dynamics of the advertising industry. The case also creates enthusiasm, as the advertising industry is quite “sexy” and Saatchi & Saatchi has had a controversial reputation. The case is also quite appropriate when discussing the topic of globalization, as few companies have been such outspoken supporters of global strategy as Saatchi & Saatchi.

One of the key points when teaching the Saatchi & Saatchi case is to encourage students to take a more balanced view of globalization and localization. Hardly any industry is entirely local or entirely global, but normally encounters a mix of conflicting pressures—globalization is not a matter of black and white, but of various shades of gray. Nor is it really a dichotomy between global (worldwide) and local (national), as some industries face pressures to integrate at a regional (e.g., Southern Africa) or continental level (e.g., Europe), while other industries need to be responsive at the sub-national (e.g., Quebec) or even municipal level. It is also almost impossible to treat every market segment and functional area as being equally globalized or locally responsive. Students must be willing to disaggregate the industry into groups or segments and the firm into functions or activities, and to judge each element independently. The first two questions are intended to force students to be more specific about whether they think the advertising industry is global or not.

Often, especially if students have had little exposure to international business issues before, it is useful to start class with a general discussion on globalization. An idea is to ask students what proportion of industries they believe are already entirely global (I usually ask for a show of hands to the question "who thinks that more than half are global?"). This polarizes and excites, and it surfaces many of the preconceptions students have about the globalization phenomenon. A rough idea of the number of companies with a relatively global strategy is a first step to establishing how many companies are in need of cross-border advertising campaigns, which is the focus of Question 1.

Case Questions

1. Is advertising a global business? Where would you place advertising on the integration-responsiveness grid? Is this true for all segments of the advertising business?

2. Are the pressures for global integration and local responsiveness equally strong for all functions/activities? Where would you place the major value-adding activities of an international advertising agency in the IR-grid?

3. Do you think that a straightforward global strategy makes sense for Saatchi & Saatchi Advertising Worldwide? If not, what type of strategy would you suggest?

4. What type of organizational structure does Saatchi & Saatchi Advertising Worldwide need and how can this structure be made to work? In particular, what type of human resource management do you think is needed?

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5. How can Saatchi & Saatchi Advertising Worldwide be linked to the other companies in the Saatchi & Saatchi Worldwide portfolio to create synergy? Do you believe that Saatchi's concept of total communications is a viable way of pulling the portfolio together? What alternatives do you see?

Case Analysis

1. Is advertising a global business? Where would you place advertising on the integration-responsiveness grid? Is this true for all segments of the advertising business?

Any classification of the advertising industry in general would be too sweeping to be useful. Therefore it is necessary to identify the various segments of the advertising business that encounter different types of global integration and local responsiveness pressures. This segmentation can be quite sophisticated, but for classroom purposes the identification of four product-market segments is usually sufficient. These are:

I. Local companies (from municipal to national level) requiring local advertisingII. Regional (from bi-national to continental level) and worldwide (from multi-

continental to global level) companies requiring local advertisingIII. Regional and worldwide companies requiring regional advertisingIV. Worldwide companies requiring worldwide advertising

When judged according to the pressures outlined by Prahalad & Doz, this leads to the grid positions as given in Exhibit 1.

EXHIBIT 1Estimation of Globalization Pressures on Advertising Market Segments

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Pressure for Local ResponsivenessLOWHigh

PressureFor

GlobalIntegration

Low

High

I

IIIII

IV

Of course these positions are rough estimates, but what they help to clarify is that the “globalness” of the various segments of the advertising business differ quite significantly. Segments 1 & 2 are relatively locally responsive, while Segments 3 & 4 require a combination of global integration and local responsiveness.

An important next step is to address the question how large each segment is and how fast each is growing/decreasing. Not much data is available to establish this, but based on Case Exhibit 11 it seems fair to estimate that Segment 1 is the largest (approximately 40-60% of the market), followed by Segment 2 (20-40%), Segment 3 (10-20%) and Segment 4 (1-3%). How fast each will grow depends on whether you agree with advocates of the global convergence perspective (e.g., Levitt) or with proponents of the international diversity perspective (e.g., Douglas & Wind). If the supporters of the global convergence perspective are right, it can be expected that Segments 3 and especially 4 will grow quickly. Initially this growth will be at the expense of Segment 2 (locally responsive multinationals moving toward more globally integrated strategies), but in the long run also quite significantly at the expense of Segment 1 (local companies losing out to global competitors). If the proponents of the international diversity perspective are right, any shifts will be marginal. And for every company or industry that becomes more globally oriented, others will emerge that are more locally oriented.

2. Are the pressures for global integration and local responsiveness equally strong for all functions/activities? Where would you place the major value-adding activities of an international advertising agency in the IR-grid?

No. Here too a disaggregate view reveals large differences in the pressures felt by different functions and activities. In Exhibit 2 the primary activities of an advertising agency—advertising development ("production"), advertising execution ("assembly & distribution") and account management ("marketing & sales")—are placed in the IR grid, differentiating between Segments 2 and 4.

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EXHIBIT 2Estimation of Globalization Pressures on Advertising Activities

For Segment 4 worldwide accounts must be managed centrally, with only a little adaptation to local subsidiaries of the worldwide account. The designing and general development of advertising campaigns must also be highly coordinated, but with a good deal of concern for the specific requirement of different markets around the world. The advertising execution, for instance the choice of media, frequency of ads, timing of the ads and the adaptation of details to local peculiarities (e.g., language, paper size) must also be coordinated, but must simultaneous be highly locally-responsive.

For Segment 2 the overall need for cross-border coordination is much lower. Account management does require medium cross-border coordination, as these regional/worldwide companies will often prefer to have one advertising agency internationally, or at the least might be open to international cross-referencing (company ABC France might recommend Saatchi to ABC Germany). There might also be a bit of advantage in cross-border coordination for advertising development, particularly in borrowing successful ideas that have proven themselves in other countries. Execution, however, is entirely locally responsive.

Of course, the conclusion that must be drawn is that any classification of a segment as global or local must not lead to an undifferentiated approach. A more specific appraisal of each activity and sub-activity is required to determine the most appropriate strategy and organizational approach.

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Pressure for Local Responsiveness High

PressureFor

GlobalIntegration

Low

High

II. AdExecution

II. AdDevelopment

IV. AdDevelopment

IV. Account management

IV. AdExecution

II. AccountManagement

3. Do you think that a straightforward global strategy makes sense for Saatchi & Saatchi Advertising Worldwide? If not, what type of strategy would you suggest?

No. The reason for Saatchi's difficulties can be seen in a nutshell by looking at Exhibit 1. Only Segment 4 would benefit from a relatively straightforward global strategy, although Exhibit 2 suggests that some functions still require a high measure of local responsiveness. The problem is that this segment is quite small (1-3%), and despite potential high growth, will never become large enough to support such a huge agency. Even Segment 3 (in particular pan-European and pan-NAFTA advertising) is not large enough for Saatchi to fully dedicate itself to. Saatchi also needs clients from Segments 1 and 2 to remain a mainstream advertising agency. Hence, a simple global strategy is out of the question, as Louis-Dreyfus has seemed to acknowledge when he took over the helm in 1990.

So, what are the options open to Louis-Dreyfus? Although students might come up with a variety of ideas, the most obvious ones are the following:

A. Global strategy by focusing on Segments 3 & 4. The company could be shrunk or split and become a niche player only serving Segments 3 & 4 with a relatively simple global/regional strategy.

- Clear positioning and image- Relatively simple organization to run- Customers might fear lack of local responsiveness- Turnover might be too small to pay for office network- Downsizing painful, costly and bad for image

B. Locally responsive strategy by focusing on Segments 1 & 2. The company could dump its global advertising strategy and refocus on local responsiveness.

- Clear positioning and image- Relatively simple organization to run- Totally contrary to organizational culture and mission- Painful loss of face in market- Loss of “big name” MNC customers might lead to defection of local customers- Loss of potential growth segments

C. Multi-focal strategy by horizontal coordination. This is basically Saatchi's current approach. Each local agency is fairly autonomous, but work together on a project-by-project basis, initiated by the Worldwide or Regional Account Directors.

- Each agency remains fairly autonomous, motivated and responsive- WADs and RADs can assure coordination on a project-by-project basis- Difficult to get all agencies working together- Matrix organization with two bosses, split loyalties, unclear career paths- Lack of specialization on local or cross-border campaigns

D. Multi-focal strategy by vertical differentiation. An alternative would be to have a clearer split between Segments 1 & 2 on the one hand and Segments 3 & 4 on the other hand. For Segments 3 & 4 Saatchi could pursue a relative global approach and

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for Segments 1 & 2 a locally responsive approach could be pursued, though this would entail splitting up the organization into two divisions: a local and global advertising division. The WADs/RADs would run the global business more forcefully, but personnel could still be stationed at the local agencies.

- Clear differentiation of target markets and responsibilities- Simpler to develop consistent culture and human resource policy- More responsive to worldwide and regional accounts that prefer one boss- Partial loss of local autonomy and motivation- Conflicts between divisions about accounts- Overspecialization, loss of local know-how by global division, lack of learning between divisions, domination of headquarters culture

4. What type of organizational structure does Saatchi & Saatchi Advertising Worldwide need and how can this structure be made to work? In particular, what type of human resource management do you think is needed?

Assuming that the discussion will turn to Option 3, 4, or a related option the organizational structure to be sought must be some type of multi-focal organization. In the terminology of Bartlett and Ghoshal, Saatchi would have to strive for a transnational solution, balancing global and local pressures. A number of the organizational forms that could be debated would be:

Locally dominated matrix structure. This structure closely resembles what Saatchi already has and corresponds with Option 3. The local agencies are the main organizational building blocks and cross-border coordination for regional or global clients is mainly achieved by means of regional or worldwide account directors. These WADs/RADs can influence and negotiate, but do not have the hierarchical power to punish or reward to ensure that cross-border coordination takes place.

Lead-country matrix structure. This structure closely resembles the previous one, except that the role of the WAD/RAD is not played by someone from headquarters, but is assigned to a lead agency (e.g., Britain) that has the responsibility for achieving coordination across borders

Bifocal matrix structure. In this matrix structure the geographic component (national agencies) would dominate when it concerned clients from Segments 1 & 2, with minimal cross-border coordination focusing on trading ideas (coordination by means of internal advertising and informal information exchange), learning effects (coordination by means of centralized conferences and education), and leads (coordination by regional boards and informal contacts). For clients from Segments 3 & 4 the headquarters WADs/RADs would dominate, with local agency personnel primarily responsible to them during the length of a project/campaign. In other words, the WADs/RADs would have formal hierarchical power.

Dual structure. A variation on the previous structure would be the case where the WADs/RADs would be further empowered by having permanent dedicated staff in most of the main agencies, instead of staff on assignment. This would actually mean the creation of two parallel structures (one local for Segments 1 & 2 and one global for Segments 3 & 4), both with clear lines of authority, incentives and career paths. A

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particular advantage of this structure is that it avoids the matrix problem of having two bosses.

Making any of these actually work will require what Bartlett & Ghoshal refer to as “flexible integrative processes.” Managers will need to have the ability to see strategic issues from both the global and local perspectives. Some points that could be discussed here are:

- Necessity of cross-border management exchanges or even career paths- Necessity of cross-border learning by means of training and conferences- Necessity of cross-border networking by means of informal contacts- Internationalization of headquarter personnel—should Saatchi lose its British

identity (following the global convergence perspective) or is this actually part of it competitive advantage?

5. How can Saatchi & Saatchi Advertising Worldwide be linked to the other companies in the Saatchi & Saatchi Worldwide portfolio to create synergy? Do you believe that Saatchi's concept of total communications is a viable way of pulling the portfolio together? What alternatives do you see?

This question is a matter of corporate level strategy. Two perspectives on corporate level strategy are the portfolio and core competence perspectives. Both approaches would emphasize a different type of synergy that Saatchi & Saatchi Worldwide could aim for:

The portfolio perspective. From a portfolio perspective, Saatchi should strive for financial synergies—money should be transferred from cash cows and dogs to question marks and stars, while also spreading risk. From this perspective Saatchi is in pretty poor shape, as there is very little money to be reshuffled and risk is concentrated in a number of cyclically related businesses. Nor are the businesses typically the kind that fit well with a financial control style by the parent company. This alternative need therefore not be further pursued.

The core competence perspective. From this point of view, Saatchi should be built around a common set of competencies. The term "total communications" seems to suggest that all Saatchi's businesses have a common competence (namely communications) however this is not the case. First, the label "communications" hides many different marketing services that don't really have much to do with communication (e.g., market research, media buying). Second, communication is so diverse and communication knowledge is so difficult to codify and transfer that making it into a core competence would be extremely difficult. Finally, the organization has voluntarily split itself up into rivaling advertising agencies to ensure customer confidentiality, making the building of a joint core next to impossible.

It seems more likely that Saatchi would try to find type of balance between synergy and responsiveness, by taking a view somewhere in the middle between the portfolio and core competence approaches. One of the most obvious ways of creating value would be to transfer skills or share activities between its businesses. This seems to be the route that Saatchi has taken. The activity shared is the acquisition of new clients. The corporation actively seeks cross-referral opportunities between its businesses, and it projects an image

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of "one stop shopping" toward potential new clients. The pros and cons of this strategy are:

- Simple linkage requiring very little coordination- Especially uncertain and unsophisticated customers may prefer to be cross-

referred or have one stop shopping- Reluctance to cross-refer if quality other business unit is not trusted or not known

well enough- Reluctance to cross-refer if there is no incentive- Most customers prefer to shop to get the best- Many customers want to spread their dependence- Many communication services are decided upon by different sets of decision-

makers

Cross-referencing and one stop shopping will probably result in a number of extra accounts and extra services provided. However, the question is whether this added value will be higher than the extra costs of having the various business units within one corporation (cost on headquarters staff, cost of coordination and control). Furthermore, all this cross-referencing does not create any synergy between Saatchi & Saatchi Advertising, Backer Spielvogel Bates and the corporation's other independent agencies.

Linkages that could be given more emphasis could be joint media buying (to achieve quantity discounts and a better package) and transfer of market know-how (e.g., personnel exchange). A further linkage that might be of importance is the umbrella of the Saatchi group's name. Especially the group companies might profit from their link to a leading advertising agency.

In short, there do not seem to be a lot of opportunities for creating synergy within Saatchi's array of businesses. But, while there seem to be few convincing arguments for keeping the corporation together, there also seem to be no pressing arguments for a corporate split either. Which route to pursue is a point for further discussion? It might be useful to end the discussion with the question which corporate management style would best fit Saatchi & Saatchi Worldwide.

Other Teaching Issues

This case can also be used to touch on the following issues:

Basis of competitive advantage. It can be asked what the bases of competitive advantage are in the advertising industry. To what extent is competitive advantage a matter of positioning (e.g., importance of brand name) and to what extent a matter of developing capabilities (e.g., ability to be creative)?

Creating a global industry. A key question in this case is whether an advertising industry player, such as Saatchi, can actual influence the development of the industry. Can Saatchi by its very actions create or increase a global market segment, or must it just adapt itself to the developments taking place?

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Organizational leadership. Saatchi is a company with a strong leader. Some would argue that this is the company’s strength, while others would argue that it is actually the company’s Achilles’ heel. With the benefit of hindsight, it can be seen that strong leadership can sometimes have some disadvantageous effects on an organization.

Corporate governance. As most students will know, the Saatchi brothers came into conflict with the company’s shareholders and were forced to resign. This was a rare case of shareholder activism and holds out a mixed message on how effective shareholder action can be. This may lead to a discussion on the question of how corporate governance should best be organized.

What Happened After the Case?

The case runs until 1991. This section describes the major developments at Saatchi & Saatchi after this period and looks at what happened to Maurice and Charles Saatchi after 1991. In particular we have focused for the globalization ambitions after the end of the case. Visit our website (www.itbp.com) for the most up-to-date information and valuable further links.

No more Saatchis at Saatchi & Saatchi. In 1993, Charles Scott took over the CEO position from Robert Louis-Dreyfus who became CEO of Adidas. At the end of 1993, Charles Saatchi handed in his resignation, to “become honorary president of the company and… to concentrate on his creative role for the group.” In December 1994, Maurice Saatchi was fired by the Board as Chairman of Saatchi & Saatchi after mainly American shareholders pressed for his removal. This because of continuous bad performance of the company and a £5 million remuneration package (including options) he wanted for himself. Particular shareholders were less than happy with his extravagant remuneration package, particularly because the share-price dropped from £50 to £2 in seven years. Together with the fired Maurice Saatchi, four top-executives (Jeremy Sinclair, David Kershaw, Bill Muirhead, and Simon Dicketts) left Saatchi & Saatchi as well to join the New Saatchi Agency (see below for further details).

Change of name to Cordiant. In January 1995, Saatchi & Saatchi Advertising Worldwide changed its name into Cordiant. In 1996, Charles Scott became Chairman and appointed Bob Seelert as Chief Executive.

Battle in court. After being fired, Maurice Saatchi started a campaign against the company he once headed as Chairman. In May 1995, an out-of-court settlement ended this “war,” with Maurice Saatchi as the virtually complete winner. He was allowed to continue using the Saatchi name, although he had to change the name from New Saatchi Agency into M&C Saatchi Agency. In return Cordiant dropped its lawsuit seeking a share of Maurice and Charles’ $40 million settlement with Adidas Chairman Robert Louis-Dreyfus for giving up a stake in the sports clothing company (Cordiant had argued that the brothers were mixing corporate and personal business). The issue of how soon ex-Saatchi executives could break loose of their contracts and begin working for Maurice was also resolved. They could start at the end of May 1995. Cordiant also agreed to drop a $50 million U.S. lawsuit it filed against Mr. Muirhead, its former North American CEO, claiming a breach of contract and

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alleging theft of company records. Legal action over Maurice's right to use the Saatchi name in Australia was also dropped. For its part, M&C Saatchi agreed, “not to solicit or act for Saatchi & Saatchi, Bates, or Zenith Media clients or employ their staff, other than those who have already moved, until 31st December 1995.” This promise came after M&C Saatchi had already pried $210 million in business away from Saatchi & Saatchi Advertising, including British Airways, Qantas Airways, Dixons consumer electronics, Gallaher's Silk Cut cigarettes, and Mirror Group Newspapers. Dozens of ex-Saatchi staff had already joined M&C Saatchi by that time.

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EXHIBIT 3World's Leading Agency Brands, Ranked by 1997 Worldwide Gross Income in US$ mn (Source: Advertising Age)

1 Dentsu 1,9272 McCann-Erickson Worldwide 1,4513 J Walter Thompson 1,1214 BBDO Worldwide 9875 DDB Needham Worldwide 9206 Grey Advertising 9187 Euro RSCG 8838 Leo Burnett Co 8789 Hakuhodo 84810 Ogilvy & Mather Worldwide 83811 Young & Rubicam 78112 Publicis 62513 Ammirati Puris Lintas 62114 D'Arcy Masius Benton & Bowles 60715 Bates Worldwide 52016 Foote, Cone & Belding 51117 Saatchi & Saatchi 49018 TBWA International 47619 Bozell Worldwide 40420 Lowe Worldwide 30021 Carlson Marketing Group 28522 Wunderman Cato Johnson 28023 TMP Worldwide 26424 Rapp Collins Worldwide 26025 Asatsu 230

Improving Cordiant’s financial position. With a £126.6 million rights issue in November 1995, Cordiant tried to restore the group’s control over its own finances, lost after the Saatchi brothers borrowed heavily to finance their massive acquisition spree in the 1980s. The issue not only allowed Cordiant to clear most of its debt (which stood at £700m in 1990), it also enabled the renascent group to negotiate cheaper borrowings in the future and pay its first dividend in six years in 1997. For clients, it allowed Cordiant to let go of the past and redefine the company culture.

Split up. In December 1997, Cordiant officially spun-off its major business units into separate companies, Saatchi & Saatchi Worldwide and Bates Worldwide. Both companies became a 50% shareholder in Zenith Media, the third major separate business unit. The primary reason given by Cordiant for the de-merger was to allow Bates to compete for client work it was denied because some Saatchi clients insisted on a group wide "no client conflict" policy (for instance Bates could not pursue Unilever business, because of Saatchi’s work for Procter & Gamble). Saatchi & Saatchi became listed on both the London and the New York Stock Exchange.

What’s left of Saatchi & Saatchi? After selling off its Siegel & Gale subsidiary in June 1998 for £20 million, Saatchi & Saatchi is at present an international holding

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company with operations in advertising, marketing, and communications. Its namesake-advertising agency, which generates about 85% of the company's sales, has about 160 offices in more than 90 countries and serves clients such as Procter & Gamble, Toyota, DuPont, and General Mills. The company also owns Cliff Freeman & Partners ad agency. In addition, Saatchi & Saatchi provides worldwide marketing communications services and media services through Rowland Worldwide, a 70% interest in The Facilities Group, and a 50% stake in Zenith Media Worldwide.

Strategy at Saatchi & Saatchi. Judging from the number of countries in which Saatchi & Saatchi is present (32 in the case, now over 90), the company has continued to internationalize. This points towards a strategy of globalization in a geographic scope sense. The significance of true global coverage as a way of giving clients the service they need is highly emphasized. However, the extent of cross-border coordination has not increased. Saatchi’s mission is “to be revered as the hothouse for world changing creative ideas.” With this mission also came the decision to drop the word “Advertising” from their name and to describe themselves as an ideas company. The company has become more corporate, but less charismatic. According to some it is now more stable and much more likely to be around in five years time.

Profitability at Saatchi & Saatchi. For the full year to December 1997 the company generated sales of £378 million (£375 million in 1996) and a pre-tax profit of £27.8 million (£16.5 million in 1996). For the first half-year of 1998 Saatchi & Saatchi reported sales of £193 million (£183 million in the 1st half of 1997) and a pre-tax profit of £20.6 million (£7.6 million in the 1st half of 1997).

M&C Saatchi Agency

Immediately after he was fired in December 1994, Maurice, together with his brother Charles and four top executives of the former Saatchi & Saatchi, started an advertising company called the New Saatchi Agency. In May 1995 this company was renamed M&C Saatchi Agency. As mentioned above, M&C Saatchi took away some important clients from Saatchi & Saatchi as well as 39 staff members. Heavily reliant on their former clients, M&C Saatchi had to open up a number of new offices fast to retain those clients. In addition to that, M&C Saatchi was very actively looking for new accounts. By the end of 1995, non-Cordiant accounts already made up 35% of total business. At the moment, the company has its headquarters in London and main offices in New York, Sydney, Melbourne, Auckland, Hong Kong, Singapore and Dubai, with total billings amounting to £195 million. The main clients (of the 29) are British Airways, Dixons, HSBC, ANZ Bank, and Asprey. Maurice and Charles Saatchi are no longer in management, but are two of the five partners. The other three are Bill Muirhead, David Kershaw, and Jeremy Sinclair (all former Saatchi & Saatchi directors). At the moment the CEO is Moray McLennan.

From the beginning, Maurice and Charles Saatchi built their new agency on their old success factors: simplicity, creativity, and charisma. They also devised a global communications strategy for their company, as they did before in the 1980s. M&C Saatchi also realized that no one company is the best at everything, but that an integrated approach is the best way for a successful campaign. For this purpose they have built

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relationships with 64 independent companies to handle the different fields like Public Relations, New Media, Event Management, and so on. This is called the ‘M&C Saatchi village’ (with the motto: integration by disintegration), where M&C Saatchi guides its clients through the partnership-network for the best possible result. The company also has an alliance with Publicis for the markets in which they are not located. M&C Saatchi claims to be 100% Saatchi, i.e., they have built all their agencies themselves, not by acquisitions (Maurice and Charles apparently learnt their lesson).

As M&C Saatchi is not publicly traded, no information about the operational performance and profitability of M&C Saatchi is available through public channels. What is known is the size of the billings, £195 million, and the notion by industry experts that M&C Saatchi is quite successful. According to these industry experts, the “new” Saatchi is beating the “old” Saatchi and establishing itself definitively as the “real” Saatchi agency. “Also people in the ad community think that M&C Saatchi has the mantle because it is doing the sort of things which made Saatchi famous. Using power at high levels to get in and see clients. Everyone was envious of that in the Eighties, and they still are.” (Martin Jones, managing director of the Advertising Agency Register, in The Independent, October 27, 1998)

EXHIBIT 4World Advertising Expenditures, Year on Year Change (%), Current and Constant Prices (Source: Advertising Age)

1998 vs. 1997 1999 vs. 1998 2000 vs. 1999 2001 vs. 2000current constant current constant current constant current constant

North America 5.4 4.5 3.9 2.4 4.2 2.5 4.5 2.6Europe 6.0 4.6 3.8 2.2 4.9 2.2 5.0 2.3Asia/Pacific -3.0 -5.5 4.1 1.8 6.2 2.8 6.8 3.3Latin America 7.7 - 6.1 - 8.0 - 9.8 -Africa/M. East/ROW

8.2 - 6.4 - 9.9 - 11.3 -

Total 3.9 1.9 4.2 2.2 5.3 2.5 5.8 2.7

References

Abrahams, B., Cordiant distances itself from Saatchis, Marketing, November 9, 1995.Advertising Age (www.adage.com).Green, H., One name, two agencies, The Independent, October 27, 1998.M&C Saatchi homepage (www.mcsaatchi.com).O'Sullivan, T. Cordiant three-way split adds fuel to take-over speculation, Marketing

Week, April 24, 1997.Saatchi & Saatchi homepage (www.saatchi-saatchi.com).The Economist, Cordiant v Saatchi: Bittersweet, December 23, 1995.

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CASE 30: MCKINSEY & COMPANY: MANAGING KNOWLEDGE AND LEARNING

Case DescriptionThe case provides a broad overview of McKinsey’s development since its founding in 1926, concentrating in particular on the last two decades of its growth under the leadership of three managing directors—Ron Daniel, Fred Gluck, and Rajat Gupta. In particular, it focuses on the various programs and initiatives that each of these firm leaders put in place, from the late 1970s through 1996, as they tried to protect the firm’s traditional “client relationship” mode of consulting while supplementing it with a “thought leadership” strategy. It describes the difficulties that each MD encounters in building new structures and processes that are often in conflict with the firm’s traditional ways of doing things.

To allow students to see how these broad changes impacted those on the front line, the case then moves to three “mini-case” descriptions that illustrate the way in which the developing knowledge network affects the daily life of consultants, engagement managers, and partners. The first mini-case focuses on a completely inexperienced financial services engagement team, located in the Sydney office, and describes how it is able to draw on the resources of the firm worldwide to deliver a study to a demanding client; the next story tracks the progress of a young associate as he moves between offices, with his career development paralleling and supporting the development of an integrated European telecom practice; and the last situation highlights the career challenges faced by another young associate who has decided to become one of the firm’s emerging group of specialists, betting his career on his ability to generate specialized new knowledge rather than on the traditional generalist skill building model required to develop client relationships.

Against a background of the diverse opinions of McKinsey partners, concerning the change in the firm’s direction and its prospects for the future, the concluding section raises the question of how Rajat Gupta should shape the future of the firm’s knowledge development and cross-unit learning activities.

Teaching ObjectivesThe case was developed to serve three major teaching objectives:

To explore the challenges of developing intellectual capital as a strategic asset:As its title implies, this case focuses on the way companies build an organizational capability that allows them to turn knowledge development and organizational learning into sources of competitive advantage. While the challenge of developing, embedding, and leveraging intellectual capital within a worldwide network of operations has only attracted broad management attention in recent years, firms like McKinsey were forced to deal with such issues at a much earlier stage due to the fact that knowledge is the basic currency of the consulting profession. In that sense, McKinsey represents leading-edge best practice of many of the issues facing other companies operating in the current information-intensive global competitive environment.

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To show how core organizational processes—in this case, knowledge development and cross-unit learning—must be built: The case illustrates that effective knowledge-based organizations are created not only by building an infrastructure of sophisticated data bases and information systems, but, perhaps more importantly, by developing of individual skills and abilities leveraged through an overlay of informal linkages and interpersonal relationships that give life and flexibility to the IT-based framework. In this regard, the McKinsey’s “one-firm” culture is the vital bedrock of its learning process, and students should see that it must be reserved, adapted, and enhanced to allow it to operate effectively in the much larger and more dispersed global operations that McKinsey has built.

To illustrate the role of an organizational leader, not only in building a viablebusiness, but also in creating a self-renewing institution:By following three generations of managing partners at McKinsey, the case shows the extraordinary care that each takes “to leave the firm stronger than he found it.” It is clear that the emphasis in doing so was rarely on creating brilliant strategic moves, but rather on building an internal organizational capability to continuously generate renewal from within.

Course Fit and PositionThe fieldwork for this case was done as a part of a larger project that concluded with the publication of The Individualized Corporation (Harper Business, 1997). The theme of that book—and the core pedagogic fit of the case—is to examine the new challenges facing managers as companies adapt to the intersecting powerful forces of globalization and the knowledge revolution. The case can be used in courses in general management, international business, management of information systems, organization behavior, and service management. It has worked successfully both at the MBA level and in executive programs. Depending on the structure of these courses, it can serve multiple purposes, from defining the role of corporate leadership to examining the nature of information technology infrastructure, to examining organizational self-renewal. However, this teaching note will be structured around the way in which we have primarily taught the case, namely to focus on the management challenges in developing a process of knowledge transfer and organizational learning. (For those wanting to link this issue to a non-service business, I have successfully used the case pairing it with the classic Procter & Gamble Vizir case (384-139), which captures P&G’s efforts managing organizational learning in the same time frame as McKinsey was going through its initial steps. P&G was one of the first industrial companies to consciously work on developing its internal knowledge transfer and learning capabilities.)

Assignment InformationThe following are suggested assignment questions that might be used with the case:1. How was this obscure little firm of “accounting and engineering advisors” able to grow into the world’s most prestigious consulting firm fifty years later? What was the unique source of competitive advantage developed by James O. McKinsey and later Marvin Bower?

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2. How effective was Ron Daniel in leading McKinsey to respond to challenges identified in the Commission on Firm Aims and Goals? What contribution did Fred Gluck make to the required changes?3. Judging by the evidence in the three mini-cases of front-line activities in the mid-1990s, how effective has the firm been in its two-decade long change process?4. What is your evaluation of Rajat Gupta’s “four-pronged” approach to knowledge development and application within McKinsey? As a senior partner, what specific advice would you give him?

There is also an accompanying video, McKinsey & Co.: Managing the Global Knowledge Network (HBS No. 300-503) that features interviews with Sydney Office Managing Director John Stuckey and Associate Patty Akopiantz. Both feature in one of the mini-cases embedded in this case.

In preparation, the instructor might also wish to read Chapter 4 of The Individualized Corporation (Harper Business, 1997). The chapter, “Creating and Leveraging Knowledge: From Individual Expertise to Organizational Learning,” draws on McKinsey and Skandia (HBS No. 396-412). Because this chapter provides the authors’ insights and analyses on some issues in the case, it would be more appropriate to assign as a reading after the discussion rather than before it.

Teaching PlanDepending on the teaching objective, there are numerous ways that the instructor can get into this case. Some might prefer to start at the micro level, for example by drawing from the lessons from the Australian financial services engagement to elicit an understanding of how the knowledge transfer and the cross-unit learning process is working; others might prefer to leap straight into an action question at the level of Rajat Gupta, asking students for recommendations on his four-pronged knowledge development strategy, and using student recommendations to back into the diagnosis of the firm’s organizational capabilities in this area.

Because the development and application of intellectual capital is a subtle and time-consuming process, I prefer to adopt a teaching plan that is more conservative. The outline that follows, takes a fairly linear and chronological approach, first establishing the unique business concept and distinctive organizational capability that made the firm a success, then proceeding to analyze the effectiveness of the changes made during the 1980s and 1990s, and finally working up to a set of recommendations for Gupta. In this approach, the micro front-line stories become the tools by which one can examine the broader projects and initiatives and through which one can test students’ diagnoses and recommendations.

1. How did a Chicago professor’s firm of accounting and engineering advisorsgrow to become the most prestigious consulting company in the world?This straight-down-the-middle, “Why were they successful?” opening question gives the class the opportunity to reflect on McKinsey’s rich heritage. Students will normally identify a whole range of reasons why McKinsey has achieved the enviable position it

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has: their early commitment to consultant training, their development of a sense of professionalism, their recognition of a niche in top-management consulting, their focus on general management problems, particularly strategy and organization, their recruitment of first-class minds, the power of their “one-firm” culture, etc. I try to record these on the blackboard under two basic columns—one related to the external business concept that they developed, and the other related to the internal organizational capability they were building. However, at this stage I do not label them; I simply place them in one of those columns. (See Exhibit TN-1)

The instructor might probe to understand the logic and value added of each of the key elements. However, given the importance of the firm’s culture in supporting subsequent changes, it is helpful to ask:

Why was the “One-Firm” concept so important to McKinsey’s success?At the heart of McKinsey’s overarching cultural values and at the core of its day-to-day operating practices lies the “one-firm” concept that Bower put in place. It is important to see its centrality to the shared belief system and the way in which this concept provided the firm with an important source of competitive advantage. Unlike many other professional service firms that tended to fragment by office and type of service (sometimes resulting in destructive internal battles over profits, clients, people, etc.), McKinsey was able to use its firm-wide integration to build a strong internal capability. Among the most important issues that will be raised (perhaps recorded on a side board) are the following:

- By treating all clients as a firm-wide responsibility, it ensured that there was both a consistent consulting philosophy and a uniformly high standard of work, since there was a consciousness that one weak office could lose a worldwide client. By recruiting and developing consultants into the firm, not an office, it ensured uniformly high quality people who were readily transferable, a characteristic that was vital to knowledge transfer.

- By making people and profits firm-wide resources, it could ensure the most efficient utilization of its financial and human resources, two assets in short supply in the rapid expansion phase. The important issue to highlight here is that even from its earliest days, McKinsey was transferring knowledge and expertise through the informal networks it created as a by-product of its “one-firm” culture. However, the expertise was largely a methodological approach (e.g., a way of framing issues, a problem solving methodology) and, even more importantly, a set of strongly held values (e.g., a commitment to client service, and adherence to professional standards). In this way they transferred McKinsey’s commitment to providing a disciplined problem-solving approach that generated unique solutions to problems faced by top management of leading companies. There was no attempt to package knowledge or transfer the specific learning from one assignment to the next.

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2. How effective was Ron Daniel in leading the transition to supplement the firm’s highly successful “client-relationship” consulting mode with a radically different “thought-leadership” approach?Before engaging the issue of what Daniel did to respond to the perceived problems with the old “client relationship” model McKinsey had pursued for 50 years, it is intriguing to recognize that although the Commission on Firm Aims and Goals presented its findings in 1971, significant change did not occur until Daniel became MD in 1976. One might then ask:

Why has it taken so long to make significant change to a system recognized as flawed?In a clear case of “Physician, heal thyself,” McKinsey found it hard to implement change for several reasons, including the following:

- At an individual level, most firm members—including, and perhaps especially the partners and directors—had succeeded in the system by developing their generalist consulting skills and building client relationships. To many, it must have seemed threatening to be asked to develop specialist skills and become “T-Shaped.”

- At the organizational level, the power structure had always been built around local offices that were responsible for hiring and developing consultants and building their local client base. Any changes that would threaten either of these sources of power were likely to be resisted.

- At the level of basic beliefs, many—including Marvin Bower—were concerned that the changes would damage the firm’s deeply embedded value of client service by promoting “one-size-fits-all” tools-based consulting driven by visiting experts without long-term client knowledge or commitment.

- Fundamentally, the proposed change to “thought leadership” consulting implied a major shift in the whole business model and organizational capabilities on which McKinsey had been built. Diagnosed in terms of the firm’s own well-known “Seven S” model, the fundamental systemic changes can be analyzed and represented as in Exhibit TN-2.

However, under Daniel’s leadership, the change process clearly took root as he initiated many of the changes indicated in Exhibit TN-2. One of the most important initiatives he undertook was to appoint one of the firm’s most productive and respected directors to head internal training. The symbolism of this allocation of a highly productive “snowball thrower” to consultant development role must have been very powerful; the impact of the programs he initiated even more so.

The structural changes—creating industry-based and functional-based groups—were alsopowerful signals, but it is worthwhile probing what Daniel was trying to achieve with these changes. Clearly, they became McKinsey’s repositories for firm expertise—in financial services, strategy or organization, for example. More importantly, they served

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as affiliation groups for consultants trying to develop their “knowledge spike” as required by the new firm guidelines.

Finally, Daniel oversaw the institutionalization of these changes in a formal redefinition of McKinsey’s Mission. It is worthwhile asking students to refer to Exhibit 2 in the case, identify the changes from Bower’s original mission and reflect on their significance. While Bower was focused only on client service, the new mission now puts equal weight on building a great firm. This recognition that “attracting, developing, exciting, and retaining exceptional people” is at the heart of the McKinsey’s mission represents a major step in the development of its intellectual capital.

3. What were the main contributions of Fred Gluck to McKinsey’s development of intellectual capital? How effective were his initiatives?Many students will immediately focus on Gluck’s initiative in starting a Knowledge Management Project in 1987 through which a series of information systems were developed. FPIS provided a computerized database of client engagements and PD Net was structured to capture consultant-generated ideas and concepts. These systems were designed to support the task of capturing knowledge that existed within the firm, and facilitating its transfer and application in other parts of the organization. In other words, it was building on the initial phase of developing “T-shaped” consultants by focusing on the task of institutionalizing the individual expertise and leveraging it across the organization. In particular, those with strong computer backgrounds will voice strong support for Gluck’s initiatives, saying that at last the firm has begun to create the infrastructure that will provide them with a sustainable source of competitive advantage. They may highlight the power of computer-based data systems that can efficiently capture and transfer knowledge throughout the system. The instructor will do well to identify those individuals and allow them to develop their ideas, before asking them to elaborate and defend their positions with the follow-up such as:

How much of a source of competitive advantage do FPIS and PD Net represent for McKinsey?This will give the opportunity for others to enter into the debate, particularly those who recognize that Gluck’s theme throughout the change process is “It’s all about people.” They will argue that the sophisticated systems he created were designed to support and enhance rather than replace the informal networks that McKinsey had long relied on. (Bill Matassoni reflects on this situation in his quote on page 6: “The objective of the infrastructure changes was not so much to create a new McKinsey as to keep the old ‘one-firm’ concept functioning as we grew.” There are many examples of this that can be highlighted:

- The failure of formal documentation in the form of Staff Papers, compared with the success of Practice Bulletins that were structured more as advertisements for internal ideas that could then be followed up personally.

- The immediate success of the hard copy Knowledge Resource Directory that served as McKinsey’s Yellow Pages resource for contacting the key people within the firm.

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-The failure of Practice Coordinators acting as librarians of databases but their subsequent success as intermediaries and “intelligent switches” who could put people in touch with each other.

In short, Gluck realized that the infrastructure that he was building was little more than a framework to support strong personal networks that had always been vital for knowledge transfer in McKinsey. As illustrated in later caselets (see, for example, section “Jeff Peters and the Sydney Office Assignment”) FPIS and PD Net were used primarily to locate sources of expertise, with connections then being made by phone calls, visits, or voicemail. Gluck’s objective was simply to make it easier for more people to establish such personal networks and to allow the organization to manage them across an increasingly dispersed set of offices.

If the distinction has not been made clear by class analysis, it is important to ask:

What is different about the focus of Gluck’s actions compared with Daniel’s emphasis?What should be clear is that Daniel was laying the foundations of McKinsey’s intellectualcapital by emphasizing the need to develop and leverage individual knowledge and expertise. This was the objective of the commitment to training and was confirmed in the dual mission statement (“… a firm able to attract, develop, and retain exceptional people”). Even the sectors and centers were designed to leverage the knowledge and expertise of individuals and to support the development of others.

Gluck’s thrust, by contract, has been focused more on embedding the knowledge in the firm and making it less dependent on individuals. This was reflected in various activities: his insistence on capturing knowledge and making it broadly accessible through documentation and the creation of data bases; his emphasis on teams to lead sectors and centers as well as to manage client relationships; and his preaching of the need to democratize the knowledge building process—to make everybody into “snowball makers.” The instructor might follow up by asking:

Why is Gluck so fixated on embedding knowledge and institutionalizing the firm’s intellectual capital?Unlike traditional capital assets like plant and machinery which is bolted to the floor, a company’s intellectual capital can walk out the office door each evening in the heads and briefcases of employees unless management captures it in the form of patents, copyrights, operating procedures, shared practices, documentation, etc. For example, when Tom Peters, Bob Waterman, and Kenichi Ohmae left McKinsey, they took with them a considerable amount of the goodwill, relationships, reputation and image their work had generated. And partners who “owned” clients over many years held similar power over the firm.

Unless Gluck had kept insisting that everyone had to become “snowball makers” as well as “snowball throwers,” his knowledge infrastructure could have become nothing more

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than an IT-powered supercharger used by an intellectual elite to leverage their ideas and by the “rainmakers” to reinforce their power bases of client ownership. His philosophy was to break down the power of the few who controlled the firm’s knowledge resources and create more of a knowledge democracy:

- The structural changes introduced by the CPDC—the grouping of fragmented practices into clientele industry sectors and functional capability groups was probably designed to weaken the fiefdoms that had grown up around the rise of the few gurus and experts. It was not accidental that teams of 5 to 7 younger partners—breaking the dominance of the old guard—led the new groups.

-Similarly, once the CSTs became the key organizational unit, the firm began to break down the “ownership” of client relationships by a single partner and replace it with shared responsibility for that role across several partners.

- The CSTs also tended to democratize knowledge development by making these units McKinsey’s primary “learning laboratories” and by creating the need to share information and ideas across these working groups.

-And finally, the CSTs focused practice development more directly on client needs, finally creating an organizational unit designed to integrate both “snowball making” and “snowball throwing.”

Together, these changes shifted McKinsey’s knowledge development process from what they refer to as the “discover-codify-disseminate” model (the old guru-based approach) to the “engage-explore-apply-share” philosophy in which organizational learning was routinely captured by all. Another way to get at this question is to ask:

What is the difference between the “discover-codify-disseminate” model of knowledge development and the “engage-explore-apply-share” approach? Why are they keen to develop the latter?

This can lead to an analysis as summarized in Exhibit TN-3.

Mid-class SummaryHaving reviewed the decade-long process of organizational development that resulted in McKinsey’s ability to enhance its superior client relationships with an ability to compete on thought leadership, it may be helpful to pause for a brief review before moving to action recommendations. The objective is not only to pull together the various threads of the many initiatives set in motion during this period, but also to show the difficulty and complexity of creating such organizational capability as a source of competitive advantage.

Perhaps with the help of an overhead structured similar to Exhibit TN-4, the instructor might highlight the sequence of steps and the interdependency of actions that Marvin

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Bower, Ron Daniel, and Fred Gluck had led over several decades as they built McKinsey’s intellectual capital:

“One-firm” culture: At the foundation of McKinsey’s ability to develop, diffuse, and apply knowledge as a source of competitive advantage was the one-firm culture that was part of Bower’s heritage. Deeply embedded and widely institutionalized as an openness, a trust, and a sense of commitment to the client, this culture is the bedrock that encourages a free exchange of information and the open sharing of knowledge throughout the firm. As other consulting firms have found, being structured around individual offices, business segments, or profit centers, represents a major disadvantage and can take years to dismantle providing McKinsey with a source of competitive advantage that has proveddifficult to imitate.

Individual consultant development: Building on this base, Daniel reinforced the firm’s commitment to recruit the “best and the brightest,” leading McKinsey to become a number one preferred employer of MBAs worldwide. His commitment to developing the knowledge and skills of individual consultants has also led to the firm spending 5% of its revenues on these activities by the mid-1990, a figure that works out to more than $20,000 per consultant per year. Together, these activities allowed McKinsey to develop a T-shaped consultant with a deep spike of expertise that became the starting point in its shift towards thought leadership consulting.

An overlaid matrix organization: Supporting the efforts to build a T-shaped consultant, Daniel laid the foundations of a more flexible organization with his creation of clientele sectors and centers of competence. These overlaid organizational dimensions not only helped formalize a whole new set of information channels that encouraged the collection and diffusion of specialized knowledge throughout the organization, they also became the primary means of reinforcing consultant’s knowledge spike by linking them to like-minded firm members.

Reinforcing information infrastructure: To link and leverage the growing pockets of expertise, Gluck’s priority was to create an infrastructure with a far greater carrying capacity for information and knowledge that had previously existed. Importantly, this framework was built not only on the formal systems, (e.g., FPIS and PDNet), but also on the informal relationships that had been developed through the “one-firm” culture and the human processes that Daniel had put in place (e.g., the Knowledge Resource Directory, Practice Bulletins and Practice Coordinators were designed primarily to leverage personal contacts).

Team-based management: Gluck also began developing a team-based management process that reinforced and embedded the knowledge-building capability. Regular meetings (partner meetings, sector conferences, training sessions, etc.) also reinforced knowledge sharing and network building capability. Daniel’s initiatives had built on—and reinforced—the power of a limited number of experts who led clientele sectors or competence centers and “rainmakers” who controlled client relationships and the engagement teams that served them. By created teams of partners to lead the sector

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groups and client service teams, the firm hoped to erode the power of those individuals who “owned” the expertise or the clients and embed that intellectual capital in theorganization.

Performance measurement: By the early 1990s, all of this was coming together around a commitment to bringing knowledge to bear to improve the performance of the clients’ operations. The client impact measures became the means for integrating the two core aspects of the firm’s mission, ensuring that “thought leadership” was being developed to improve “client service.”

5. Let’s focus on how these changes have affected the actions of McKinsey associates. Judging from the three mini-cases on front-line activity, have the changes succeeded or failed? Is the global knowledge network working effectively or is it seriously flawed?By focusing on the activity described in the case section “Knowledge Management on theFront,” students can evaluate the effectiveness of the changes made. Each mini-case reveals both the strengths and the limitations of the structures, systems, and processes that McKinsey’s leaders have developed, and students can enter into quite spirited debates about the effectiveness of the emerging knowledge-based organization. The instructor might ask them to assign a grade to represent the effectiveness of each project, and pit those giving As against those awarding Bs or Cs.

For example, some will be amazed that the Sydney office project could have been staffed by such junior and inexperienced consultants supervised by an engagement manager who did not even arrive on the scene until most of the analysis was completed. It is not surprising to them that a director John Stuckey was disappointed that the team did not come up with a breakthrough.

On the other side of the argument, students will argue that this is a perfect illustration of how the system is supposed to work. Far from being abandoned, the team was advised and supported by five experts acting as consulting directors on call, educated on firm expertise through 179 PD documents, and backed by the specialized input of more than 60 associates answering specific questions. This safety net of organizational support allowed a junior team with little personal expertise to deliver the firm’s knowledge and experience to a demanding client.

Those using the videotaped interviews with John Stuckey and associate Patty Akopiantz may wish to focus primarily or even solely on the Sydney office mini-case, using it as an indicator of how effective McKinsey’s global knowledge network has become. The videotaped comments give support to those who believe the system is very effective.

Similarly, on the European telecom example, some will be impressed by the way in which McKinsey seems to be transferring and leveraging specialist knowledge through personnel transfers (Bray to Europe), documented learning (PD publications), systematic networking (practice coordinator’s role), and embedding knowledge (the evolution to team leadership of the practice).

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On the other side, some will express concern about the insularity of industry practices as they turn inward for input and support. Even beyond John Stuckey’s concern that the Sydney team only looked within McKinsey for expertise, it appears the telecom group prefers to look only within its own practice. With the development of a telecom intranet, some ask whether the information technology is opening up or insulating this practice.

Finally, on the business-to-business competence center, some will see Dull’s assignment as a successful redirection of a valuable firm resource to develop as a specialist. The high ranking of B-to-B documents on the PDNet Best Seller list (Exhibit 7) indicates he is generating valuable knowledge and the success of the conference shows he is developing the networks to develops his ideas to clients.

On the negative side, however, other students will point out that McKinsey still does not appear to have solved the problem of how to support the development of specialists and that people like Dull are constantly worried about promotion. Dull’s thoughts about writing a book sounds like a plan to develop his own “brand image” to allow him to leave the firm and take his intellectual capital with him.

Exhibit TN-5 summarizes the evaluation of the three cases.

6. What is your evaluation of Rajat Gupta’s management of the next stage of knowledge management in McKinsey? How appropriate is his four-pronged approach?Gupta seems committed to the continued development of McKinsey’s knowledge network not only by supporting the elements described above, but also by creating new forums and mechanisms for knowledge development to address some of the concerns. His new initiatives recognize that the existing infrastructure of functional capability groups and clientele industry sector as well as the systems infrastructure of PD Net practice coordinators, etc., were put in place almost a decade ago when the firm was half its current size. While different from past approaches to knowledge management, his new initiatives still reflect a need to keep reinforcing personal networks and the “one-firm” culture that supports them.

The Practice Olympics engages all front-line associates, a group that to date has not participated widely in the firm’s knowledge development. However, this is the group that is most closely in contact with clients and, therefore, where the greatest opportunity exists to develop new ideas directly out of practice. The Practice Olympics also has the benefit of creating direct contact among associates, exposing them to each other’s ideas without having to go through formal structures or systems.

Finally, it has allowed Gupta to send a powerful message to the organization that everyone is in the business of “snowball making,” right down to the most junior associate. In contrast, Gupta’s six Special Initiatives tap into the senior partners who have long provided leadership in the development and transfer of knowledge in McKinsey. However, there are two important differences in this initiative. The first is that the topics cut across the industry and functional groups that have previously defined the main

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channel of knowledge development providing a means to break down compartmentalization and insularity that were of concern in European telecoms. The second is that those leading the initiatives are encouraged to reach outside of the firm to pull in knowledge from academics and others with expertise. This directly addresses JohnStuckey’s comment on page 10 of the case: “We have to beware of the trap that many large successful companies have fallen into by becoming too introverted, too satisfied with their own view of the world.”

The third additional prong in Gupta’s knowledge-building strategy is the expansion of thefirm-sponsored research centers. This initiative will put McKinsey directly in competition with universities for recruiting the best and the brightest PhDs, people who do not see their role as traditional consultants but rather as researchers and knowledge builders. This is an important initiative from several standpoints, not least of which is that it provides yet another signal that the firm wants to legitimize the development of experts within its organization.

It is interesting to note that the Special Initiatives and Research Centers seem to be drivenmore by the expert-based “discover-codify-disseminate” philosophy of knowledge development, while the Practice Olympics reinforce the spontaneous front-line learning of the “engage-explore-apply-share” model. This reflects Gupta’s philosophy that rather than getting caught up in philosophical debates, the firm “had to pursue all the options.” One might question the validity of that assumption, and this leads to a follow-up question:

Every competitive advantage comes with a cost. What is the cost—benefit analysis on these investments?This will allow an exploration of an often-overlooked fact that the development of new knowledge does not come cheaply. Gupta states that McKinsey has “doubled its investment in knowledge over the past couple of years” and has indicated that this means that the firm may be doing 5% to 10% less client work as a result. With billings of $1.8 billion, this translates to somewhere around $90 million to a $180 million of additional investment in knowledge building per annum.

This is a substantial commitment by the firm’s 470 partners since it represents a loss of marginal revenue (almost all of which would become marginal profit) of $190,000 to $380,000 per partner. Despite the cost, most students are likely to agree that this is what it will take to keep McKinsey a leading player in a knowledge-intensive, service-based business facing strong global competition. Indeed, some may feel that Gupta should be doing more to keep McKinsey ahead, and the instructor might spend some time soliciting specific proposals.

Why is McKinsey consistently the number one employer of preference for MBA graduates worldwide—despite the fact that there is an 85% chance that the associate will be asked to leave within 7 or 8 years?This discussion, which strikes close to the heart of MBA student interests, is likely to result in a lively debate. Many reasons will be given (prestige, salary, etc.), but the issue

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that is central here is that many students believe they can get an excellent post-postgraduate education. Formal training and on-the-job experience will develop their expertise, not only making them of more value to McKinsey, but also increasing the associates’ market value.

This discussion leads to a summary around the new employment contract in knowledge-based firms which I build around the concepts developed in Chapter 10 of The Individualized Corporation, “The New Moral Contract: Companies as Value-Creating Institutions.” A the center of this discussion is the changing relationship that companies must negotiate with their employees in an environment in which those at the top who have traditionally directed strategy through their control over the scarce financial resources, must give responsibility to those on the front lines who control the new critical resource—knowledge and expertise. (See Exhibit TN-6)

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