You are on page 1of 130

WH Smith plc

Bill Sutherland
This case examines a well-known retailer, WH Smith plc, and adjustments to its
portfolio of business units in light of falling margins and changes to its external and
competitive environments. At a time when mass retailing was coming under pressure
from specialist retailers, WH Smith sought to redefine its position and improve its
financial performance with special emphasis on increasing margins. A further aspect of
the case reviews the companys unsuccessful attempts to change the balance of power
in the wholesale magazine distribution industry - resulting in their decision to exit from
that field. The case can be used to evaluate aspects of corporate strategic choices.


INTRODUCTION
WH Smith plc, the name of the WH Smith Group with effect from 1 February 2000,
has been a familiar name in high-street retailing in the UK for many years. The change
of name was intended firstly to reflect how customers commonly refer to the company;
secondly, it was hoped that it would help to promote the WH Smith brand across the
business. The company believes that its brand is synonymous in the high street with the
concept of trust and accessibility and it hoped to build on these core values for the
future. In 2000, WH Smith had sales of 2,584 million and some 26,400 employees.
The business units were focused on retailing (predominantly book, magazine and
stationery retailing), consumer publishing and news distribution. Although the majority
of its business is UK based, the company operates in a further 10 countries, with North
American, Asian, Australian and mainland European presence. WH Smith was the
leading seller of books and magazines in the UK in 2000. The configuration of the
business at the start of 2001 is detailed in Exhibit 1. Selected financial information is
provided in Exhibit 2.
The structure of the company has rarely been static since the mid-1990s, with several
businesses being acquired and others sold. There has been significant change and many
tough decisions over the years to reach this point.

Exhibit 1 WH Smith business units in 2001

__________________________________________________________
____________
PRINCIPLE BUSINESS DESCRIPTION ANNUAL TURNOVER
UNITS MILLION (YEAR
1999/2000)
WH Smith High Street 1,058
Retail outlets primarily in high
street and shopping mall locations
WH Smith Europe 265
Travel Retail Retail outlets located primarily in
UK airports and railway stations
WH Smith USA Retail outlets in airports and 192
Travel Retail hotels
WH Smith Asia Retail outlets primarily in 12
Travel Retail Singapore, Hong Kong and
Australia
WH Smith.co.uk Online retailing service 7
Hodder Headline Book publishing 105
WH Smith News Newspaper and magazine 945
Distribution wholesaling, marketing and
distribution
TOTAL 2,584

THE DEVELOPMENT OF WH SMITH


The history of the business is a fascinating one. Established in 1792, WH Smith is
arguably one of the best-known names in high-street retailing. The company was
originally a family newsvendor business run from a small store in London. Several
generations of the Smith family presided over continuous growth in the formative
years. In 1848 the company opened its first bookstall at a railway station, Euston in
London. These station outlets expanded rapidly, taking advantage of the growth in
railways at that time. Newspaper distribution businesses and a printing works were
acquired and the first overseas branch was opened in Paris in 1903- Expansion into
North American markets began in Canada in the 1950s and was followed by entry to
America in the 1960s. In the 1970s the company diversified into the travel agency
business and do-it-yourself (DIY) stores. The 1980s and 1990s saw further acquisitions
of stationers, office suppliers and the music retailer, Our Price, and joint ventures with
Boots in DIY and Virgin in music retail. A controlling interest in the major specialist
book retailer, Waterstones, was achieved in 1989.

Exhibit 2 Selected financial information


BUSINESS 200 199 199 199 199 199 200 199 199 199 199 199 200199 199 199 199 199 200 199 199 199 199 199
UNIT 0 9 8 7 6 5 0 9 8 7 6 5 09 8 7 6 5 0 9 8 7 6 5

WHS High 1,0 1,03


Street 58 3 894 796 778773 69 60 49 43 41 53 7 6 5 5 5 7 51 50 36 32 37 42
WHS Travel
265 242 172 125 114107 17 14 75 5 4 6 6 4 4 4 4 13 12 5 4 5 3
Europe
WHS Travel
192 178 171 150 134127 12 13 9 10 9 7 6 7 5 7 7 6 9 11 7 7 8 6
USA
WHS Travel
4 4 -2 -50 -1
Asia 12 8 2 0 0 0 0 0 0 0 0
Internet -
7 5 1 -8 -3 -60 -6 -3
Trading 114
TOTAL 1.5 1,461,241,07 1,021,00
RETAIL 34 6 2 5 87 90 84 63 58 55 64 6 6 5 5 5 6 67 70 47 43 50 50
Publishing
105 4 15 14 3
Businesses 28 16 12
WHS News
Distribution
945 897 933 946 884793 38 39 45 45 31 36 4 4 5 5 3 4 28 33 33 33 28 28
Discontinue
d
operations
(disposals)
0 0 643 790 916889 0 0 37 36 25 27 0 0 27 27 23 21
TOTAL 2,5 2,392,812,81 2,822,68 135 135135 127 5 5 5 5 4 5
GROUP 84 1 8 1 89 120 111

WH SMITH FROM 1995 TO 2000


Exhibit 3 provides the core business units in 1995. The performance of the business at
this time came under intense scrutiny following some difficult trading conditions
prompted by an economic downturn in the UK which had significant impact on the
housing market and corresponding knock-on effects in the DIY sector. In 1995 the book
selling and publishing industries faced some major changes following the removal of
the Net Book Agreement. This agreement had until then effectively fixed the price of
books in the UK. The change in legislation provided opportunities to promote special
offers relating to books or to compete with lower prices. This also enabled other
volume multiple retailers such as supermarkets to actively undercut the more traditional
bookselling companies.
In the mid-1990s sales in the books, periodicals and newspapers segment of retailing
grew by 9-7 per cent in a four-year period compared with other

Selected elements of the retailing sector such as floor coverings,


pharmaceutical/medical and specialised stores which exhibited growth of 22, 22 and 27
per cent respectively over the same period.
The then chairman and group chief executive, Jeremy Hardie, had to explain the
companys performance to its shareholders. His opening statement in the 1995 annual
report did not pull any punches; it read:

Exhibit 3 WH Smith business units in1995


ANNUAL
TURNOVER
DESCRIPTION MILLION
PRINCIPAL BUSINESS UNITS (YEAR
1994/1995)
Virgin Our Price 414
Music, games, video,
multimedia retail outlets

Waterstone's Book retail outlets 148


WH Smith News (Distribution) Newspaper and 806
magazine wholesaling,
marketing and
distribution
WH Smith Business Supplies 165
Acquisition and
distribution of stationery
supplies
WH Smith Retail 916
Book, multimedia and
stationery retail outlets

WH Smith USA Retail outlets in the USA 240


including those under the
brand names of The Wall
(music retail), Waterstone's
(book retail) and outlets in
hotels and airports
Heathcote Books Book wholesaler Not specified in
annual report
Do it All Do-it-yourself chain Not specified in
annual report
TOTAL 2,689
__________________________________________________________________
In last years report I said that we must do better. We have done worse. The perform-
ance on which we are reporting this year is unacceptable. We fully recognise that over
the next two or three years we will still have to do a lot better.
A reduction of 7.6 per cent in Group profits is not cataclysmic. But against the
growth plans which we had developed for the Group over the next few years and the
expectations which we create among our investors, it has raised pointed questions about
the calibre of the Groups senior management and the quality of our strategy.
I have no doubts about our strategy for securing future growth. We recognised some
time ago that our specialist retail brands - Virgin Our Price and Waterstone's had a lot
of potential. We have invested heavily in building these brands and we have made them
profitable. We saw good opportunities for developing both WH Smith and our specialist
brands in the USA and we have not been disappointed.
Our office supplies business, despite a setback in 1994/95, should move ahead strongly
over the next few years as the benefits of rationalisation are secured. WH Smith News,
the oldest business in the Group, is once again proving its capacity to move with the
market and will go on earning good profits.
But for many months - well before the May profits warning - it has been clear that
WH Smith Retail faces a formidable task. Threatened in some areas by supermarkets
and in others by the specialists, some analysts argue that it no longer has a future. It is
true that WH Smith will continue to face increasing competition, but so will all
retailers, so that cannot of itself be fatal. The key task, having identified afresh our
substantial customer base, is to serve it much better than we do now. This is the
opportunity to make our profits grow.

It was clear that the company could not continue with its strategy as it had failed to
deliver the key anticipated objective of improvements to margins. Changes to its
strategy were required if it was to retain its place as a major force in its industry. A
major strategic review of WH Smith, its operations and customers was reported in the
groups 1996 annual report. This review resulted in a rationalisation of the portfolio of
the company. The overall aim of the review was to improve net margins by increasing
customer satisfaction and sales. Exhibit 4 summarises the various disposals and
acquisitions made by the company from
1996 to 2000.
The performance of the company could not just be blamed on changes to its business
environment. The review also looked internally to streamline supply chain issues,
improve supplier relationships and remove unprofitable product lines. An external
benchmarking exercise was also undertaken and the top management team strengthened
by employing several external directors for finance, operations management, and
supply chain logistics. Stores were also revamped in response to feedback from
customers.
Following the problems identified in 1995 the organisation itself adopted a flatter
management structure and certain individuals in key positions were

Exhibit 4 Significant events in the corporate profile of WH Smith, 1996-


2000
______________________________________________________________________
BOOK AND MUSIC AND
MAGAZINE VIDEO STATIONER
YEAR PUBLISHING RETAILING RETAILING Y OTHER
1996 Sells Heathcote Sells the Sells 50% share
Books (wholesale Niceday in Do It All DIY
bookselling) to stationery chain to Boots
John Menzies pic company (WH
Smith
Business
Sells
1997 Paperchase

Closes chain Sells stake in


Launches loyalty of 29 Virgin Cinemas
card Clubcard Playhouse
scheme Video stores
Enters the
gaming hotel Sells 'The
market in the Wall, its US
USA music
retailing
business, to
Camelot
1998 Sells its 75%
stake in Our
Sells
Price music
Waterstone's to retailing to
EMI Group Virgin Group
Purchases John
Menzies retail
chain
Purchases the
Internet
Bookshop
1999 Acquires Helicon Signs up for the
Publishing Open shopping
(electronic channel (digital
publisher) interactive TV)
Acquires book
publisherHodder
Headline Launches
Purchases Internet portal
wayland site for selling
Publishing Ltd online in alliance
which speecialiseswith Telewest
in books for and
schools Carlton
______________________________________________________________________
2000 Appoints John Brown Purchases The Forms Connect2U
Contract Publishing to Benjamin Company (80% holding) a
produce WH Smith stores in the USA business-to-busines
own-brand magazines Acquires Hazelwood s Internet trading
and guides Enterprises Inc. Portal in alliance
(retail outlets in 71 with Axon. Forms
Hotel- based stores) alliances with BT,
Egg and OnDigital
______________________________________________________________________
replaced. The group moved to new, less costly headquarters and proposed to deliver a
more commercial, customer focused culture. In 1996 the role of group chief executive
was given to Bill Cockbum, with Jeremy Hardie continuing as chairman. This
appointment was, however, short-lived, as Bill Cock- bum resigned in 1997 and after a
gap of three months Richard Handover, who was previously managing director of WH
Smith News, was confirmed as his replacement.
In 1998, having disposed of its Waterstones book chain for 300 million and its
music retail businesses The Wall and Our Price for 28 million and 153 million
respectively, WH Smith used some of the proceeds to purchase the high- street stores of
its main competitor, John Menzies, at a cost of 70 million. Some 232 stores were
purchased as part of the deal and gave WH Smith immediate access to markets in
Scotland where its presence had been limited. By 2001, WH Smiths stores had sold
more books than any other retailer in the UK.
Changes to the top management of the company continued, with Jeremy Hardie
standing down as chairman in November 1999 and being replaced by Martin Taylor
who had rejoined the board earlier that year.

The WH Smith brand


The company believed that the WH Smith brand was a powerful asset, standing as it
does for associations of trust and accessibility. Richard Handover, WH Smith group
chief executive, said, It has enormous untapped power and potential. Our products
provide entertainment and learning for our customers. We aspire to create an
environment and customer offer that is exciting, adventuresome and inspirational.
Other industry watchers commented that the WH Smith product was unexciting and
undifferentiated given that other multiple retailers carried identical products. Some also
questioned what WH Smith was actually for, given that others could satisfy the same
needs, sometimes even more conveniently than the high-street retailer.
Exhibit 5 provides additional background to changes in the number of stores, retail
space available and staff numbers in the late 1990s. The following paragraphs describe
the business units at the start of the year 2001, with further background information on
the history of their development and issues which were then being faced.

WH SMITH IN 2001
WH Smith High Street
The primary categories of merchandise in the high-street stores were books, magazines,
stationery, music and video products. Books, stationery and magazines were the core
markets. Exhibit 6 lists the various product and service offerings from many of these
stores in 2001. UK retailing has seen significant industry consolidation in the 1980s
and 1990s. The sector was dominated by

Exhibit 5 Stores, retail space and staff

YEAR 2000 1999 1998 1997


Number of stores
WHS High Street 529 545 558 413
WHS Travel Europe 187 183 184 105
WHS Travel USA 503 412 409 387
WHS Travel Asia 20 10 8 2
TOTALS 1,239 1,150 1,159 907
Retail selling space in square metres
(000's)
WHS High Street 271.8 275.6 277.3 208.4
WHS Travel Europe 18.6 18.1 17.9 9.9
WHS Travel USA 47.0 41.5 41.4 39.6
WHS Travel Asia 2.5 0.8 0.7 0.4
TOTALS 339.9 336.0 337.3 258.2
Number of employees
WHS High Street 15,772 17,290 16,906 14,025
WHS Travel Europe 2,764 2,733 2,626 1,561
WHS Travel USA 3,309 2,762 3,039 3,118
WHS Travel Asia 173 89 90 45
TOTAL RETAIL 22,018 22,874 22,661 18,749
WHS News Distribution 4,397 4,278 4,406 4,749
Number of employees (FTE*)
WHS High Street 8,036 9,012 8,935 7,419
WHS Travel Europe 1,774 1,754 1,685 978
WHS Travel USA 2,838 2,110 2,464 2,467
WHS Travel Asia 160 86 90 35
TOTAL RETAIL 12,808 12,962 13,174 10,899
WHS News Distribution 3,509 3,370 3,467 3,720
______________________________________________________________________
* FTE = Full Time Equivalents, i.e. the reduction of the number of people employed
(including part-time staff) to full-time equivalents.
supermarkets, which, by the late 1990s, together accounted for more than 37 per cent of
total retail sales. There was strong evidence that these large food multiples were
expanding into other non-food market segments, with the pharmaceutical, book,
clothing and home electrical sectors being particularly favoured. Many of these familiar
names such as Tesco, Sainsbury, and Marks and Spencer had already diversified into
services such as finance, DIY and furnishings respectively. Books were a key product
area for WH Smith and it faced increasing competition in this product line from
superstores and online sales companies.
WH Smith embarked on a store revamp and selectively closed old stores which it did
not consider suitable for refurbishment or which were poorly positioned, such as the 21
former John Menzies stores it closed in 2000, and identified new locations such as
shopping malls.
______________________________________________________________________

Products
Home entertainment, videos, CDs, DVDs
Books, magazines and newspapers
Home, office and fashion stationery
Education and revision aids
Travel guides and maps
Art materials
Theatre tickets
Gift vouchers
Gift ranges comprising activities such as wine tasting, white water rafting
Stamps
Batteries
Lottery tickets
Electronic products
Confectionery
Snacks and soft drinks
Rhone cards

Services (not in all stores)


Online kiosks (for delivery to customer)
Book ordering
Magazine ordering
Historic newspapers
Photographic film processing
CD-ROM factory - burn your own CDs
Information screens
Newspaper payment point (honesty box)
Customer helpline
WHS International Travel Retail (USA, Europe and Asia)
WH Smith has provided news vending at travel centres, starting with railway stations in
London and latterly at airports in the UK, USA and Hong Kong. Since becoming the
first retailer at Londons Heathrow Airport in 1948, it has continued a long tradition of
exploiting retail opportunities in the travel business. To this has been added the
development of opportunities in the hotel and gaming hotel market in the USA.
The travel retail businesses had specialised stores located at airport, train stations and
hotels. In 2000, some 8 per cent of the companys turnover was earned in foreign
currencies. The size of Travel Retail effectively doubled in 1998 with the purchase of
the John Menzies chain. The Travel Retail business units were formed in 1998, as an
organisational change which reflected the different attitude of the travelling public from
the shopping public. Customers of the Travel Retail outlets, in contrast to the high
street outlets, had little time to browse and required to make their purchases quickly
with minimum disruption to their busy schedules. To help achieve this WH Smith
introduced honesty' boxes for customers to pay for their newspapers without using a
till. Changing the sales mix to one with less entertainment and more books helped
improve the margins in the Europe Travel business unit. Prior to 1998, these stores
were considered part of the High Street business.
These airport and station outlets recognised the differing needs of their customers
which were distinct from high-street customers. When time is limited, efficient store
configuration is particularly important. Innovative promotions such as Read of the
week' for books and Hot off the Press for magazines stimulated sales and provided the
regular travelling public with something fresh every week. Airport business
performance was particularly strong in the late 1990s and the company continued to
negotiate long-term contracts with major airports in the USA and elsewhere. WH Smith
had a presence in nine of the top ten US airports following its acquisition of Benjamin
Books. The 2000 annual report stated that the USA was seen as the largest English
language consumer market in the world.
The Asian market performed poorly in the late 1990s but, despite this, WH Smith
continued to invest in new stores and entered the Australian market in 1999 with a
contract to operate retail outlets at Sydney airport.
Europe Travel Retail was focused mainly on UK airports and railway stations.
London stations showed particularly strong sales performances in 2000, up some 10 per
cent on the year 1999. Forecasts from the Civil Aviation Authority and British Airports
Authority estimated strong growth in the number of airport passengers at around 5 per
cent per annum to the year 2005.

Publishing
WH Smith strengthened the publishing stream of its portfolio in February 1999 with the
acquisition for 6 million of Helicon Publishing, the Oxford-based publisher of
Hutchison Encyclopaedia. Hodder Headline, which had an educational publishing
division and its own commercially focused mainstream titles, was acquired for 192
million in May 1999. The company produced educational textbooks and home learning
guides, including the well-known Teach Yourself brand. The thinking behind the
purchases was to increase ownership of home-grown content and to improve the WH
Smith own-brand titles and develop itself as a publisher of mainstream books in its own
right. The publishing arm would also feed through to online content.
In rebuilding its book ranges WH Smith focused on food, travel, gardening and
popular fiction. The company was also well known for its own-brand GCSE syllabus
books and its range of educational books for 3-11-year-olds which were unique to the
high street. According to the 2000 annual report, sales of these and other own-brand
products had grown by 15 per cent across the group.
A range of electronic books (e-books) has been produced by Hodder in conjunction
with Helicon. Helicon was also heavily involved with the launch of the worlds first
encyclopaedia for interactive digital television.
In October 2000 the group announced its intentions to enter the magazine publishing
sector. It planned to launch a series of WH Smith-branded one-off guides and lifestyle
titles. These gave purchasers advice on a range of issues from getting fit, to the pros
and cons of purchasing a new computer or hi-fi music system. The contract for these
products was given to John Brown Contract Publishing (JBCP). JBCP chief executive
Andrew Hirsch denied that the new titles were in direct competition to other magazine
products. They are not monthly newsstand titles, so they will not compete with titles
that are already in store, he said.

Internet Trading
Some key acquisitions in the late 1990s provided WH Smith with its Internet presence
at whsmith.co.uk. It purchased bookshop.co.uk for approximately 9 5 million. The
Internet business in 2000 demonstrated a 55 per cent increase in sales - though the
business unit itself was not profitable. One element of the e-business activity which
was dissimilar to other online product offerings was the ability of WH Smith customers
to order goods online for pickup or return to their nearest WH Smith high street store.
Internet kiosks were installed in some existing retail units. Strategic alliances were
formed with BT, Open, Egg, MSN, Telewest, OnDigital (which became ITV Digital in
2001) and Carlton to extend its distribution channels.

WH Smith News Distribution


WH Smiths News Distribution division was responsible for the wholesale and delivery
of magazines and newspapers to some 25,000 businesses comprising its own retail
outlets and also those of other retail businesses throughout the UK. As well as
distributing and delivering newspapers and magazines to its own retail stores, WH
Smith News also delivered newspapers to other outlets, including independent
newsagents, confectioners, tobacconists, newsagents, petrol retail forecourts and
multiple retailers such as supermarkets. This process involved advising retailers of
appropriate titles and appropriate quantities for their local market. Independent retailers
accounted for some 40 per cent of magazine sales. By 2000 WH Smith News delivered
34 per cent of all newspapers in the UK and 36 per cent of all magazines, making WH
Smith the biggest wholesaler of news in the UK.
Contracts for distribution were struck with publishers of newspapers and periodicals.
In 1998 a contract with Emap valued at SAI million, which generated 6 million of
profits, was lost. Some 75 per cent of turnover for the business unit came from its long-
term contracts. In order to secure these long-term contracts the company came under
pressure from customers to offer additional discount and as a consequence of these bulk
arrangements profit margins were reduced. By the end of the century growth in the
magazine market had slowed and WH Smith sought to use its logistical capabilities in
other areas, such as the distribution of pre-paid mobile phone cards.
John Menzies continued to offer news distribution in Scotland, although WH Smith
opened new distribution centres in both Scotland and Leeds in the north of England in
2000.
As stated earlier, WH Smith Retail is a customer of WH Smith News distribution. Of
the 1,047 million sales in 2000. some 102 million of sales were attributable to WH
Smith retailing businesses. This proportion of in house sales had remained at a little
short of 10 per cent for some four years.
The main challenges for WH Smith News was the timely distribution of newspapers
and journals and the provision of sufficient quantities to match supply with demand.
The implementation of SAP information systems and the launch of the Connect2U
portal with its technology partner. Axon, indicated significant investment in the
logistics and supporting technology to improve distribution. The portal permitted
newsagents direct access to place and monitor their order through the Internet. Some
500 independent retail outlets had entered into an agreement with WH Smith for the
facility, which helped the company manage and track the daily sales of some 2,500
magazine and 300 newspaper titles.

THE NEWS DISTRIBUTION SYSTEM


The distribution of newspapers and magazines in the UK is a major logistical exercise.
Newspapers in particular have a limited shelf-life and it is therefore critical to ensure
that they are distributed speedily and efficiently. The distribution system relies on
wholesalers who are assigned exclusive distribution rights within a specific
geographical area for both magazines and national newspapers. Wholesalers are in
effect middlemen for the publishers of newspapers and magazines. National retailers
must therefore negotiate with a variety of wholesalers up and down the country rather
than with a single wholesaler for the supply of the retailers national magazine
requirement.
The distribution system itself was seen as inefficient with up to one-third of all
magazines being pulped because they remained unsold. Retailers routinely either
complained about getting insufficient access to supplies of magazines or claimed to be
forced into taking large numbers of magazines which they did not wish to stock. In
some cases retailers might sell out of the more popular periodicals in days and could
not get further supplies even though there may have been unsold copies lying elsewhere
in the country. WH Smith claimed that as a result of this mismatch sales of some 36
million per year were being lost. WH Smith and John Menzies had the major share of
the wholesaling and distribution business, with competition from Surridge Dawson and
some other smaller independents.

Arguments for change


In 2000, WH Smith embarked on a controversial agreement with Tesco, the UKs
largest supermarket, which raised major concerns from all comers of the industry. In its
annual report of that year, chairman Martin Taylor stated, WH Smith has acted with
determination in the UK to recast the magazine supply chain, which has been
dominated by producer interests for too long. This statement was backed up with
action in the form of a proposed joint magazines distribution deal with the supermarket
giant. What the two companies were proposing was for a single wholesaler to supply
the UKs national magazine requirements for all multiple retailers.
Such an agreement would benefit national retailers like Tesco as they would have to
negotiate only one contract for distribution rather than a range of locally specific ones
as required under the existing scheme. Single wholesaling contracts would offer some
economies of scale and also reduce the power of local wholesalers.
Tesco and WH Smith suggested that the proposed deal would improve market
freedom and extend consumer choice. IJoyd Wigglesworth of WH Smith claimed that
the deal would actually result in less money for WH Smith and it affirmed that the
company wished to might drop, he argued that the independents would retain the ability
to complain and seek improvements.safeguard the future of independent retailers, and
indeed that those retailers would welcome change in the supply chain. In response to
suggestions that service levels.
With a national distribution system there was speculation that WH Smith, having
more control, would be able to identify and focus on deals with publishers which were
more lucrative. There was the possibility of the independent retailers in turn having to
face higher charges from wholesalers trying to recoup lost sales.

Arguments against change


The deal was received with hostility from the publishers themselves and independent
retail outlets and the proposal became the subject of a report commissioned by the
Newspapers Publishing Association (NPA) by Professor Paul Dobson of Loughborough
University. The results of this report were presented to Members of Parliament and
other opinion formers with a view to block the proposed deal between Tesco and WH
Smith (some referred to this as the WHESCO deal). At the time, Tesco accounted for
some 7 per cent of sales of the 1.8 billion magazine market and WH Smith 16 per
cent.
The NPA argued that the proposal would impact the industry in a variety of ways,
including the abandonment of regional distribution in favour of national distribution.
This would have meant that many wholesalers would have had to compete nationally
for access to magazines and perhaps, if the agreement were to be extended, newspapers
as well. If the deal had been approved, WH Smith News would have had effective
control of over 50 per cent of the magazine distribution market.
Publishers believed that the proposed deal would adversely impact upon small
publishing houses and independent retailers and that it was likely that some companies
would be forced to cease trading and this, ultimately, would reduce consumer choice
and restrict where periodicals could be purchased. If small newsagents disappeared this
could result in localised areas across the country where access to newspapers was
severely restricted. This in turn would result in lower sales and job losses in both
retailing and newspaper publishing. Professor Dobsons report suggested that some
6,000 to 8,000 retail outlets might be out of business as a result of changes in magazine
distribution. Regional newspapers were likely to be hardest hit because many of them
had direct contracts with retail outlets and were therefore not as reliant on wholesalers.
Therefore, with the possibility of a national deal, regional newspaper publishers were
likely to suffer disproportionately as a result of the reduction in the numbers of these
retail outlets.

Events and outcomes


A reported slip of 3 per cent in WH Smiths profits for the wholesaling business to 38
million for 2000 added to the uncertainty surrounding the distribution deal with Tesco.
Richard Handover, WH Smith chief executive, insisted that rumours of a planned pull-
out of magazine and newspaper wholesaling altogether were unfounded. Despite these
problems Tesco and WH Smith pressed on with the proposed national distribution
system and the disagreements between the companies and publishers came to a head
when Griiner and Jahr (G&J), the publisher of periodicals Prima and Besf, had its
publications withdrawn from Tescos shelves after it refused to sign the deal with Tesco
and WH Smith. In response to this, G&J threatened to take matters to the Office of Fair
Trading (OFT) and a further blow was dealt when, in November 2000, the Daily Mails
publisher, Associated Newspapers, announced its decision to terminate two-thirds of its
newspaper distribution contract with WH Smith. Once implemented, this would have
removed approximately 100 million from WH Smiths annual revenues. This bad
news was further compounded when the distributors of Emap publications and the
BBCs magazines, Front Line and Seymour, threatened to terminate contracts with WH
Smith. Of the 500 million total value of these contracts, WH Smith had some 140
million of the business. The company was therefore under severe pressure to abandon
its proposed national system of magazine distribution and by the end of November
2000 the proposed deal with Tesco was abandoned.
Late in 2000 the Periodical Publishers Association ( PPA) announced plans for an
alternative new national information hub for the distribution of magazines from
publishers to retailers. The PPA was considering seeking out organisations which
provided similar services in other industries - such as national postal operators, or
possibly a consortium of existing wholesalers. A major focus of the PPA proposal was
the protection of the industrys 40,000 or so smaller retailers.
Following the withdrawal of the national distribution proposal a spokesperson for the
industry said, WH Smith has been surprised by the power of the industry. We are
delighted and are convinced that an industry-wide solution is the way forward.'
A press release on 12 April 2001 confirmed that the rumours surrounding the
proposed sale of the WH Smith News Distribution business unit were in fact correct
after all. Richard Handover commented. The decision to sell WH Smith News is
consistent with our strategy of realising the potential of the WH Smith brand through
our retail and publishing businesses. Whilst WH Smith News continues to create value
for the Group and is highly cash generative, over the longer term it is not central to
achieving these objectives.'
Against this background of events, Richard Handover identified that the challenge
for WH Smith in the new century was to maintain and build upon its history of
innovation - as it had done for some 200 years. The management of WH Smith's
portfolio of products and services in a rapidly changing business environment continues
to test the creativity and skills of its people.

SOURCES
Bennett. N. (2000) Newsagents threatened by retail giants'. The Telegraph, 6 August
2000. Dobson. P. (2000) 'The impact of proposed national distribution developments on
the UK
Regional Press Industry', Loughborough University, a Report for the Newspaper
Society. Olins, R. (1997) 'Cockburn leaves WH Smith in limbo', The Sunday Times, 29
June 1997. Rankine, K. (2000) 'WH Smith denies plan for wholesale pullout', The
Telegraph, 27 October 2000.
Rees. J. (2001) Press barons cut WH Smith plan to ribbons', Scotland on Sunday. 7
January
2001.
Stretton, M. (2000) 'Magazine publishers in revolt over distribution shake-up. The
Sunday
Times, 13 August 2000.
WH Smith pic. Embracing the future', 2000.
WH Smith pic Annual Report and Accounts 2000.
WH Smith Group pic Annual Report and Accounts 1999.
WH Smith Group pic Annual Report and Accounts 1998.
WH Smith Group pic Annual Report and Accounts 1997.
WH Smith Group pic Annual Report 1996.
WH Smith Group pic Annual Report 1995.

NOTE
Regarding figures in exhibits: Year on year comparisons of WH Smith's financial
performance are complicated by the disposal and acquisition of business units, the
development of an Internet business which is initially in a loss-making situation and in
some years the return of capital to shareholders. Nevertheless, the exhibits provide
some background data to the performance of the individual business units.
GlaxoSmithKline-a merger of
equals?

Bernardo Batiz-Lazo
This case summarises events leading to the creation of a global giant. The merger of
Glaxo Wellcome and SmithKline Beecham had implications that went beyond the UK,
where both companies were domiciled. The new company sought to take residence in
the US but anti-trust authorities kept the companies formally apart for more than a
year as they examined every aspect of the deal. The case invites readers to consider the
process of integration as a general strategy, as well as the expectations, deliberations
and motivation of managers and shareholders in doing so.


Exhibit 1 summarises how, during the 1990s, Europes pharmaceutical companies were
locked in a high-stakes multi-billion dollar struggle with their US rivals to stay in
business beyond the first decade of the twenty-first century. The frenzy of takeover
activity resulted from companies seeking economies of scale to finance spiralling
research and development budgets. However reassured companies could be of going
alone, each new merger deal intensified pressure on rivals either to respond with
matching amalgamations or to risk falling behind in the race for market share. Merger
activity during the 1990s took place while little evidence emerged to suggest that
bigger research programmes were better (least of all after a merger) to replenish the
pipeline. For instance, the amalgamation of Hoechst (Germany) and Rhone-Poulenc
(France) into Aventis reported a meagre 13 per cent annual increase in profits between
1999 and 2000. Aventiss financial performance was amongst the lowest in the industry'
but typical for a drugs company that had merged and had realised as much cost-saving
as possible.
More representative of the industry norm were Pfizer and newly formed
GlaxoSmithKline. Pfizer reported a 27 per cent annual increase in profits between 1998
and 1999 after launching Viagra. In 2001 GlaxoSmithKline reported a 29 per cent
annual increase in profits from that achieved a year earlier by its originating companies.
But while Pfizers performance resulted directly from the successful launch of a new
product, some questioned GlaxoSmithKlines ability to generate and sustain revenue
growth. Deciding

______________
This case was prepared by Bernardo Batiz-Lazo, Open University Business School. It is intended as
a basis for class discussion and not as an illustration of either good or bad management practice.
Helpful comments from Sarah Holland, Steve Gorton and Ana Maria Valdes are gratefully
acknowledged. B Batiz-Lazo, 2001. Not to be reproduced or quoted without permission.

Exhibit 1 Ethical drug after mergers are completed ($millions, 1998)


EUROPEA
TOTAL US N
COMPANY SALES SALES RANK SALES RANK
GlaxoSmithKline 21,227 9,504 2 5,028 2
Pfizer (including
Warner-Lambert) 17,834 11,435 1 3,170 6
Aventis 15,172 3,061 12 5,526 1
Merck 12,840 6,076 4 1,864 10
AstraZeneca 11,876 5,519 5 3,422 3
Bristol-Myers Squibb 10,368 8,393 3 2,926 5
Novartis 9,534 3,995 11 3,111 4
American Home Products 8,902 4,723 8 1,398 14
Eli Lilly 8,622 4,517 9 1,006 21
Johnson & Johnson 8,562 4,857 6 1,781 11
______________________________________________________________________
whether shareholders of GlaxoSmithKline should expect disappointing results in the
medium term, however, was not so straightforward.

SMITHLINE BEECHAM
The 1989 merger of Beecham and SmithKline Beckman led to the creation of a
transcontinental pharmaceutical and healthcare firm, and also sparked a wave of
mergers between pharmaceutical companies that spanned the following decade.
Beecham and SmithKline Beckman were two 'also fans', both running out of internal
options: SmithKline had failed in its efforts to replace the income stream of its main
blockbuster' drug (Tagamet) but had an aggressive salesforce in the US. Beecham was
essentially a consumer goods company that had been successful in early research on
antibiotics. Beecham had neither the mass nor the competences to become a serious
pharmaceutical player but it and SmithKline Beckman felt threatened as potential
takeover targets.
Through amalgamation, both Beecham and SmithKline Beckman were able to keep
up with critical mass in R&D, as the combined research budget doubled, but total R&D
expenditure still lagged behind the likes of top firms such as Glaxo, which were
outspending them two to one. However, the amalgamation resulted in a meticulous
power-sharing agreement between the two management groups and brought about a
new organisation with international marketing and sales presence.
People at SmithKline Beecham knew that the advantage of a friendly merger was
allowing for 'equality of chances' for those involved - a perception reinforced by Mr
Bauman CEO, and his team investing substantial amount of time and effort to create a
new culture (under the Simply Better initiative), which also transformed the way people
were measured and rewarded. The amalgamation of Beecham and SmithKline
Beckman was lengthy and relied on a combination of benchmarking (i.e. continuous
improvement efforts) and process re-engineering. But the fairly lengthy integration
process resulted in great deal of uncertainty for the workforce as stringent demands
were made on individual managers, who were not given their new responsibilities until
after the integration plans and new organisation structures were approved.
Jan Leschly became chief executive in 1994 and was responsible for the continuing
implementation of Baumans vision. The key element of this vision was to create a
'fully integrated healthcare provider' through, among other things, diversifying into
managed care in the US. The intent was for the pharmaceutical company to match
services already offered by insurance companies, hospitals and doctors, by offering
complete healthcare packages for a flat, up-front fee. Merck had been the first to
integrate vertically by acquiring a pharmacy benefit manager (PBM) called Medco in
1993. This move was followed by other major pharmaceutical companies in 1994 when
SmithKline Beechant and Eli Lilly purchased DPS and PCS Health Systems,
respectively.
Drugs companies aimed to integrate vertically for several reasons. First, there was a
potential threat in the success of the managed care model: in the US and elsewhere,
pharmaceuticals could be reduced to meagre suppliers of commodity products. A
second reason involved the possibility of giving preference to SmithKline drugs in
formulary lists managed by DPS and substitution for SmithKlines leading prescription
drugs by DPS pharmacists. Yet a third reason was an expectation that synergies would
emerge from SmithKlines Clinical Laboratories division and DPS, enabling the group
to offer combined pharmaceutical and diagnostic testing services to large employers.
Another potential benefit was having access to detailed patient records, which would
improve drug discovery' processes but also benefit direct-to-consunter marketing
efforts.
Through the acquisition of DPS, SmithKline inherited a six-year alliance with United
Healthcare Corp., which owned several health management organisations (HMOs) with
some 1.6 million members. The alliance would assure SmithKline exclusive rights
among pharmaceutic-al and diagnostic companies, and access to medical outcome data
from members of HMOs owned by United Healthcare. This would constitute a set of
patient usage data, doctors' prescribing habits, and personal information that was more
complete than that accessible to Merck through Medco. The alliance, therefore, would
provide a potential advantage in conducting outcome studies as well as actuarial studies
on patient usage patterns.
However, the validity of the managed care model was questioned in 1998 when Ely
Lilly sold PCS, at a substantial financial loss. The following year SmithKline divested
DPS as well as the clinical laboratory' business. For the industry' the divestiture of
PBMs was more significant than the associated financial losses. The strategic turn
around of Eli Lilly and SmithKline Beecham signalled a failure to control distribution
channels through formulary lists and the inability of established pharmaceutical
companies to integrate proprietary- outcome and patient information into new drug
discovery.

GLAXO WELLCOME
In the mid-1970s, Glaxo was a small British firm with its origins in the dried milk
business and most of its sales in antibiotics, respiratory' drugs and nutritional
supplements. During the 1980s Glaxo grew organically and rapidly thanks to its
success in researching and developing innovative new medicines. By 1994 sales
totalled 5,656 million or 3-6 per cent of the world market, with earnings emerging
from a strong presence in Europe and the US.
The top industry' position was secured in 1995 when the industry as a whole faced
yet again climbing drug discovery costs. Glaxo managers effectively engineered a
takeover of Wellcome, as the Wellcome Foundation (the largest non-profit medical
institution in the UK) owned a 40 per cent stake in Glaxos Zantac and 39 per cent of
Wellcome s share capital. Zantac was an anti-ulcer blockbuster' product and the worlds
best-selling drug, commanding 35 per cent of the anti-ulceran market and achieving
record sales of 2.4 billion in 1994. Zantac had been launched at the beginning of the
1980s and contributed 43 per cent of Glaxos revenues, resulting in a large part of
Glaxos growth being based on Zantacs success. The problem was that Zantac's patent
expired in 1997.
Wellcome was known for its academic approach to pharmaceuticals, with strong
science but weak marketing. In 1996, and six months after the merger with Glaxo,
managers already claimed that the newly created Glaxo Wellcome was fully integrated
while its sales volume ranked worldwide first, it was the third largest company by
market capitalisation in London and the worlds largest pharmaceutical research firm
with 54,000 employees. But the reality was that a severe clash had occurred between
Wellcome and Glaxos hard- nosed. commercial culture and things had worsened by the
fact that few former Wellcome executives survived the takeover to sene the new Glaxo
Wellcome. Organisational culture problems were exacerbated by significant overlap
between product portfolios and the geographic distribution of the salesforce in key
therapy classes.
Top managers thus endeavoured to rationalise the overall organisation and introduce
economies of scale in R&D activities. How ever, executives had great difficulty holding
the new company together. Russell Reynolds, a top recruitment consulting firm, was
brought in to help reorganise w orldwide operations. The aim was to create a levelled
playing field so that few key individuals were lured away while, at the same time, the
integration of different units was smooth and effective. In spite of this, there was
increased middle-management turnover after coming together.
As part of its US operation, Glaxo Wellcome had developed presence in the managed
care sector through a subsidiary called Wyeth-Ayerst Healthcare Systems. This
company provided disease-management programmes, patient/ member materials,
outcomes assessment, and support for managed care marketing efforts. The incursion
into the managed care sector was cautious as management believed that research,
development and marketing of drugs were Glaxo Wcllcome's areas of expertise. Other
areas of excellence included developing world-class operations in combinatorial
chemistry and a late (although successful) involvement in the biotech industry'. A joint
venture with Warner-Lambert, called Lambert Wellcome, had given a foothold in the
pre- scription-to-OTC switch market and thanks to this venture Glaxo Wellcome
successfully managed competition from generics at the end of Zantac's patent in 1997.
At the time of the merger with Wellcome, the chief executive at Glaxo was Sir
Richard Sykes. He had been holding that job since 1994 and was a former (very
successful) British academic and R&D director, as well as a firm believer in investing
in R&D for company growth. One of the biggest setbacks of his career, at the top
position in the new Glaxo Wellcome, was the UK governments decision in 1999 not to
place Relenza, the company's new flu drug and the first real success of combinatorial
chemistry research, on the National Health Service list of prescription drugs. However,
he had been responsible for the diversification into emerging markets, a new
organisational structure (called global products responding to regional needs'), as well
as joint ventures in India and Japan.
By the end of the 1990s, some analysts were sceptical about whether the merger of
Glaxo with Wellcome had produced any synergies at all. It was true that sales of
revitalised Wellcome products through Glaxos marketing muscle had helped to avoid
slipping in the rankings, but it was also true that the drugs pipeline' was unimpressive
and many new products had failed to live up to expectations. The merger had, indeed,
brought Glaxo presence in certain therapeutic areas that it had not exploited before
(such as anti-virals), while Wellcome benefited from greater financial discipline and
focus. But both companies had been used to cash- and profit-rich years. So analysts
wondered whether costs had really been brought under control, whether Glaxo Well-
come had relied too much on disposals to flatter its earnings performance and, on
balance, many were disappointed that augmented R&D facilities had done little to
replenish the pipeline' by producing new potential blockbusters.

THE BIRTH OF GLAXOSMITHKLINE


In 1998, the merger between the two top British drugs companies seemed virtually
complete, with Glaxo Wellcome shareholders having 59.5 per cent of the new group,
leaving 40.5 per cent to SmithKline Beecham shareholders. With a market
capitalisation of SI 10 billion, the deal would create the biggest pharmaceutical
company and the world's third biggest corporation. The chief executive for the new
group was going to be Jan Leschly, a former international pro-tennis star turned
pharmaceuticals executive and SmithKline Beechams CEO. The new chairperson
would be Sir Richard Sykes, Glaxos CEO. But after a weekend meeting of intense
negotiations and to everyones surprise, the deal was called off. The following trading
day $6.6 billion or 10 per cent of SmithKline Beecham's market capitalisation was
knocked off while the stock price of Glaxo lost 13 per cent. Formally, Glaxo
Wellcome's directors indicated that they were not prepared to proceed on the agreed
basis. Informally, SmithKline directors claimed that Glaxo Wellcome reneged on the
original agreement that Leschly would be leader of the new colossus. Glaxo executives
never challenged this version of the events. Neither were there comments on whether
Mr Leschlys suggestion of spinning off the entire research effort into a separate
capital-raising company might have been rejected by Sir Richard and Glaxo as too
radical, sacrificing innovation in the pursuit of short-term cost reduction.
Both Leschly and Sykes had worked together in the past and some sort of rivalry
seemed to have emerged since then. Leschly's patriarchal management style and
SmithKlines financial rigour and performance-related culture seemed to have clashed
with Sykes passionate (sometimes even messianic) belief in science and Glaxo's more
traditional management model. But it appears that if Leschly and his colleagues had
retreated on the CEO issue, the merger would have gone through, and Leschly would
have been $100 million dollars richer - the value of his shares and stock options in
SmithKline, according to an estimate published in The Economist.
Another explanation offered for Mr Leschlys bitter reaction against the possibility
that he might not be the chief executive of the new group was based on matters of
principle and dignity. As CEO of SmithKline Beecham and before that as the CEO who
delivered Squibb to Bristol-Myers, Leschly had done well financially. With or without
the merger with Glaxo Wellcome he had already amassed enough for him and his
family to fulfil any conceivable material wants. At the same time, Sykes and his
management board disliked Leschlys management style and feared the merger would
turn into a takeover by SmithKline people. Glaxos management board also wanted to
break with tradition (as Skyes had not led the initial move to merge) and claim the top
post, because Glaxo Wellcome was the bigger of the proposed partners in terms of
market capitalisation, products and R&D expenditure.
The fact remained that after the failure to merge, SmithKline still lacked the R&D
funds to pursue its many leads for new drugs. Other major drugs companies continued
with their plans and merged, while later that year Glaxo Wellcome still remained
without a partner as managers also failed in their talks to amalgamate with Bristol-
Myers Squibb.
After the first round of merger talks collapsed in acrimony in 1998, renewed interest
in the merger emerged after Jan Leschly's retirement announcement in mid-1999, which
effectively removed the barrier to the merger. This was also the time when industry
participants learnt that Pfizer, the US drugs giant, had begun negotiating with Warner-
Lambert, another US competitor, to create the worlds second-largest drug maker with
the potential for a 6.7 per cent global market share, $4.5 billion in R&D spent, and $28"
billion in market capitalisation. Sir Richard Sykes said about his companys
determination to do a deal:

This is where two big successful organisations come together, not to protect future earnings
growth but actually to increase critical mass to really outperform the industry. . . . The more effort,
the more money, and the more power you can put to research, the stronger the company is going to
be.1

Significantly, as part of the new deal, Sir Richard Sykes agreed to become non-
executive chairman, a post of influence but few management responsibilities, while the
chief executive of the new GlaxoSmithKline would be Jean Pierre Gamier. Known
simply as JP', he had been raised in Normandy (in the north of France), where he grew
steadily on a diet of British and US movies and music (he still claims Jimi Hendrix as a
patron saint). Mr Gamier got a master's degree and a doctorate from Frances
Universite Louis Pasteur before accepting a Fulbright scholarship to Stanford
University. Except for a few years in various parts of Europe, Mr Gamier's career had
kept him in the US ever since, where he got a business degree. He joined SmithKline in
1990 as president of the pharmaceuticals division and moved to number one after
Leschly retired.
British and European regulators were swift to give clearance to the emergence of
GlaxoSmithKline, though some time after that the Federal Trade Commission (FTC),
the US competition regulator, forced the groups to dispose of medicines for
chemotherapy-induced nausea and herpes with annual sales of almost $400 million. At
that point managers felt that the most substantive issues had been dealt with. However,
the FTC continued to have concerns about the merged company s perceived
domination of the US smoking-cessation market and this caused a second delay in
taking the merger forward. The concerns of the FFC were based on the fact that, at the
time, SmithKline had the leading over-the-counter brand and Glaxo the only approved
prescription drug to help smokers quit - two key products which the FTC felt would
give the combined company control over 90 per cent of that market.
For some observers, managers at GlaxoSmithKline failed to envision that creating
the worlds biggest pharmaceuticals firm would involve a very complicated regulatory
submission process. Others argued that the arrogant approach by the new company
management team to the FTC was to blame. Yet others felt that regulators were
burdened with the recent wave of mega-mergers (in pharmaceuticals and elsewhere)
and that they were also influenced by the US presidential race (which put the spotlight
on healthcare spending). In any event, managers intimated that some regulatory delays
were anticipated but it was never thought that regulator) concerns in the US over
monopoly power of the new group in certain therapy classes would consume more than
10 months of negotiations and backtrack the merger process twice. Further, lengthy
negotiations with US regulators prevented the early implementation of the new
organisational structure. Executives were prevented from specifying how economies of
scale in labs would be achieved, how performance would improve or how co-operation
across business units would be implemented. Delays in getting regulatory clearance
also prevented managers from stopping speculation that the company could eventually
split up into separate businesses or announce how they would reckon with incompatible
information technology' platforms. All this, in turn, resulted in low morale and a 'brain
drain' of middle managers (although occurring mainly among administrative staff).
Nevertheless, developments were worrying for a corporation which had yet to be born
and which had yet to be born and which was already involved in a process full of
mishaps.

BUSINESS PORTFOLIO
As one of the key points of the merger, managers considered building operational
headquarters in the US while corporate headquarters would remain in the UK. The new
company's increasing leanings to the US in style and markets puzzled many, as Britain
was home to both originating companies and the UK one of the worlds leading centres
for the research, development and
Exhibit 2 Global presence and product leadership of GlaxoSmithKline (1998 pro
forma sales figure)
SALES
(% OF TOTAL
COMBINED MARKET SHARE (%
SALES) OF TOTAL SALES) RANK
Region
North America 45 8.9 1
Europe 34 7.6 1
Rest of the World 21
Asia Pacific 7.5 1
Middle East/Africa 7.6 1
Latin America 4.9 4
Japan 1.9 18
Therapy class
Anti-infectives 25 16.9 1
Central Nervous System 18 11.6 2
Respiratory 15 16.8 1
Alimentary & Metabolic 10 7.0 2
Vaccines 5 N/A 1
Consumer Health 16 N/A NZA
Other Pharma 11 N/A N/A
______________________________________________________________________
manufacture of prescription medicines. Britain 's pharmaceutical output doubled
between 1980 and 2000 in real terms while exports boomed and research and
development of prescription drugs increasingly became a high-technology business and
one of the most successful parts of the knowledge economy'. But the fortune of the
British pharmaceuticals industry seemed closely linked to that of its two main
representatives: Glaxo Wellcome and SmithKline Beecham. When announcing the
merger, Mr Gamier said that the new company was proud of its UK roots:
But a world-class competitor cannot operate all its functions from a market that rep-
resents only 6 per cent to 8 per cent of its existence. The US, by contrast, accounts for
45 per cent of the global pharmaceutical market."
Indeed, Exhibit 2 shows that that US would be an important market for
GlaxoSmithKline as that market represented about half the business (based on 1998
combined pharmaceutical sales). Europe and the rest of the world would account for 34
and 21 per cent respectively. In addition to having a broad portfolio of products, the
new company would lead in four of the five largest therapy classes, which together
represented roughly half the global pharmaceutical market. This was complemented by
a leading position in the vaccines market. The new company would also have
blockbuster treatments for asthma, depression, AIDS and migraines. Not surprisingly,
new drugs still in the pipeline were expected to reinforce the new pharmaceuticals
position in the anti-infective group, but other strong growth products were expected in
the alimentary and metabolic group as well as a new vaccine (Infantrix) and a
respiratory drug (Seretide/Advair). Top managers then claimed that the new group
could be expected to have a solid base in selected therapeutic markets while delivering
sales of 17 billion per annum or 7.4 per cent of the worlds pharmaceutical market.
Another key point to the merger were expected savings of 250 million from
combined R&D operations. Those savings were to be reinvested in R&D to produce an
annual research budget of 2.4 billion, the largest in the world after the new Pfizer. Top
executives also expected the combined company to save an annualised 1 billion
pounds after three years. These savings would come on top of previously announced
restructuring at both companies, expected to cut a combined 570 million a year. But
analysts of pharmaceutical companies at investment banks were puzzled by these
figures. On the one hand, analysts were disappointed by the planned savings. Most
estimated the figure to be between 1.1 billion and 1.5 billion, as well as some sort of
immediate disposal of factories, reduction of intermediate capacity or outsourcing plan.
On the other hand, analysts were encouraged by potential pay-offs that could come
from the complementary research skills of the two companies. In other words, Glaxo
Wellcomes investment in technology to automate the chemistry of developing drugs
combined well with SmithKlines leadership in genomics (which promises a wealth of
drug development opportunities). In fact, SmithKline Beecham had an existing pipeline
of four promising drugs in the final stages of development. This was indeed very
attractive to Glaxo Wellcome, who relied heavily on the generic sales of its blockbuster
drug Zantac. However, only 7 per cent of Glaxo Wellcomes sales depended on drugs
whose US patents expired before 2006 as compared with SmithKlines 33 per cent.

HUMAN RESOURCE MANAGEMENT


As part of the merger process, plans were drafted for the amalgamation of corporate
and support operations of the new pharmaceutical colossus in most countries. This
made labour unions unhappy because of the lack of consultation. Corporate executives
claimed that there was nothing to consult about until the legal merger had taken place
and thus, the newly introduced European regulation on consultation would not be
broken. Nevertheless, unions feared that at least 15,000 jobs, no less than 14 per cent of
the 105,000- strong combined global workforce, would be lost.
As for the 300 or so senior managers likely to be made redundant, Spencer Stuart, an
international recruitment consultancy, was brought in to look into areas of potential
overlap between business units rather than the universe of managers at the new
corporation, and would leave the vital R&D and marketing teams intact. By bringing in
a recruitment consultancy to carry out a management audit, top executives once again
expected to develop a level playing field so that few key individuals were lured away.
This fear was further supported by anecdotal evidence which suggested that the most
valuable executives were likely to 'jump ship' to competitors (including small, entre-
preneurial biotechnology start-ups) before the merger process was over and this could
be a reason why most mergers between pharmaceuticals failed to add shareholder
value. As one top manager of another new big pharmaceutical said at the time:
We learnt from other mergers to spend more time on cultural values and the way we wanted to
behave in the future . . . Senior managers felt the final report captured the real competencies,
and we believe were the first merger not to have lost market share. 3
Once the FTC approved of the merger, no divestitures were required in the smoking-
cessation market and the new company revealed plans to re-engineer its R&D and
marketing operations. At the time, Jean Pierre Gamier considered that organising
15,000 scientists across several time zones, with an annual budget in the billions of
pounds, would require a radical new structure. This facilities master plan' would allow
him to assess which, if any, of the 24 global R&D sites should be closed. However,
rivals such as Pfizer, Novartis or Aventis, which had already restructured their core
operations, questioned how radical Garniers plan really was.

ORGANISATIONAL STRUCTURE
The new plan considered breaking up discovery efforts through a combination of
centralisation and decentralisation. Investments to generate new chemical entities
(NCE) would concentrate on traditional activities and genetics while aiming to develop
economies of scale. Discovery' efforts would then be broken into six autonomous sub-
units while aiming to maintain the excitement of a small discovery outfit. Drug
development (including clinical trials) and marketing would again be co-ordinated by
the central organisation.
Maintaining a single effort to discover NCEs aimed to apply scarce skills and
expensive equipment across a range of diseases. There was to be two administrative
divisions or the partition into Genetics Research and Drug Discovery' Research. The
emphasis on genetic research followed the new companys inheriting substantial
investments in the use of genomics4 in drug discovery': at its formation,
GlaxoSmithKline would have over 500 patent filings for genomics- based drugs.
Actually, just as merger proceedings evolved, SmithKline brought to clinical testing
one genomic-based drug to treat obesity and one (o treat hypertension, which were
likely to take only five years to get to the market.
The plan for the new structure at GlaxoSmithKline also considered creating six sub-
units (one in Italy, two in the UK and three in the US) out of the middle section of the
pipeline, the part of the drug generation process considered to be where bright ideas are
incorporated into drugs. The six business units, called Centres of Excellence (Cedds),
were to organise the efforts of the 24 R&D sites across the world, work semi-
autonomously and compete to attract financial resources from head office (and
eventually from venture capitalists and even the stock market). The six sub-units were
empowered to use molecules discovered within internal early research divisions,
brought in from academia or from external biotechnology groups. It was hoped that as a
result of the plan, the new company would avoid greater scale anti associated
bureaucracy while maintaining agility, entrepreneurial spirit and individual account
ability in a key part of drug discovery. Moreover, it would attract talent by emulating
the culture at biotechnology firms, including the introduction of big share option
packages through which scientists receive royalties on the sale of medicines they
helped to invent. But observers were sceptical as to how autonomous the six 'internal
biotech' would be allowed to become or whether the new structure would increase
short-term productivity.
Finally, the plan for the new' structure at GlaxoSmithKline also considered clinical
trials and marketing to be undertaken on a massive scale, often across continents, and
simultaneously complying with strict regulatory conditions. Scale at this last stage of
the pipeline aimed to achieve corporate control and uniformity as well as capitalise on
global reach. For instance, shortly after the merger was announced, two licensing
agreements were signed by SmithKline Beecham while looking to strengthen links with
the Japanese pharmaceuticals sector. Since marketing partnerships were seen as the
only way to enter some markets (particularly for non-Americans to enter the US or for
non-Japanese to enter Japan), the deals could become very important to make the best
of the new organisational structure. But, at the same time, creating a difference through
licensing agreements of late-stage products would not be easy. For instance, Pfizer had
a successful record of marketing drugs in the US created elsewhere while many other
big and medium-sized pharmaceuticals also had gone along the licensing route into
Japan.

CONSUMER HEALTH
Greater scale in marketing was attractive to managers because, while regulatory
approval proceeded in the US, SmithKline Beecham became the worlds second-
biggest toothpaste manufacturer following the completion of its acquisition of Block
Drug of the US for $1.24 billion with a cash bid worth $53 per share. The deal added
Blocks Sensodync toothpaste to SmithKlines range of dental care brands, which
included Aquafresh, Macleans and Odol. Consumer goods sales, including toothpaste
and drinks such as Lucozade, Ribena and Horlicks, would then make 2.5 billion or a
third of SmithKline Beechams sales and 15 per cent of the combined 1999 sales of
Glaxo and SmithKline.
When questioned on the subject of consumer healthcare, Jean Pierre Gamier was said
to be committed to the consumer health business because he saw this area as being key
for GlaxoSmithKline extending the life of certain prescription pharmaceutical brand,
such as blockbuster Tagamet, by switching them to over-the-counter sales. However,
analysts at investment banks speculated that the lower-margin consumer unit could be
sold and the money reinvested in pharmaceuticals assets. SmithKline Beecham had
been willing to sell individual brands in the past. Opinion was thus divided as to
whether the Block Drug acquisition represented greater commitment to consumer
health or a strengthening of the business in preparation for a sale. Yet, for others,
growth into consumer health signalled another significant acquisition for
GlaxoSmithKline in the not too distant future, while questioning which were the core
competences that would deliver the much-needed advantage in prescription
pharmaceuticals markets.
The debate around the role of healthcare in the business portfolio of
GlaxoSmithKline suggested that the new company was at a crossroads. The merger
could yield a wealth of new drugs, for the good of shareholders and patients alike. And
the new company seemed to have everything needed to be the best in the business, but
so did Glaxo and Wellcome or Beecham and SmithKline Beckman when they merged.

Snappy Snaps

This case is taken from an article in Business Fr Weekend on 28 April 2001. It explains
the development of the franchise operation, Snappy Snaps, and provides an opportunity
to consider the challenges faced by the owners as digital technology threatens to
change the future of its market.


Twenty-one years ago in a shop in Toronto, Don Kennedy clapped eyes on the machine
that was to transform his life. He was on holiday, hoping to get some photos developed.
Ordinarily, he might have expected to wait a few days, but in this particular shop he
discovered a machine capable of churning out prints in just an hour.
When he returned home, he got in touch with an old school friend named Tim
MacAndrews. He thought it offered a great business opportunity, says MacAndrews,
who was initially sceptical. I told him it was a daft idea - until I saw the machine in
action and immediately realised he was right.'
Thus was bom Snappy Snaps, a Hammersmith-based business that now has roughly
400 staff working at 90 stores and an annual group turnover of 35m.
Ten years ago, if Id met someone at a social occasion and mentioned Snappy Snaps,
theyd have said, Who? claims Kennedy. But now weve become synonymous with
high-street photography.' Better still, the organisation has for five years running been
named High Street Photo Lab of the Year by Amateur Photographer magazine.
Even so, all is not well. In the decades since Kennedy brought MacAndrews news of
the developing machine, the march of technology has, if anything, picked up speed. Its
now practically impossible to visit a tourist destination without bumping into crowds of
visitors armed with the latest in digital cameras. (See Exhibit 1 for an explanation of
digital camera technolog)' and capability.)
These are in the vanguard of a revolution in photography, which threatens to make
old-fashioned film a thing of the past. This month, Eastman Kodak announced massive
job cuts, blaming a 48 per cent fall in profits on declining sales of camera film. So what
future can there be for a chain that was established precisely to process that film? Can
Kennedy and MacAndrews continue to prosper? Or will the people they encounter at
social occasions once again start to ask, Snappy who?
Exhibit 1 Briding the Digital Divide by Richard Cook
When George Eastman launched Kodak more than a hundred years ago, his proposition
was simple: 'You push the button and we do the rest.' Kodak duly grew to dominate the
film and processing businesses, but the company largely ignored the early days of
digital photography, arguing that Kodak was a mass- market brand, while digital
photography was an expensive, top-end niche.
Last month that strategy abruptly changed. Kodak used an ad in the middle of the
Oscars ceremony to launch the mc3, a device that not only takes digital pictures but
also records videos and plays music. The mc3 retails in the US for just $230 (160) and
some commentators are saying it could be the breakthrough piece of kit that opens up
digital photography to a mass audience.
With the cost of digital cameras dropping all the time, the one stumbling block appears
to be the printing process. The inkjet printers now commonly employed to make hard-
copy prints of digital images are relatively inexpensive and - especially if you use
glossy paper - the results look, from a few feet away, just like real photos. However, up
close, the image is rather grainier and the prints fade within months, not years. Whats
more, you usually need a PC to process your snaps.
The answer to this may already be here. Hewlett-Packard has already developed
technology that enables consumers to plug a digital camera directly into a printer and a
technology called dye-sublimation printing is producing results that are
indistinguishable from the best lab-processed prints. A dye- sublimation printer such as
the Olympus P-400 will produce a single 10x8 inch image in just 90 seconds. The only
problem is cost. Right now, the P-400 will set you back 650.
If it werent for the advent of digital cameras, the story of Snappy Snaps could be
considered a textbook example of how to turn a money-spinning idea into reality. The
duo realised their dreams in a thoroughly businesslike fashion. After returning from
Canada in 1980. Kennedy quit his law and accountancy studies, MacAndrews gave up
his job as an accountant and the two gained the specialist experience they needed by
becoming franchisees of the Kail Kwik printing-shops chain.
In September 1983, they set up the first Snappy Snaps photo lab in Queensway near
the West End of London, offering a one-hour development service. First-year turnover
was an impressive 300,000, thanks to the shops prime location. Three further stores
were opened over the next three years. Since then a growing army of franchisees -
among them a former bank manager, a customs officer, a teacher, a City trader and a
sailor - have helped turn Snappy Snaps into a nationwide concern with outlets from
Brighton to Belfast and Exeter to Edinburgh, even if it is still centred on the London
area.
Photo-processing has always been competitive but competition has, if anything,
intensified in recent years. Every letter-box in the couqtry has an envelope stuffed in it
a couple of times a year, petrol stations want to do it, newsagents and supermarkets
want to do it - everyone wants to get on the bandwagon,' says Kennedy, sitting at the
double desk he shares with MacAndrews in their first-floor office in a converted
Victorian bakery. Yet we re more successful than ever.
Over the past dozen or so years. Snappy Snaps has grown by an average of around 10
per cent per annum, helped by the takeover of the 11-outlet Anglia Supercolour in 1989
and nine Express Photo Labs in 1993. Much of its success can be attributed to a drive
for quality. We all know operations where the quality varies from outlet to outlet. Thats
something we were determined to avoid, says MacAndrews.
The shop might have made their name catering for happy snappers', but a third of
custom is now business-related. And the shops themselves offer a range of services
including image-scanning and photo restoration, poster printing and the transfer of
images on to CD - in addition to providing traditional developing and gifts such as
picture frames.
Another keystone of Snappy Snaps' success is that it opted for the business model
best suited to its needs. After opening their first few stores, Kennedy and MacAndrews
experienced difficulties in motivating staff. We felt franchising was the best way to
expand because the person running each outlet was, in effect, their own boss, says
Kennedy.
Unlike some businesses that went down the franchise route in the 1980s but
expanded too quickly and went under in the recession of the early 90s, Snappy Snaps
played it safe - and prospered. We never had grand ambitions of opening a phenomenal
number of shops. says Kennedy. Our strategy has always been to grow at a controlled
pace.
Choosing the right franchisees was also vital. if we send out 100 information packs to
prospective franchisees wed rather take on no one than take on the wrong person, says
MacAndrews. How can they be sure of picking a franchisee with the Midas touch?
That's one question we never answer, says Kennedy wryly. They obviously need to
have drive, enthusiasm, a desire to succeed and a belief in our way of doing things - but
the selection procedure for finding the right franchisee is our own Coca-Cola-styie
secret formula.
The cost of setting up a Snappy Snaps shop is about 140,000 but the franchisee only
has to stump up 30,000. In return for a 6 per cent royalty and a 2 per cent advertising
royalty, Snappy Snaps helps raise the money for equipment (the main cost), negotiates
discounts from suppliers, provides a business plan and training and allows use of the
company name. In return, franchisees benefit from the Snappy Snaps brand and a
750,000-a-year advertising budget.
Franchisees can expect a 35,000 profit by the end of their first year in business,
according to MacAndrews. But he warns: Its not an easy way to make money. Youre
not just running a comer shop and shutting up at five. You dont turn customers away at
one minute past four, as happens at some high- street chains. And the busiest days are
Saturday and Monday, which ruins any hope of a long weekend.
There has been the odd failure - usually put down to a franchisees inflexibility or
failure to go out and look for new business, but Kennedy says, No matter how you
profile people, until theyre doing the job you can never predict 100 per cent how they
are going to cope.
The duo are proud of their close relations with the franchisees, whose own pictures
adorn the walls of their office. There are annual conferences, regional meetings and
staff-training courses - all designed to foster team spirit. We were once franchisees
ourselves so we understand their concerns, says MacAndrews. But they continue to
stay with us and even buy further franchises - a testament to the strength of the bond
between us.'
He and Kennedy have retained the shared dream they started out with - another factor
in Snappy Snaps success. It's been a joint business from the beginning,' says Kennedy.
We created Snappy Snaps, we built it and its our baby. It really is a 50-50 partnership
and if somebody asked our advice Id like to think wed give the same answer. (The
two laugh when I remind them how they told me they weren't interested in photography
on our first meeting several years ago. But MacAndrews is quick to point out: Our
expertise lies in franchising and business management. )
Despite the material success Snappy Snaps has brought the pair, to which Kennedy's
gleaming Jaguar sports car outside the company HQ bears testament, they have no
desire to sell up and spend the rest of their lives flitting between golf course and
sunshine villa.
We hope to have about 100 stores by next year, says Kennedy when I ask about
their plans. The duo are also preparing to expand overseas. Weve had many inquiries
over the years but its something we've hitherto avoided,' says Kennedy. But we now
believe the time is right to look abroad. We have a big enough organisation to support
the training of a master licensee overseas. MacAndrews adds: It wont be crash, bang,
wallop, let s go and open 500 units in Poland. We ll be taking it slowly, going into one
country at a time to make sure we get it right.
Not that the future is without risk. The digital camera revolution means that its
possible to take pictures without purchasing film and, by plugging your camera into a
PC, run off colour copies on a printer.
But Kennedy, who points out that Snappy Snaps offers a wider range of digital
services than ever before, says: Film volume is being maintained despite all the digital
cameras out there. The reality is that veiy few people are developing pictures at home
because it's cumbersome, difficult and the cost per print actually works out far more
than what we charge for high-quality durable prints. If anything, the new technology
has boosted business because people who have spent serious money on digital cameras
want serious photographs and therefore come to us.'
Surely the digital revolution poses a substantial threat in the longer term, though? its
impossible to predict the future.' says Kennedy cautiously. But I suspect the vast
majority of people who buy a digital camera will use it for certain specific functions.
They wont take a veiy expensive digital camera to a beach for instance. Its rather like
camcorders. A few years ago it was predicted that lighter, cheaper camcorders would
make the camera obsolete, but that hasnt happened. People use them sparingly and
continue to use an ordinary camera for day-to-day stuff.
It was, however, embracing technological change that first put Snappy Snaps in
business and thats the way MacAndrews and Kennedy want to keep the company
thriving. As MacAndrews bluntly puts it: If a business cannot adapt, it will die.

Coopers Creek and the New Zealand wine industry

Heather Wilson and Maureen Benson-Rea

The case examines the international growth of a medium-sized New Zealand winery -
Coopers Creek. It is concerned with the international strategies employed by Coopers
Creek since its inception. This is set against the background of a small, rapidly
internationalising economy within a global market environment and the effect upon the
New Zealand wine industry. Readers are encouraged to consider the future strategic
for Coopers Creek.


INTRODUCTION
Coopers Creek, established in 1982, became one of New Zealands more successful
medium-sized wineries by following a strategy of resource leveraging via networks of
co-operative relationships with other New Zealand winemakers in the domestic and
export markets. This strategy allowed Andrew Hendry, the managing director, to
consciously manage the growth of the company to retain the benefits of small size.
However, with increasing globalisation of the wine industry, the changing nature of
export markets, the early maturity of the New Zealand industry and the constrained
supply facing New Zealand winemakers, Andrew Hendry was faced with the decision
of how to position a smaller company for the future. He had to decide whether the
network-based strategies that served the company so well continued to be appropriate
under conditions of industry' concentration, increasing competition and emerging
globalisation.

BACKGROUND

Coopers Creek and network-based strategies


Coopers Creek was a typical entrepreneurial venture in that its development and growth
had been driven by the founding entrepreneur, Andrew Hendry. From 120 tonnes of
grapes crushed in 1988 and less than 1 per cent export

Exhibit 1 Comparative export figure


______________________________________________________________________
NZ WINE INDUSTRY 1992 1993 1994* 1995* 1996 1997 1998 1999 2C00
FIGURES

Total exports
NZ$million 34.7 48.3 41.5 40.8 60.3 75.8 97.6 125.3 168.6'
% increase 37.4 39.2 -14.1 -1.7 47.8 25.7 28.4 34.6
28.8
Exports as % of sales 13.9 18.9 21.7 25.3 25.2 28.5 30.1 n/a
(vol.) 20.2
% increase 15.8 36.0 14.8 -6.9 25.2 -0.4 13.1 5.6 n/a

COOPERS CREEK
FIGURES 1992 1993 1994* 1995* 1996 1997 1998 1999
2000

Total exports .36 .76 2.3


NZjmillion 1.1 1.0 1.2 1.8 2.0 2.1
% increase 65.0 44.7 -9.1 50.0 15.0 -8.7
111.1 20.0 11.1
Exports as % of sales
(vol.)

22.4 42.9 48.9 42.4 49.2 63.3 57.9 61.5 49.1

% increase 97.3 91.5 14.0 -13.3 16.0 28.7 -8.5 6.2 -20.2
______________________________________________________________________
volume to 670 tonnes crushed in 1999 and greater than 49 per cent export volume,
growth was achieved with minimal comparable overheads and infrastructure. Exhibit 1
contains the relative export figures for Coopers Creek and the New Zealand wine
industry. A critical factor in the success of Coopers Creek was Andrew's ability to build
relationships, within the context of an innovative and flexible approach, in order to
leverage critical resources to pursue growth.
Andrew Hendry and his wife Cynthia purchased the land for the Coopers Creek
vineyard in 1980 with seed capital from their home-made pate business. Coopers Creek
was formally established two years later with 40 per cent loan capital from a local bank
and 60 per cent equity capital, 20 per cent from Andrew and 40 per cent from other
shareholders. These other shareholders comprised grape growers, who were also
suppliers to the business, colleagues from Andrews former employment with Coopers
and Lybrand, and the original winemaker for the company. Andrew Hendry arranged
the partnership structure so that the winemaker owned one-third of the company.
Andrew owned another third and the other shareholders owned the final third. Later on,
as profits were generated, Andrew bought out the partnership and. by 2000, he owned
71.3 per cent of the shares of the business and the ratio of debt to equity was 1:1.5. The
original winemaker partner left the business to return to the USA, selling his
shareholding to Andrew. Only one grower retained a shareholding, although all of the
shareholder growers experienced capital gain. Essentially the growers decided they
could no longer operate on both sides of the fence: as growers they wanted to negotiate
the highest price, but as shareholders they wanted to bargain for the lowest prices. Most
of the other shareholders had retained or increased their shareholdings.
Coopers Creek established collaborative relationships with a group of four local
competitors in the West Auckland area. These relationships were formed in 1990 on the
initiative of Andrew Hendry' who, on a visit to Australia, observed some Australian
wineries collaborating locally. This group of Auckland companies regularly gathered in
an informal committee to decide on their next collaborative efforts. Sometimes till five
companies were involved, at other times only two or three went ahead with particular
initiatives. The West Auckland group initially came together for joint advertising and
promotions. increasing the custom from retailers, restaurateurs, wine vendors and
visitors for the group of wineries beyond what they could achieve individually. The
success of these marketing initiatives led to collaboration on the production side of the
companies' operations, sharing equipment and processes like grape crushing at key
times. Investigations made to collaborate on joint purchasing of key inputs, like barrels,
corks and bottles, resulted in Coopers Creek sharing the costs of container-loads of
barrels with three other wineries. Although the local collaborative grouping still existed
in 2000. its configuration had changed, with one winery dropping out and a new one
taking its place with its relocation to the West Auckland area. Also, one of the original
wineries had been taken over by another in the grouping and, in turn, this combined
winery was taken over by an Australian winery.
A feature of the more recent networks in which Coopers Creek was involved was a
focus on horizontal or competitor-based co-operation. Competition in the domestic
marketplace was considered to be intense, but this did not impede collaborative efforts
where these were deemed more efficient or beneficial, while paying heed to the need to
avoid anticompetitive behaviour. According to Andrew Hendry, there were very few
secrets in the wine industry as transfer of technology and know-how between wineries
was highly developed and was a source of national competitive advantage for the
industry. In international markets the competition for sales anti market share was seen
by New Zealand wine companies to be from other countries rather than from individual
firms. However, once the customer had decided to purchase New Zealand wine.
Coopers Creek considered itself to be in competition with all New Zealand wineries
present. The newer producing countries, such as Chile, were perceived to be the bigger
threat due to rapid advancements in production quality. However, even within the
international marketplace there was co-operation, with industries across countries
sharing information and learning about new techniques and processes. This
international learning was achieved often through informal means. For example,
Coopers Creek organised exchange visits by producers and sent its winemaker to spend
the off-season in northern hemisphere wineries to build connections and to benefit from
low-level technology exchange.

The NZ wine industry


When Andrew Hendry established Coopers Creek, the New Zealand environment was
liighly regulated. By 1984, the New Zealand government had initiated a programme of
deregulation, which included devaluation of the New Zealand currency, exchange rate
flotation and general anti-inflationary' measures. The opening of New Zealands
domestic market meant that businesses had to improve their efficiency substantially
over a short period. Hie agricultural sector sought out new markets, to replace the loss
of their traditional dependence on the UK market with its increasing commitment to its
European trading partners, and new products, reflecting a growing awareness that much
of New Zealands exports were of a commodity nature. This period saw growing
exports to Australia, the United States, Japan and the rest of Asia and exports of
predominantly sheep meat and dairy produce being accompanied by more fresh fruit,
venison and wine. A further response to fiercer competition at home and in overseas
markets was an increasingly strong focus on quality, a case in point being the New
Zealand wine industry.
The New Zealand wine industry' accepted the consequences of the liberalisation of the
domestic economy and recognised the need to understand how ongoing changes in the
international economic environment affected its prosperity and how to plan accordingly
. Building from a low international base in the 1980s ($4.5 million in exports in 1987),
New Zealand wine exports achieved phenomenal growth and accounted for $168
million in 2000, comfortably exceeding the S100 million by 2000 target set in 1997.
The UK market was the most important export market for the industry' in 2000, and at
$84 million it accounted for around 50.22 per cent of total exports by value and 54.28
per cent by volume (see Exhibit 2). Europe accounted for 66 per cent of exports, with
85 per cent of that going to the UK. Four large firms, namely Corbans, Montana.
Nobilo and Villa Maria, dominated the wine industry' in New Zealand in 1999. The
following year, Montana purchased Corbans and Nobilo was bought by BRL/Hardy of
Australia. Between them, these large firms accounted for around 80 per cent of all
exports in 2000, with another 17 medium-sized companies, of which Coopers Creek
was one. handling 16 per cent in combination. For the most part, industry participants
exported between 30 and 35 per cent of their production, but a few producers had a
much higher export intensity.
All New Zealand winemakers had to belong to the New Zealand Wine Institute. In
order to sell wine, companies were legally obliged to acquire a licence and take out
membership of the Institute. The Institute acted as a self- regulatory body for the wine
industry. Among its regulatory activities, the Institute administered the Ministry of
Health's export certification procedures, which involved chemical testing and blind
tastings In 2000. there were 293 members of the Wine Institute, with the majority
comprising small, boutique wineries. Some Institute members with export interests in
specific markets had established special interest groups, of which the UK Wine Guild
was one (see later). Other groups, termed Country Action Groups, were established to
share information, experiences and promotional activities relating to Germany, the
USA, Canada and Australia. The groups developed marketing plans to explore and,
ultimately, exploit export opportunities within the chosen markets, and these were
implemented through a semi-formal funding arrangement whereby individual
companies contributed to costs on a project-by-project basis. For example, only those
companies interested in a particular promotion contributed to the costs of mounting it.
Countries were split into Tier 1 markets,
Exhibit 2 New Zealand wine exports 1995-2000
where New Zealand had a strong and growing presence (UK, US and Australia) and
Tier 2 markets, where there was a smaller presence and growth potential (Canada.
Germany, Ireland and Japan). These markets received differential attention and funding.
As well as the UK Wine Guild, Coopers Creek was actively involved in the Canadian
and US Country Action Groups in terms of joint promotional efforts. In those markets
where collaborative efforts had been employed, the principal aim had been jointly and
effectively to sell the New Zealand label ahead of individual wine company labels.
Promoting the generic New Zealand brand in this way was seen as a way of benefiting
all New Zealand exporters.
With the management of the quantity and quality of the grape supply proving to be a
critical resource issue within the New Zealand industry, investment in plantings had
been important for the industry as a whole. Rising grape prices followed poor yields in
the 1992, 1993 and 2000 seasons. Some wine producers diversified away from high-
priced contract grapes and invested extensively in their own vineyard plantings. After
two relatively small harvests, the 1995 and 1998 vintages produced bountiful crops.
Along with the New Zealand industry entering early maturity (see later), oversupply
situations caused concern that the industry would focus on the production of lower-cost
wines, either by growers forming a co-operative to utilise the excess grapes and
produce their own wine or by wineries focusing on low-cost competition. It was
anticipated that a low-cost competitor would affect the export market more than the
domestic markets, because domestic customers valued particular winery and vineyard
labels while export customers were considered to be more price sensitive because they
lacked this local knowledge. However, it should be borne in mind that, in the past, the
liabilities of a small economic base and the vagaries of the New Zealand climate had
left the industry' without sufficient product to tackle export market diversification.
By 2000, the New Zealand wine industry' was considered to be at an early maturity
phase of its life cycle, as evidenced by a small number of takeovers and increasing
concentration. Historically, the industry had focused on the production of premium
wines, given its constrained supply, small scale, high cost structures and distinctive
clean and green' growing conditions. This was in keeping with the general trend of
New Zealand producers to move away from the commodity mentality to more value-
added, quality products. The wine industrys strategy was to retain a focus on a
quality, differentiated product, hold its premium price position, play to its strengths in
white wines and introduce more red wines into its portfolio. In the UK market it
obtained the highest average prices for wines, closely followed by Australia. The Wine
Institute's marketing strategy' was intended to maintain this position and not to
compromise it by attempting to achieve volume production. Whilst the emerging
global wine companies in the US, Australia and Europe' sought to supply reliable,
consistent supermarket sales, the New Zealand producers aimed for the fine wine',
connoisseur niche market.
In terms of the industry's structure and positioning. New Zealand was facing major
challenges. As an industry' facing early maturity, the number of new entrants into the
smaller production end of the industry continued to grow. However, concentration was
occurring among the medium and large players as a result of both local acquisitions
and acquisitions by overseas purchasers. Two related challenges faced the industry: the
rise of the global wine company and access to production inputs, such as grape supplies
and expertise. Historically, the New Zealand industry had a small lev el of international
ownership of wine companies. However, international wine companies from Australia.
France and the Americas were becoming more active globally and in New- Zealand. Of
the original top four larger producers in the New Zealand wine industry. Corbans,
Montana, Nobilo and Villa Maria, only one had been partly overseas owned in 1997.
By' 2000, only Villa Maria remained 100 per cent New Zealand owned. Whilst this
international interest was motivated by portfolio ambitions, risk spreading and issues of
market access, perhaps the key reason was to gain access to New Zealands unique
growing conditions and the local industry's technology, skills and talent. On the one
hand, this could strengthen the resource base behind the New' Zealand industry and
facilitate access to increasingly concentrated distribution channels in Europe and the
US, but, on the other hand, it could impact on New Zealands unique position in world
markets.

COOPERS CREEK
Operations
In order to keep up with growth, principally driven by exports. Coopers Creek had to
increase its supply of grapes from the original four hectares west of Auckland. This was
achieved by acquiring additional land for its own plantings in West Auckland and
Hawkes Bay, also in the North Island, as well as buying grapes from independent
growers in Gisborne in the North Island and Marlborough in the South Island. This
strategy enabled the company to spread the risk of adverse weather conditions in any of
the four major New Zealand growing regions. By 2000, Coopers Creek sourced 90 per
cent of its grape supplies from 20 independent growers. These purchases were made on
longterm contracts, which were based on the potential quality of the site and the
grower's husbandry of the grapes. The company would have liked to have grown more
of its own supplies, but decided to wait until prices stabilised before purchasing more
land. Given this. Andrew Hendry had to plan with growers for longer-term quality
plantings, especially with the companys shift in emphasis from retail sales to on-
premise sales (that is, sales to restaurants). To that end, Coopers Creek had effectively
leased blocks of vines from grape growers and the price per hectare was determined
according to the targeted wine style for the end market. Buying in bulk wine from other
wineries had enabled Coopers Creek to meet extra export demand without having to
produce cheaper wines itself. Andrew Hendrys intent was to avoid being production-
led and to leave the production of cheaper wine to wineries with the overhead structure
to support it.
The batch production system at Coopers Creek was well set up to produce in 25-30
tonne lots, a modular approach based on grape truck load capacities. The company had
the capacity to crush 100-120 tonnes of grapes a day, giving it a major competitive
advantage: for example, in one year in five, wineries may have to crush all of their
grapes over a short period, as Coopers Creek did in the bad cropping year of 1995.
Coopers Creek also had the capacity to juice for other wineries, as outlined above. The
cost difference when installing the crushing plant was insignificant so it made sense to
Andrew Hendry to install the larger machinery, and one person could operate this
machinery alone if necessary. The batch operation system allowed for tank traceability
on each consignment or bottling run and samples were kept on hold in the winery.
Andrew Hendry considered production based on 1,000 tonnes of grapes crushed to be
an optimal level for Coopers Creek. If production rose much above those levels, then
the company would be moving into higher administrative costs and away from quality-
based wines. In addition, lifestyle aspirations meant that Andrew Hendry had
consciously avoided dilution of shareholdings to fund expansion. Future growth was to
be through servicing the export market. He had a strong commitment to a rifle rather
than shotgun approach to international marketing and relationship building. Coopers
Creek's strategy was based on having a carefully controlled, but finite quantity of wine
to sell in any one year. The company considered the requirements of each market for
certain wine styles and, as the grapes came in, it looked at the targets, the price points
and the maintenance of quality standards in each market. The company produced in
expectation of sales (planning for which was linked to previous years performance and
also to the grape supply) and, in order to retain flexibility, the company did not label
bottles of wine until it was known exactly where the product was going. Nonetheless,
major decisions had to be made at the supply stage and sometimes this involved the
buying of bulk wine from other New Zealand producers to keep supplies going. For
example, Tescos in the UK wanted to do a summer price promotion in 1997 on a New
Zealand wine. When one of the larger New Zealand wineries failed to respond. Coopers
Creek took up the challenge, although it did not have all the wine to meet Tescos
requirements. The company sourced additional wine through a commodity purchase
from some local companies and even made some money from the wine purchase.

The domestic market


Andrew Hendry observed that the New Zealand marketplace had become increasingly
competitive, with nearly 400 New Zealand producers and cheaper imports from
Australia. Coopers Creek serviced the three segments of onpremise, liquor store and
supermarket sales in the domestic market. The winery had recently employed two sales
representatives, one concentrating on restaurant and inner-Auckland retail sales, the
other focusing on retail sales in the outer-Auckland and local country areas. According
to Andrew, the advent of supermarket wine sales, as well as the increasing competition,
required more personal representation. Elsewhere in the country, Andrew continued to
use commissioned sales representatives. In the Wellington region, Coopers Creek
shared a representative with another winery based in Tauranga, south of Auckland, and
was looking for a similar arrangement to cover sales to the South Island.
Domestically, the last few years have seen some ups and downs for Coopers Creek in
terms of public relations. In November 1997 the company received a major national
award for excellence in exporting. Then in March 1998 came an accusation that
Coopers Creek had, in 1995, altered the composition and labelling of an export wine in
breach of export regulations. In the media lax rules were blamed, together with a lack
of government funding to police the compliance requirements of three different laws
facing wine producers. The Wine Institute publicly expressed its concent that sloppy
monitoring of wine producers was leaving the industry open to abuse and announced
that it would take a more active role in policing wine standards and would act to
safeguard wine authenticity. The New Zealand Ministry of Health investigated the
allegations for a breach of the Food Regulations Act and the Food Act. Coopers Creek
voluntarily suspended all exports pending an external audit of its vintage records,
which was carried out by a senior partner of Ernst & Young. By April 1998 Coopers
Creek had resumed exporting. Whilst in May 1998 the Ministry audit did find
discrepancies in record-keeping and in the make-up and labelling of some 1995 and
1996 wines, no further action was taken. In an ironic twist, two of the wines which
were the subject of some of the controversy later won awards at the London
International Wine Challenge, and in early 2000 British Airways added Coopers Creek
Reserve Pinot Noir 1998 to its first-class wine list.
The negative publicity knocked the local business back for a while, mostly in the
retail sales area, but the following years sales were up 15 per cent on the previous year
and Coopers Creek's representation in the on-premise segment was stronger than ever.
Andrew Hendry believed that the export sales were not really affected, although he did
observe that, not unexpectedly, other New Zealand wineries distanced themselves from
the issue with visiting international sales representatives. In addition, it was noted that
whenever negative publicity arose for another New Zealand winery, the New Zealand
press would raise the Coopers Creek case as a prior example of a problem relating to
the industry.

Major international markets


The international development of Coopers Creek drew on the shared learning,
marketing efforts and resources with other wineries in the New Zealand Wine Institute,
the UK Wine Guild and other market development groups, although considerable
individual company effort was also expended in the process. For example, in perhaps
the toughest market in the major economies served by Coopers Creek. Ontario, where a
100 per cent margin is imposed on liquor prices by the state monopoly, the winery
received a Trade New Zealand export commendation in 1994 as the first New Zealand
wine producer to receive a general listing by all of the 630 government liquor stores.
Recently. Coopers Creek had been offered two more listings by the Ontario board,
which would bring exports there to a potential six thousand cases per year.
Andrew Hendrys approach to exports had been to delay efforts until the company
had secured enough long-term commitments from grape suppliers and had established a
firm foothold in the New Zealand market. However. Andrew- found the opportunity to
enter the Australian market in 1984 irresistible due to the devaluation of the New
Zealand currency making New Zealand products attractive in the Australian
marketplace. Entry into the Australian market was facilitated by the New Zealand
Wine Institute, which co-ordinated a wine expo in Sydney. By 1987, less than 1 per
cent of Coopers Creek produce was exported, mainly to Australia.
Coopers Creek initiated a serious export strategy in 1989. having delayed for one
year because 1988 was a bad season for the production of grapes. The UK was the next
major market targeted by the company, again in partnership with the Wine Institute.
From this, the UK Wine Guild evolved. This was a partnership of Trade New Zealand,
a publicly funded body concerned with promoting overseas trade, and wineries either
already established in the UK export market or interested in entering this market.
Established in 1992, the UK Wine Guild was supported by one-third funding from
Trade New Zealand for a limited period and two-thirds funding from active exporters
and collected as a 1 per cent levy on free-on-board sales. These funds w ere used to
establish an office in London with two full-time employees to promote and support the
sales of New Zealand wines. Sales and distribution remained the responsibility of the
exporting firms. The overall Wine Guild administration, based in the offices of the
Wine Institute in Auckland, was initially controlled by a board of directors, of whom
Andrew Hendry was one. Essentially, the board provided financial and marketing
expertise for the successful operation of the Guild, as well as ideas for future
developments. Although a voting system was in place, decisions were usually made by
consensus. By 2000, the configuration of the UK Wine Guild had changed and, with the
end of government funding, the board of directors was disbanded and control came
under the function of the Wine Institute. The Institute moved to a system of presenting
UK promotion initiatives to members and inviting participation and payment, which,
according to Andrew Hendry', resulted in the loss of feeling of involvement in the
Guild.
The winery catered for buyers own brands in the UK market and, although
considered useful, this segment was not particularly profitable. Coopers Creeks own
branded product was the winery's focus and, in 2000, it was anticipated that it would
sell more in the USA than in the UK. Andrew Hendry was concentrating on the
development of a small number of markets and selling a broad range of higher-margin
wines in the on-premise segment. This focus allowed the company to reach consumers
willing to pay more expensive prices as New Zealand wines became a permanent
category' on restaurant wine lists.
Andrew Hendry visited his overseas importers on a regular basis, spending 12 weeks
per annum overseas, as much overseas contact as any other New Zealand winery
regardless of size. The visits w ere usually linked to wine trade shows in the UK,
France and the USA. Apart from the exchange of view's on the state of the market,
details of latest vintages and discussions on prospective new customers, the visits had
proven successful in providing a constant reminder that the winery' was committed to
the market, encouraging the agent to focus attention on the Coopers Creek brand and
making sure that export customers were very clear about the amount of product they
could expect from the winery in coming years.

The UK market
By 2000, Coopers Creek was no longer selling through the same liquor chains in the
UK. Its initial arrangement with Victoria Wines changed when the company was taken
over by Threshers, now named Thirst Quench. Unfortunately the takeover coincided
with Coopers Creek being out of stock for six months as a result of Andrew's decision
to sell off the 1998 Sauvignon Blanc vintage in bulk because it was of a poor standard.
This stockout, combined with the rationalisation of stock following the takeover, led to
the Coopers Creek brand being dropped. Recently sales commenced with two new UK
retail groups, the supermarket Aldi and a buying consortium representing 60
independent wine merchants. Meanwhile, Coopers Creek encouraged its UK distributor
to set up an on-premise division in 1997, which enabled the easy realignment of the
companys sales to focus on the restaurant segment. Sales through the UK distributor
have picked up again after a slowdown caused by its takeover of another distributor.
The winery's relationship with the Tesco supermarket chain was still strong, nearing
nine years in length by 2000, with Coopers Creek producing wine for the supermarkets
specific own-label requirements. This arrangement resulted from Andrew Hendrys
basic inclination to conduct some personal selling in export markets in addition to his
appointed agents. The winery was actively involved in the promotion of new vintage
releases through the supermarket chain and was looking to extend this arrangement to
the Co-operative chain of supermarkets in the UK.
The changing nature of the UK Wine Guild in New Zealand coincided with a change
of staff in the London office and the perception that there were fewer attendees per
winery' at organised tastings. Coopers Creek was not alone in its concerns about the
changes to the UK Wine Guild. A number of wineries had reduced their involvement in
the Guild, including Coopers Creek, and a knock-on effect was experienced, with lost
support for other Country Action Groups and initiatives of the Wine Institute. In
addition, the makeup of Coopers Creek exports to the UK, with 85 per cent comprising
buyers own brands, meant that the Guild levy system caused some concern to Andrew
Hendry. Essentially, the winery was in a high fees category', given the total volume of
sales, but only a small percentage of these sales promoted these sales promoted the
Cooper Creek label. As Andrew Hendry states:
The main thing is to get New Zealand known as a big brand, once it has a following
then you look at your own. New Zealand has reached that stage and it reached that
stage in the UK a long time ago. It probably reached that stage in the States last year
[1999].
However, Coopers Creek was involved in discussions with two other New Zealand
wineries to undertake some joint promotions, possibly in the UK and other markets,
taking advantage of Trade New Zealand funding that is available to groups of
applicants rather than individual applicants.

The US market
A major aspect of the longer-term plan was developing the US market. An on-premise
focus in the US was critical because, in the retail sector, Australian and New Zealand
wines were marketed together and Australian wines were cheaper due to the ability to
achieve scale economies. Coopers Creek had changed to a larger distributor with
expertise in on-premise representation, being one of the top three distributors in New
York servicing some 2,000 restaurants in Manhattan alone. Until recently the winery
had focused on increasing its network of distributors and conducting regional tastings
on a state-by-state basis, mainly focusing on the East Coast, but also California,
Colorado and Wisconsin.
A new development, initiated by Andrew Hendry, had been a collaborative
arrangement with a Chilean winery, a Californian winery and a US importer. Together
they had shared the costs of employing a brand manager in the USA, with the importer
paying half of the managers salary and the other half being split between the three
wineries on the basis of cases sold. The brand manager had begun by organising all of
the US promotions and going out with the importers sales representatives, essentially
doing the same sort of job that Andrew Hendry' did on his overseas visits. Since
coming up with this arrangement, Coopers Creeks sales have trebled, growing from
1,500 cases in the late 1990s to 6,000 in 2000 with anticipated sales of 10,000 cases.
Coopers Creek and the Californian winery were of a similar size, selling wine at similar
price points, while the Chilean winery was much larger and focused on selling cheaper
wine. This arrangement had now changed and Andrew employed the brand manager to
work exclusively on Coopers Creek business. By cutting out the intermediary, and
distributing across 15 states from warehouses in California and New Jersey, Coopers
Creek was able to reduce the cost to restaurants by 35 per cent, making its wine
extremely competitive in the critical on-premise segment.

THE FUTURE
The New Zealand wine industry, despite entering early maturity, remained constrained
by issues of supply. Whilst the cost of new land for grape planting was rising and more,
previously marginal land became economic to grow on. the problem was still one of
access to capital for these resources. Overseas investors were welcomed by the
industry, so long as New Zealands distinctiveness and competitive advantage were not
compromised. The key was to lock this investment in for the long-term economic good
of the industry and the country.
Andrew Hendry' believed the self-funded, relationship-based approach to growth
achieved good fit with the nature of the New Zealand industry', namely the strong
reliance on scarce resources on an annual basis. He and Coopers Creek had bounced
back from the difficulties of 1998, and indeed Andrew was enthusiastically pursuing
new opportunities. However, with the local industry' showing signs of concentration,
should Andrew Hendry maintain a focus on building relationships with other domestic
producers? Is he right to begin seeking collaborative arrangements with overseas
producers given the nature of the wine industry globally? Can Coopers Creek remain
independent, retain the benefits of small size and yet still achieve exceptional returns in
the changing environment? Is it time for Coopers Creek, and Andrew Hendry, to
fundamentally rethink the winerys dominant strategy?

Enterprise resource planning at Topps International Ltd


Frederic Adam and Eleanor Doyle

This case illustrates the importance of a reliable information systems infrastructure in


supporting the operations and the development of modern businesses, it presents a
longitudinal analysis (1995-2001) of Topps International Ltd and its attempt to acquire
and implement a state-of-the- art enterprise resource planning (ERP) system to
increase control over its operations and to develop management information systems to
improve decision making in relation to the commercial strategy of the firm. The case
shows how the evolution of Topps to an internationally successful competitive situation
has been enabled and facilitated by the greater control allowed by its ERP system, The
case begins with a description of Topps - its line of business and its development over
time - and its business strategy in 1995. The reasons that contributed to the decision to
select an ERP system for Topps emerge from both the case and the consultants report
included in the Case appendix, which considers the relevance of ERP systems for Topps
International Ltd in view of the general strengths and weakness of ERP systems. The
teething troubles associated with the system are addressed and latest information from
Topps management on the success of the implementation concludes the case.

TOPPS INTERNATIONAL LTD, 1995


Topps International Ltd has been operating since 1977 and is a subsidiary of a US-
owned multinational company, the Topps Company Inc. Topps is an international
marketer of entertainment products - principally collectable trading cards,
confectionery, and sticker and album collections - and was founded in 1938. Topps
created Bazooka bubblegum in 1947 and marketed the first baseball cards in 1951.
Nowadays, Topps is a major player in the children's entertainment business on the
European market and describes its business as the marketing and distribution of fashion
items for the children's market. Hence, Topps is not a typical manufacturing company.
Some of the most famous products on which Topps success has been built, the Bazooka
chewing gums and the Push-Pops lollipops, have now become household names. Topps
has also become famous for adding an entertainment component to its confectionery
products in the shape of Casper the friendly ghost toy containers, containing gum or
sweets. Recently, Topps has been particularly successful with its purchase of the rights
to make Pokemon-branded products, including the sale of stickers and albums.
The emphasis of its business has changed substantially over the years from a heavily
manufacturing perspective to an approach based more on the trade of goods imported
from the Far East. By 1995, 20 per cent of its products were manufactured locally, the
remainder being imported from China, Thailand and other countries. This represented a
significant shift from the position even five years earlier when less than 20 per cent of
products were imported. This switch in business emphasis allowed sales growth to
mushroom with corresponding increases in the import/export activities. The product
life cycle of some of the products was extremely short so the company needed to react
quickly to change, emphasising the company's requirement for accurate information
that was readily available. This acceleration of the business flows was aggravated by
the rapid development of the new trading element of Topps' business.
Topps products were distributed out of three warehouses - Cork (Ireland), Liverpool
(UK) and Rotterdam (Holland). The Cork plant stored the products manufactured in
Cork while the Rotterdam depot stored imported products and the Liverpool depot
maintained stocks required to serve the UK market. All activities were managed from
Cork1 with outside companies providing warehousing and distribution facilities at both
external locations. The UK was the biggest market and a team of sales representatives
handled sales to multiple stores and wholesalers. Ireland and the rest of Europe were
serviced through distributors in each country'. Products were sold mainly on a sale or
return basis, making it vital that returns were identified quickly and resold within the
life cycle where possible. Sales campaigns were not launched simultaneously in all
countries and regions so it was often possible to pass unsold products on to another,
less saturated market.

Identifying the critical success factors for Topps in 1995


Topps' business success revolved around making correct management decisions
quickly. Information technology (IT) supported the vital provision of rapid, accurate
information on which to base these decisions. Spreadsheets were used extensively (on a
limited number of PCs used in the company) to create mini profit and loss accounts
representing scenario analyses on specific markets or for specific products and to
identify windows of opportunity aimed at maximising the rotation of stock. The main
business tools centred on the strategic plan and operational budgets derived therefrom
which were based on a number of spreadsheet models developed in a PC-based
software package. The majority of information was gathered manually and the non-
strategic data processing services (payroll, invoicing, inventory control, and other non-
strategic transactions processing systems) were provided by software supplied by an
external supplier. Both the software and the computer used to run it were completely
obsolete - Topps was the final customer using these services, which were becoming
increasingly expensive and unreliable.
Management at Topps had repeatedly complained to its parent company about the
failure of their largely manual systems, but each time clearance to purchase a new
system was requested, it was refused by headquarters (in New York). Topps
management realised that too much replication and duplication was taking place and
that a fully integrated financial, manufacturing and distribution system was required to
both:
support the basic business processes, and
automate basic flows of information
A more reliable information basis was required to speed up the reporting processes
across the organisation. A need for the capability of downloading all required
information from a central system into existing information systems was identified to
improve and make the production of crucial management reports more reliable. Such an
approach would require the implementation of a network of PCs to enable data
collection and screen enquiries throughout the different business functions (new
hardware), selection and implementation of appropriate financial, distribution and
manufacturing modules (new software), and staff training.
In March 1995, Topps International I.td again attempted to purchase such an
integrated software package that would cover the financial, distribution and
manufacturing aspects of their business. The business was growing rapidly across all
European markets and it was also looking to expand into a number of South American
countries. It had been mainly a manufacturing organisation, but 75 per cent of its
turnover was now coming from trading in goods produced by Far East suppliers.
The most significant problem for Topps was identified as the lack of online stock
control for key personnel as the basic computerised stock system used tracked only
goods manufactured and stored in Cork. There were also occasional failures to meet
shipping deadlines because of paperwork delays. The robustness of the cash flow was
compromised by the lack of control of debtors balances and invoice due dates. In
addition, there were also problems with reporting to the US headquarters due to the
unavailability of information on territory and product profitability. Compliance with
requirements for regular monthly and quarterly reports on EU movements of goods was
slow. As described by the then financial controller, the company was vulnerable in the
shipping, credit-control and treasury departments. He concluded that too much
information was contained in employees heads rather than in the companys
information systems. Reports that were written at this time pointed out that hiring extra
staff would not solve these problems and that the availability of a fully integrated
system of the enterprise resource planning type would be required (see, for example,
the Consultants' Report in the Appendix). In addition to this operational data layer, a
powerful report generation application would also be required to generate better quality
managerial reporting.
At the time, a number of potential failures were threatening:
Sales order processing required attention as it was feared that Topps might begin to
lose a significant portion of the ever-growing business due to order not being met on
time or not being processed at all.
Invoicing is always a crucial element of a business, but Topps' management
sometimes had no clear idea how much had been shipped to a particular customer. In
fact, some shipping deadlines were not met due to paperwork delays.

Convincing HQ
Over twenty months of time and effort (in tendering, and development) was involved in
the process that culminated in the selection of the required F.RP system and the local
software vendor who was to supply it. Consultants had argued that local support would
be a significant asset during the implementation phase as people in Topps had little
experience with large computer systems (there were no full-time IT personnel in Topps
at the time). The next step in the process was to commit the money to this investment of
roughly 180,000 and the signs were good when the IT director at HQ responded
favourabh to the request and agreed with the conclusions of the final report he had been
sent.
Topps' parent company then purchased Merlin Publishing, a UK-based company
similar in size to Topps but operating in the complementary children's entertainment
market (e.g. the production of stickers of players in the English premiership and other
major European soccer leagues). Due to uncertainties regarding the sharing of business
between Topps and Merlin and the relations to be developed between the two
companies, HQ decided, again, to block the ERP investment in Topps. Following a
number of meetings with equivalent personnel in Merlin, a new strand of reports was
sent to HQ to indicate how the systems in both Topps and Merlin could operate and the
processes that could be shared between the two companies. A joint report signed by
Topps and Merlin was even sent to the US to emphasise the support that Merlin were
ready to give Topps in its implementation of the system selected. A further series of
negotiations took place but the project was put on hold while a global IT strategy for
Topps was developed by the IT director at HQ. More than two years ifter the first
reports had been written and sent to the US about the weaknesses of the systems in
Topps, nothing had been done and the manual systems were still holding on. A
computerised system for Topps International had never seemed so far away.
In a final attempt to demonstrate that there were no managerial grounds for
postponing the commitment of Topps to the purchase of a system (software and
hardware) another report was sent to HQ. The report emphasised that a global IT
strategy for the company made little sense as no truly shared processes requiring
integration of computer systems had been identified either between Ireland and the US
or between Topps and Merlin (the computing cultures differed significantly as Merlin
had full-time IT personnel and a networked IT infrastructure with its international
subsidiaries; no such common processes existed between Menu, and Topps - no
consolidation of financial information was required; finally, using a UK-based supplier
of software services would lead to significant cost increases in IT provision).
Compatibility of each organisation's systems would, however, be required to enable the
smooth exchange of information, and for example, reports on the performance of
various Topps and Merlin products. In addition, the implementation of a global strategy
meant that Topps would have to sacrifice the possibility of using local support for the
software, an added - and potentially very costly - difficulty for a company without full-
time resident IT expertise. This report was to change the minds of managers in the
parent company. In mid-December 1995, news from HQ indicated that management
should start implementing the decision to purchase an integrated computer system
covering the financial and distribution activities. Before the end of January, the cabling
had been put in place and system installation began in earnest.

ERP teething troubles following implementation


Management at Topps found that committing to a solution was not the only important
aspect of the decision making in relation to deciding to implement its ERP system.
Actual implementation involved enacting the choices made on the basis of management
expertise and consultants' advice, and raised new issues and fresh questions which were
overlooked or ignored throughout the previous stages. Such difficulties have frequently
been reported in the management of ERP projects around the world.
More specifically, there were problems with the support provided by the system for
the manufacturing operations of Topps' business. ERP systems are an extension of the
materials requirement planning (MRP) systems of the 1970s and most of them are
based on some MRP logic. This means that companies should have an MRP-organised
factory before they can implement an ERP system that also supports their
manufacturing. At the lime, Topps had reduced its manufacturing to a small number of
products (most originating in the Far East) but the factor)' floor had never been MRP-
oriented. In fact, there had never been any just-in-time requirement in the factor) and it
was not known how useful it would be to switch to MRP at that stage. This issue was
increasingly relevant as the manufacturing operations of Topps' activities were being
phased out. As a result, 'workarounds' had to be implemented at the interface between
the ERP and the manufacturing activities. Workarounds were portions of business
processes that had to be invented' in the computer system and in reality to ensure that
the ERP software could be used even though it did not exactly match the way activities
were carried out. Developing the workarounds was not likely to compromise the
success of the ERP implementation because the products being made in the factor)
represented a very small fraction of Topps' turnover but it did take some time that had
not been planned for.
There were also problems with the lack of familiarity of Topps' staff with the
software. Such problems are very common with enterprise-wide software such as ERP
and most companies who implement them find themselves on a steep learning curve
from the moment their new system goes live. No amount of training is ever going to
provide staff with the confidence needed to use their ERP to its full extent from the
outset. Thus, even though training was quite extensive, it took a while before staff
became accustomed to the new ways of doing business through the ERP system. Topps'
business, like any other, includes a certain level of idiosyncrasy and, in the ERP area,
software providers can never become so familiar with a company that they would be
able to anticipate every detail of the business processes. Some are replaced by new
processes suggested by the package, but some remain and require workarounds that
take a while to establish and to integrate into day-to-day routines. After a few weeks,
staff became more comfortable with their systems, and after a few months, they became
true experts at exploiting the functionality of their ERP software to develop Topps
business.
Another problem that arose was that of data migration, which is also common with
ERP systems. ERP systems are organised around very large databases that contain all
the data required for the systems to operate properly and to link up with other
information systems the company may have decided to keep. These data must often be
uploaded from previous systems (which is referred to as migration). This applies to the
more stable data a business uses, such as bills of material (describing the recipe of the
company's products), customer data, but also some much needed transactional
information such as invoicing data, sales data and any other accounting-based data. In
the case of Topps. the previous system was an obsolete integrated package running on
an even more archaic computer. The data proved difficult to extract on account of the
lack of flexibility of the old system. Also, the data did not always have the proper level
of detail, as modem ERP systems offer far greater depths of information and far more
schemes to classify and organise data. Thus, a substantial amount of manual data entry
was originally required before the system could go live.
After a few months, however, it became clear to the managers in Topps that their
ERP system was a sound investment anti that the benefits obtained in terms of
inventory management and acceleration of business processes would far outweigh these
initial teething problems.

Using the ERP system-January 2001


According to the financial controller in 2001. the ERP project had been very useful and
positive from the first year of its implementation and Topps had progressed in leaps and
bounds in terms of its information systems. Before the implementation of the ERP
system, production of the complete month's end results took two weeks and even then
did not allow managers to drill down into products, geographical areas and activities
with any flexibility. This time had been halved after the implementation of the ERP
system and the system also enabled managers to investigate sales figures to a much
greater level of detail, drilling down into each market and each product far more
accurately than ever before. The main strength of the ERP system was that it provided
managers with the full set of live data regarding the inventor) and shipment elements
of the business, whereas managers used to rely on suppliers to establish accurate
quantities shipped. The sales function, by contrast, was not improved to the same exact,
but the purchase of an additional software package (called Adaytum) enabled
managers to achieve significant improvements in this area.
This added flexibility in understanding the business and controlling the flows of
goods had been achieved despite enormous growth of sales from IR20m in 1996 to
over IR50m in 2000. The greatest advantage of the ERP system identified was how it
allowed managers to control stocks, sales volumes and quality control in a way that was
never possible before. Slow-moving lines were exposed, quality problems could be
traced down to specific consignments and first-in first-out stock movements could be
strictly enforced. Such was the accuracy of the ERP system that managers in Ireland
could tell operators in the Rotterdam warehouse which cases should be shipped first
and the exact location (or bin number) where they were located in the warehouse. In
practice, however, they did not need to do so because the Rotterdam operators had a
separate system which tallied with Topps' ERP system. A new project is currently under
way which will enable staff in the Liverpool and Rotterdam facilities to access Topps'
ERP system remotely through its e-business module so as to increase the integration of
the companies and reduce the extent of duplication of work.
These represented very significant improvement from a quality control point of view
because the appearance of sweets disimproves over time (even though they are
extremely slow to perish) and become impossible to sell. Since the implementation of
the ERP system, products no longer had to be destroyed on a regular basis.
As far as reporting was concerned the ERP package was not initially sufficient to
cater for Topps needs. Even though all the required information was available, the
report generation capabilities of the system were not sufficiently flexible. This problem
was solved in 2000 by the purchase of the additional package (Adaytum) which used
the data contained in the ERP system to provide the drill-down and reporting
capabilities required by Topps managers. Reports could then be produced on every
single line or item sold by Topps and customer profitability analyses could be carried
out to an extent never possible before. At this point, the ERP system could cater for all
the actual orders and the Adaytum software could handle the forecasting and planning
of demand. These two key sources of data could then be aggregated to produce the
overall plan for the company.

CASE APPENDIX: TOPPS INTERNATIONAL LTD2


CONSULTANTS REPORT (1995)

Goal of information system implementation for Topps


As an introduction, it should be acknowledged th3t Topps is currently a healthy
organisation with a clear management structure and a very good knowledge of its
market. This does not mean, however, that the performance of Topps could not be
improved significantly. Topps possesses a combination of up-to-date managerial
thinking but rather outdated administration. It is therefore certain that the introduction
of state-of-the art computing in Topps could have a significantly positive impact on the
performance of the business and create a more reliable administration of the
organisation as a whole, especially given the recent increases in the volume of
transactions dealt with by Topps International Ltd. Additional benefits arising from
such an introduction could include:
an advance towards ISO certification (and the potential resulting benefits);
freeing of manpower for either higher-level analytical tasks or improved customer
service;
an administrative system less reliant on individuals, thereby providing more
permanent and consistent long-run company operations.
Given that Topps' business success revolves around making correct management
decisions quickly, it is important that information technology (IT) is applied more
efficiently to provide the rapid, accurate information on which to base these decisions.
This occurs to a degree with the extensive use of spreadsheets but these are not
centrally available and sometimes are not preserved for reuse such that substantial
duplication of work arises. Reports take more time to produce than they should and the
standard of presentation suffers as a result. Time better spent in utilising the
information creatively and efficiently to exploit opportunities and be aware of threats is
currently spent on gathering basic information.

Required system for Topps


As an initial step, the application of a modern software package would substantially
improve the quality of managerial reports. However, from the investigations carried
out, excessive replication and duplication of work (e.g. data entry) also need to be
addressed. A fully integrated financial and distribution system would support both the
basic business processes carried out at Topps and automate the basic flows of
information within the organisation. All modules of the system need not be
implemented simultaneously and a phased approach to implementation should suffice,
once commitment to implement all modules in the in the medium is established.

Enterprise resource planning systems


Such a system may be classified as an enterprise resource planning (ERP) system
which is an integrated enterprise-wide software package designed to support the key
functional areas of the organisation. ERP systems have inherent strengths and
weaknesses, and are therefore better suited to certain types of organisations and certain
circumstances. Management at Topps should, therefore, understand the inherent trade-
offs of an ERP system before they make any decision regarding the potential
appropriateness of the ERP concept for their organisation. While many consultants and
media reports are prompt to emphasise the benefits of ERP implementations, the key
issue resides in understanding the specific needs of an organisation and the business
model best suited to its operations.
The added difficulty in ERP projects is that few companies, if any, could possibly
contemplate developing such vast applications in-house. For the majority of companies,
the decision to implement ERP functionalities will mean buying a software package
from one of the major suppliers on the ERP market. 3 The software selection phase is
not straightforward and managers must understand what ERP packages are on offer,
how they differ, and what is at stake in selecting one ERP over another. Each ERP
package uses a business model as an underlying framework and can be quite different
relative to competitors' products in terms of how they operate or the business processes
they support. The problem for Topps' management is that not all business models fit all
organisations and the cost of failing to recognise the relationship between the nature of
one's business and the ERP system to be purchased can be very high indeed. Quite
literally, selecting the right software package, i.e. the right blueprint for one's
organisation, is a critical failure factor in ERP projects. An analysis of the strengths and
weakness of ERP systems can help managers facing such decisions.

Strengths and weaknesses of ERP systems


The case for ERP systems
In many ways ERP systems represent the implementation of a managerial dream of
unifying and centralising (or at least under one name) all the information systems
required by the firm in one single system. Most notably, ERP systems support the
recording of all business transactions from purchase orders to sales orders and the
scheduling and monitoring of manufacturing activities. Most ERP systems are based on
an inventory control module that records the movements of goods in and out of the
company which makes them particularly suited to organisations seeking to rationalise
their internal processes and obtain higher performance from their operations.
ERP systems provide employees within organisations with a common language and a
common pool of data. At a practical level, ERP systems have very beneficial effects
that remove the need for often disparate and unreliable end-user applications, operating
and reporting procedures can be standardised and some of the key processes of the firm
(e.g. order acquisition and processing or inventory control) can be optimised. In
addition, these systems offer high levels of portability and reasonable flexibility in
adapting to the requirements of specific organisations.
One of the key strengths of ERP systems is that they are built on top of a relational
database4 which enables a reliable and rapid circulation of the data between the
modules and eliminates the need for multiple data entry. Thus, ERP systems simplify,
accelerate and automate much of the data transfers that must take place in organisations
to guarantee the proper execution of operational tasks. The relational database
underlying an ERP can be quite large, depending on company and operational
complexity (some SAP applications implemented are reported to have in excess of one
thousand different tables).
Currently, the case for ERP systems seems compelling and the development of more
powerful and user-friendly platforms makes it now possible to integrate many large
systems in a way that was not possible up to very recently. This is clear from the fact
that Microsoft spent 10 months and $25m replacing 33 existing systems in 26 sites with
ERP systems. Managers in Microsoft claim to save $18m annually as a result and Bill
Gates reportedly expressed great satisfaction with the system. Microsoft had reportedly
grown so fast that it could not keep up with itself - the number of applications
developed to support the company's operations and their lack of integration meant that
information systems staff had lost control over the complexity of the systems they
administered. Moving to a single ERP architecture enabled better linkages between
business areas as well as with suppliers and customers.

The case against ERP systems


The strengths of ERP packages are matched by the high level of risk associated with
ERP projects. ERP projects are complex and require the reliance on many different
types of expertise often sourced outside the organisation. Consultants often advise
managers to undertake some degree of re-engineering of key processes before acquiring
ERP systems and this adds to the complexity and political character of the projects.
There is empirical evidence of the dangers inherent in such vast projects/
These difficulties have led to some researchers taking a negative view of ERP
systems. Some researchers argue that the current interest in ERP in the business
community is justified more by political reasons than by sound managerial reasoning.
Relevant surveys show low levels of satisfaction of firms having implemented ERP
systems, with 45 per cent of firms perceiving no improvements whatever from
implementation and 43 per cent claiming that no cycle reduction had been obtained.
The difficulty inherent in ERP implementations is largely due to the fact that
organisations implementing them should typically only hold on to 20 per cent of their
previous applications. But the extensive replacement of previous systems may be a
requirement if the major benefits of ERP implementation - greater integration of
functional areas and, in the case of multinational firms, greater co-ordination between
entities and between sites - are to be obtained. The consequence of this 'dean slate'
approach is that organisations find it virtually impossible to revert to their pre-ERP
situation and, in any case, their investment either cannot be recouped or generates very
low returns.
Finally, there is anecdotal evidence that many companies were pushed into ERP
projects by the much-publicised fears of what might have happened to legacy systems
during the year 2000 change.

Conclusion for Topps


These arguments paint a very mixed picture of the potential of ERP packages which
may be portrayed as silver bullets as often as villains. The message to be taken from the
potential strengths and weaknesses of ERP systems for Topps' management is that they
would be well advised to conduct a detailed analysis of proposed benefits and costs of
their ERP system prior to going down the implementation road to ensure that the
system can appropriately meet the organisational requirements. Of vital importance in
this process is the consideration of the business strategy needs of Topps and the specific
improvements that an enterprise-wide integrated software package can provide.

Articles consulted support report


Adam, F. and Doherty, P. (2000) 'Do ERP implementations have to be lengthy? Lessons
from Irish SMEs'. 5th Conference of the Information and Management Association,
Montpellier, France, November.
Bancroft, N. (1996) Implementing SAP/RJ: How to introduce a large system into a
large organisation. Manning / Prentice Hall, London. UK.
Bingi, P., Shanna, M. and Godla, J. (1999) 'Critical issues affecting an ERP
implementation, Information Systems Management, Summer, 7-14.
Forrest. P. (1999) 'Les ERP a I'epreuve de I'organisation, Systemes d'lnformation et
Management, 4(4), 71-90.
Kalatoka, R. anti Robinson, M. (1999) E-business - Roadmap to success. Addison-
Wesley, Reading, MA.
Rowe, F. (1999) Coherence, Integration informationnelle et changement: esquisse
dun programme de recherche a partir des Progiciels Integres de Gestion, Systemes
dlnformation et Management, 4(4), 3-20.
Wood, T. and Caldas, M. (2000) Stripping the big brother': unveiling the backstage of
the ERP fad, http://www.gv.br/prof_alunos/thomaz/ingles/papcr5.htm.
White. B., Clark. D. and Ascarely, S. (1997) Program of pain'. Wall Street Journal. 14
March
6.

Generals Motors Brazil


Genera! Motors Gravatai plant in Brazil is a test-bed for manufacturing techniques
and has transformed the relationship between carmakers and suppliers.


The managers running the Gravatai car plant believe they run the most Japanese
factor)' in the world. That may seem an odd claim for a $554m (390m) industrial
complex on the outskirts of Porto Alegre, deep in Brazils southernmost state. Until,
that is, they describe how General Motors most innovative assembly facility promises
to revolutionise modem car production.
GM is one of several global carmakers expanding its presence in Brazil. The Gravatai
project has coincided with new investment by Ford, Fiat and PSA Peugeot Citroen -
among others - in Brazilian car assembly. These manufacturers have come to regard
South Americas largest economy as a low-cost manufacturing hub for the region,
where a combination of cheap labour, state aid packages and readily available green
field sites has attracted $1.8-$2.4bn of annual investment in each of the past five years.
GMs plant, code-named Blue Macaw until its official opening eight months ago,
represents a test-bed for manufacturing techniques. Almost all the new initiatives by
GM are based on concepts generated here, says Roberto Tinoco, the manufacturing
director at Gravatai.
Given the mule traffic and shanty dwellings on the approach to the onetime coffee
farm, it is hard to believe that the complex contains a car plant surpassing most
European and US specifications. Gravatai even boasts its own banks, post offices,
shops, travel agencies and restaurants. Its 40 streets, each named after a GM car such as
Corsa, Vectra and Omega, connect all these amenities to the production site.
More importantly, Blue Macaw has broken ground in the relationship between
carmakers and their suppliers. While most manufacturers have encouraged component
groups to set up supplier parks near their assembly lines, GM has gone a step further at
Gravatai by designing the plant and the car it produces in conjunction with suppliers.
The worlds largest carmaker has persuaded 17 leading suppliers, including Delphi,
VDO, Goodyear and Valeo, to build their own production facilities.
inside the complex. Each supplier is located according to where its components are
required on the assembly line.
That system sourcing concept has made Gravatai one of the worlds most productive
plants, completing a car even two minutes. According to Mr Tinoco, the arrangements
mean that 85 per cent of the Chevrolet models produced at Gravatai rely on
components assembled on site. In most plants, 60 per cent of a cars components by
value are sourced from outside the factory.
We have broken a lot of paradigms, says the plant manager. In a big company you
have to fight against internal pressures.
Mr Tinoco admits that Gravatai is regarded as something of an experiment by some
GM managers. What might be acceptable in southern Brazil - where inward investment
is hailed as a vote of confidence - was regarded with suspicion in Michigan. The
carmaker abandoned plans for US versions of the plant, known as Project Yellowstone,
amid concerted opposition by the United Auto Workers union.
Union leaders feared that suppliers would influence the employment conditions of
their members. GM's senior management also wanted to avoid suggestions that they
were adopting ideas pioneered by Jose Ignacio Lopez de Arriortua. the former GM
purchasing chief who was accused of defecting to Volkswagen with thousands of
confidential company documents.
Mr Lopez argued that suppliers should take more responsibility for assembly,
allowing carmakers to concentrate on higher-margin design, engineering and
distribution. The controversial purchasing manager is the subject of extradition
proceedings in the US, where a federal grand jury has charged him with wire fraud and
handling stolen property.
In spite of Mr Lopez's departure. Mr Tinoco acknowledges his contribution. Lopez
made a revolution in GM.' he says. 'And we have achieved a considerable reduction in
costs here.'
The Lopez vision was for suppliers to assume more and more responsibility for final
assembly. Although he has now left VW, l.opez' legacy has survived at the German
groups truck plant in Resende, not far from Rio de Janeiro. There, components are
trucked in as at other plants but they are installed on the assembly line by their
suppliers, rather than by VW.
Other carmakers are studying VWs project, notably at Fords so-called Amazon
plant in Bahia. But most have retained control of final assembly. For all practical
purposes, however, Blue Macaw is following the VW trend. Employees at the plant -
who have an average age of 28 - are hired by the site rather than by the individual
companies within it.
The management of human resources is handled jointly by a committee representing
GM and its suppliers. A network of joint committees, reporting to an executive council,
oversees even- aspect of the site.
The executive council has another pioneering achievement in regard to payments to
suppliers. Companies such as Delphi are not paid when components are delivered; they
receive payments when the finished cars reach the dealer. To make this work. GM had
to simplify the whole supplier chain at Gravatai. It has done so by producing only one
basic model at the plant, the Celta small car, which is badged as a Chevrolet for the
Brazilian market.
The Celta, derived from GMs Corsa model, is less sophisticated than more
expensive models and requires fewer complex sub-systems.
What we did was to dis-assemble a Corsa into basic modules and then invite about
60 suppliers from all over the world to bid for supplier contracts for various parts,'
recalls Mr Tinoco.
By simplifying in this way, GM can install sub-systems quickly and easily as they
arrive on the line. Orange wagons, each bearing the motif of the supplier, arrive at the
assembly line at the moment that the vehicle requiring the parts rolls past. A system of
traffic lights automatically stops the line as each wagon of components is emptied. A
new wagon is lowered into place from an overhead gantry', while the old one is rolled
away.
In another area, the cars undergo an auto-marriage' where robots fit the Celta's
engine, gearbox, fuel tank, rear axle and front suspension at a single work-station.
Productivity is measured on digital screens overhead that are labelled 'Objective' and
'Actual'.
Some analysts argue that the sy stem could not be adapted easily for more-
sophisticated models. It is typical of GM to build a well organised and impressive
facility but then to make a car that does not really do it justice,' says Prof Garel Rhys,
head of motor industry economics at Cardiff University business school.
Following a recent visit to Gravatai. Prof Rhys warned: GM really has to put in other
models if the plant is to punch its weight, not least in export markets.'
But GM claims that the Celta is suited to Brazil and neighbouring Mercosur
countries, because they are heavily weighted towards cheap, entry-level cars.
We are selling everything we produce and introducing a second shift, creating
another 700 jobs.' according to Mr Tinoco.
Any lack of sophistication in the Celta, he says, is more than offset by its quality:
What we have here is a proving ground. It is a first not only for Brazil but also for the
whole of GM.

ScottishPower Learning
Mik Wisniewski Jim McLaughlin
77>e case looks at an industry that has undergone major strategic and operational
change over the past decade. It is primarily concerned with how ScottishPower
structured itself after privatisation and the relationships between the corporate centre
and the business units. These issues are viewed from the perspective of one business
unit (ScottishPower Learning, SPL) that was created through the merger of a number
of teams and units responsible for training and development throughout
ScottishPowers UK operations. The case is about the role of SPL in relation to the
company as a whole and in relationships with the other semi-autonomous operating
divisions which were now its customers. It encourages readers to reflect on the
different organisational structures and management processes that can be adopted by
organisation and their strategic and operational implications.


A COMPANY TRANSFORMED
1990. The South of Scotland Electricity Board (SSEB) is part of the UK's nationalised
electricity industry and with its 12,000 employees generates and supplies electricity to
its customer base of fewer than 2 million customers in the south of Scotland.
2001. ScottishPower, the privatised SSEB, is one of the world's top 15 global utility
businesses and rated the very best FTSE 100 company by The Times newspaper. The
group has a turnover of over 4 billion in the UK and the USA, a customer base
exceeding 7 million, around 20,000 employees and as well as electricity has moved into
gas, water and wastewater, appliance retailing, telecoms and Internet services.
Strategic change and success on such a scale rarely happen by accident. A clear
strategic vision and focus are required together with the development and
implementation of appropriate plans at both the strategic and operational levels to turn
the vision into a reality. Equally, such strategic change cannot be driven simply on a
top-down basis from the centre of the organisation. Each part of the business must
contribute to success.

SPL
From the time of privatisation the company had reorganised around semi- autonomous
operating divisions such as Generation and Power Systems. One of the more recent
divisions, established at the start of 2000, was ScottishPower Learning (SPL). The
company had a number of reasons for creating such divisions: the need for a clearer
strategic and operational focus in each of different parts of the company and an
increased ability to respond quickly and effectively to turbulent and increasingly
competitive environments in the different parts of the business. Historically, training
and development had been the responsibility of each of the six major stand-alone
divisions within the company, with each division having its own team of staff
responsible for this. SPL was created through the merger of a number of teams and
units responsible for training and development throughout ScottishPower's UK
operations. In addition, the ScottishPower Learning Unit became part of SPL. This unit
had been established in 1996 to promote the companys commitment to lifelong learn-
ing for its staff and to support the wider communities in which ScottishPower operated
through open learning centres and by supporting learning and training for the
unemployed in local communities linked to the UK government's New Deal initiative.
The creation of SPL produced a number of major opportunities for SPL but also a
number of critical challenges that it had to address. These were primarily about its
future role in relation to the company as a whole and in relation to the other semi-
autonomous operating divisions which were now its customers. Critical tensions that
needed to be managed related to the relationship between SPL and group headquarters;
the relationship between SPL and the other operating divisions; the boundaries of SPLs
activities; and the organisational processes critical to SPLs success.
The companys review of training and development activities in 1999 had identified
this as an area of significant expenditure (over12 million in 1999/ 2000) directly
employing over 100 staff, as well as buying in training and development from external
suppliers. There was a clear expectation that the new SPL division would contribute to
the company's ongoing cost reduction targets. However, the review had also identified
that the training and development environment in the company as a whole was likely to
change. Some parts of ScottishPower business were being divested; there were ongoing
organisational changes in the company's core businesses; there was increasing
opportunity to exploit new technology in training and development delivery; there were
increasing opportunities for generating external income by selling SPLs services to
other organisations. The creation of SPL as a semi-autonomous division was felt to be
an appropriate way to respond to these challenges and to capitalise on opportunities.
Training and development had already made major contributions to the companys
success since privatisation. As the chief executive, Sir Ian Robinson, said: In the
development and evolution of ScottishPower, our people, with their drive and
enthusiasm, have been the big differentiating factor.' 1 However, SPL could not afford to
take the future for granted. To better understand SPL's position it will be worthwhile
reviewing the companys strategic growth over the previous decade.

SCOTTISHPOWER STRATEGY
By its own admission, at privatisation in 1991 SSEB was dominated by a culture
characterised by: a strong engineering orientation where costs, profit margin and
commercial performance came second; where maintaining electricity supply at virtually
any cost was seen as the prime organisational objective with little real priority given to
customer service as a whole: a large, centralised, nationalised industry with diffused
responsibility and no real ownership or accountability at either strategic or operational
levels; being risk averse with little importance attached to entrepreneurial anil
innovative approaches. This culture had to change if the company was to survive, let
alone be successful.
At the time of privatisation, each of the new companies (RECs, or regional electricity
companies) in the UK still had a geographical monopoly for much of its customer base.
In addition, the generating companies in England and Wales had also been privatised
and split into two companies. Powergen and National Power (ScottishPower was
vertically integrated anil had both the REC responsibilities in its area as well as the
generation capacity). The UK government, however, had indicated that there would be
a gradual move to full competition in both the electricity and gas markets, with all
customers ultimately able to choose their energy suppliers. The government had also
appointed an industry regulator to ensure that RECs delivered year-on-year
improvements in performance and customer service, and the regulatory regime required
both operating cost reductions and price reductions as well as requiring RECs to meet
service quality targets. In addition, through what was known as the government's
golden share in each new company, the RECs were effectively immune from takeover
until 1995.
However, much of the rest of ScottishPower's environment was highly uncertain. It
was not clear how the detail of the regulatory regime would develop. It was not clear
what would happen to the industry as a whole from 1995 onwards when individual
RECs would be exposed to potential takeover, mergers and consolidation. Emerging
from the strategic analysis undertaken by the company was a clear vision statement, to
become a world-class multi- utility'. The overall strategy set by the company is
summarised in Exhibit 1. The first focus of the overall strategy was that of reshaping
the existing core business and exploiting existing assets. There were two related aspects
to this: a major drive to improve operational efficiency and reduce costs and ensuring
that the companys assets and skills base were exploited to the maximum. By 1995
employee numbers were down from 12,000 to 8,000. However, the focus was not
simply on cutting costs by cutting staff numbers. The company had made great efforts
through workshops and staff briefings to ensure that all employees were aware of, and
understood the implications of, the harsh commercial environment in which it now had
to operate. The company also invested heavily in staff training and development to
ensure that staff could contribute effectively to the overall strategy. As Paul Pagliari,
group human

Exhibit 1 Company strategy

resources director, says: We want to make evetyone improve. Its a big thing for us as a
business to get evetyone to move up their performance curves'.1 The focus was twofold:
technical training to improve efficiency and productivity and to reduce operating costs;
management training to help develop commercial awareness and business skills.
The second stage of the overall strategy was that of diversifying into other utility
businesses. Two markets were specifically targeted: that of gas supply and that of
telecoms, both areas where the company anticipated that considerable synergies with its
traditional business existed. The third stage was expanding the company to become a
broader utility-based business. This was achieved with the takeover of two companies.
The first of these, Manweb, based around Merseyside and north-mid Wales, was
another REC taken over by ScottishPower in 1995 and adding a further 1.5 million
customers. The second was Southern Water, based in the south of England supplying
water to around 1 million customers and wastewater services to 1.7 million. The fourth
stage involved moving from being a UK utility business to being an international
multi-utility. In 1999, following abortive attempts with other US utilities,
ScottishPower merged with PacifiCorp, based in Oregon but operating across six
western US states.
The last decade of the twentieth century was a successful one for ScottishPower.
However, the company was well aware of what happens to those organisations that
become complacent with current success. The company recognised that there were
considerable future challenges, particularly in terms of: an increasingly tighter
regulatory environment in its core activities and markets; customer demands becoming
increasingly sophisticated; increasingly competitive markets developing in the utility
industries; restructuring of utility industries on a global basis. Training and
development are seen as critical. As Sir Ian Robinson says. Staff development is all the
more important now as the group expands, to encompass the needs and aspirations of
employees.5
SPL STRATEGY
It was in this wider context and background that SPL was created in 2000. Following
the strategic review of company training and development, the company set out the
core purpose of the new SPL as:
to improve the quality of all training;
to optimise the use of new technology in supporting training;
to minimise costs associated with training;
to support other business units within the company in terms of their training and
development needs;
to support the ongoing organisational and cultural changes required in all businesses
and at Group level.
How this was to be achieved, however, was down to SPL itself; there was no top-down
imposition of strategy other than the broad expectations set out in the purpose
statement. Shortly after the company announced its creation, the senior managers from
the various teams making up the new SPL division met to develop their strategic
thinking. SPL was faced with an immediate task of putting together a business plan to
present to the companys senior management. However, it also realised that longer-term
thinking and planning were needed if SPL was to be successful. The strategic thinking
and planning were not simply a matter of rolling forward each teams activities into the
future. SPL realised that its operating environment was now radically changed as a
result of the larger reorganisation within the company. For the short term, each of the
business divisions within ScottishPower which originally made up SPL were required,
because of a corporate-level decision, to use SPL for training
and developing their staff. However, in the medium term there was a clear corporate
expectation that divisions would ultimately be free to buy their training and
development from SPL or from any other competing external supplier. SPL, in other
words, would need to establish quickly some meaningful competitive advantage in the
eyes of its internal customers. It decided that this could best be achieved by ensuring
that the services it provided were demonstrably seen as adding value to their (internal)
customers' own core business. This was also consistent with the message coming from
the company HQ from Paul Pagliari, group HR director: I always question what an HR
activity or proposal means for business performance, business efficiency and business
deliverables. I think that if you can talk to line management in that language, they're
quite prepared to take things on board because they do understand the real value thats
been added.4
The boundaries of SPLs activities were another strategic aspect to be resolved. Some
parts of SPL generated external income into the business. Part of this related to
technical training courses that were made available commercially to other utility
companies. Part related to the activities of the ScottishPower Learning unit which
attracted government grants for its work with local communities. It was recognised that
this external income generation was likely to cause considerable strategic tension and
conflict. On the one hand, SPL would need to ensure it was delivering a value-adding
service to other ScottishPower divisions. On the other. SPL realised there were oppor-
tunities for further external income generation adding further value to the company as a
whole. SPL realised it would have to agree processes and systems for managing this
tension in terms of its operational planning and resourcing.
SPL also saw the business plan as an opportunity to market its services to the other
internal divisions, to declare its mission in supporting other divisions and to indicate
longer-term strategic direction. SPL decided that a number of key messages for various
stakeholders would be communicated through the plan:
Stressing SPLs enhanced collective capabilities and competences in terms of the
range of services it could now offer other divisions. This involved SPL changing its
relationships with the other divisions - moving from simply being a provider of
training and development to one of business adviser, understanding how training and
development could best support each divisions own goals, strategies and plans.
SPLs commitment to achieving its own performance targets in terms of reducing
costs and improving service quality. This meant reducing training costs for other
divisions also.
An indication of SPLs longer-term vision. This included a commitment to growing
the training and development business' both internally and externally, with external
income used to reduce internal costs or reinvested in new' technology applications; to
ensuring that SPL added value to other divisions activities through its own services;
to an increasingly innovative approach to training and development (through online
learning, for example).
There were two broad parts to the plan. The first part was primarily strategic and the
second operationally focused, providing the detail of SPL's services and activities for
2000/2001 for each division in ScottishPower. The plan also summarised the key
actions/objectives for the coming year. These included the need:
To identify the major long-term opportunities and challenges for SPL by completing
a detailed environmental scan.
To develop a product/service costing model so that SPL could properly cost and price
its products/services (both internally and externally). This would help ensure SPL
was properly competitive for the time that divisions could buy their training and
development from outside the company. It also ensured that recharges to businesses
were transparent and open to scrutiny, very important from a regulatory perspective.
To review SPL operations using the costing model to enable SPL to assess costs and
value of all activities.
To arrange top-level discussions with the managing directors of the other divisions to
sell SPL and to start developing service level agreements (SLAs) with the
individual divisions. The SLAs in particular were seen as a critical mechanism for
agreeing with divisions the services and activities to be provided by SPL and the
agreed cost of doing so.
Development of a strategy for exploiting online/technology-based learning across all
SPL activities.
Developing an approach to performance measurement that demonstrated where SPL
added value to the companys operations.
It is often assumed that strategic thinking and strategic management only take place at
the corporate level in an organisation. The same sort of thinking, however, is also
needed within the organisation, as demonstrated by the SPL division. As Jim
McLaughlin from SPL comments:
Strategy at this level is more difficult than at corporate level since the division must
operate within the strategic constraints set by the company as a whole. But thinking
strategically is just as appropriate and applicable in our own search for future success.

Tetra Pak Converting Technologies: A project-based


organisation
Lars Lindkvist
Tetra Pak Converting Technologies Inc. is an example of an organisation which,
triggered by a performance crisis, decided to abandon its traditional matrix structure
and operate almost exclusively on the basis of autonomous projects. 'The case provides
an opportunity to consider the appropriateness and viability of this approach to
organizing.


BACKGROUND
Tetra Pak Converting Technologies (CT) was an R&D unit within Tetra Pak, a leading
company worldwide in developing and producing process, packaging and distribution
systems for liquid food. Tetra Pak had about 18.500 employees and total sales in 1999
amounted to 7.3 billion. Tetra Pak was organised in a matrix structure with three
business areas - Carton. Plastic and Processing - and two regions - Asia/America and
Europe/Africa - including 70 market companies. CT was located in Lund, Sweden, and
belonged to the Carton business area, which was the largest of the three. Within Carton
there were two main R&D centres. Besides CT, which engaged in converting tech-
nologies, there was another complementary' R&D unit located in Modena, Italy, which
was engaged in developing filling machines. Taken together, these units employed
about 250 people. Serving the entire Tetra Pak organisation was a central R&D unit,
located in Lund, that was engaged in basic research and prospecting future packaging
technologies.
CT developed, implemented and optimised material and converting technologies,
covering the whole process (including lamination, printing, etc.) which transformed
raw carton into ready-made packages. Most of its development projects were customer
initiated, either by Tetra Pak factories or by market companies after agreements with
external customers. But it also initiated its own R&D projects and advanced
development projects with no customer attached. Although CT was legally an
independent company it was financially operated as a cost centre, and received
centrally allocated funds based on performance, reputation and demand for its services.

THE RECORGANISATION
CT was established in 1989 blit already by the beginning of the 90s it had experienced
a diminishing demand for its services. At that time, Tetra Pak was decentralised in order
to facilitate adaptation to different development and needs in local markets. In the new
structure the factories and product companies increasingly turned to other sources, such
as consultants, machine or raw materials suppliers, or they built their own capabilities
to manage their development needs. In September 1994 demand was very low and the
future of the unit was strongly questioned. At that time a newly appointed managing
director initiated a comprehensive SWOT analysis. This resulted in several conclusions.
It became obvious that the organisation was not very customer- focused. There was also
a realisation that the only chance of out-competing its internal and external competitors
was to build superior competences and problem-solving capabilities. To stay ahead of
them it also had to be more efficient, especially in its ability to shorten and keep lead
times.
At that time, CT had a traditional line-of-command structure organised along
functional units, which was subdivided into smaller, technical specialist departments.
The functional units were responsible for personnel, and project leaders had to engage
in difficult negotiations in setting up new projects. Line managers tended to focus more
on their line duties than on project goals, and they maintained great influence over how
projects were carried out. This led to a reinforcement of their technical character while
downplaying a customer or market focus. As a result, project leaders were accountable,
but had little authority, and individual project members felt torn between the demands
of the line organisation and the projects they were engaged in.
It became clear that minor changes were hardly enough. To bring about increased
focus on customers, projects and competences, more profound changes in the ways of
thinking and acting were needed. It was no longer deemed adequate to think in terms of
functions and positions. The managing director and a team of top managers in CT thus
decided to undertake a more fundamental reorganisation. The former matrix
organisation dominated by the functional units was abolished, and instead a purely
project-based organisation was introduced.
In the change process, functional units were dissolved, leaving individuals without a
home base or superiors in a traditional line-of-command sense. Instead they only
belonged temporarily to projects and w ere subjected to new project leaders as their
assignments changed. In the new structure, a number of competence networks' covering
core technical areas were established. Each individual had a mentor, responsible for
suggesting wage increases and discussing appropriate ways of furthering the
individuals long-term competence development. To underline the non-hierarchical
nature of the firm, the individuals were free to choose their own mentor from among
those elected as nominees.
These revolutionary change efforts were successful. As a consequence, the
organisation was no longer on the edge of survival, but was prospering with highly
increased demand for its services, increased creativity manifested in its patent records,
and more motivated members. Between 1994 and 1999 demand for its services doubled
several times over, and the same was true of the number of patents registered yearly.
The characteristics of CT promoted the picture of a very flat, decentralised and
loosely coupled system. This also applied to the knowledge dimension - knowledge
was highly dispersed, fragmented and localised. Despite its basic feature as a
distributed knowledge system, it was, however, obviously integrated enough to produce
valuable services. In addition to market and technology strategies, the rules of the
game implied by the new organisation structure were highly significant in achieving
this. CT carried out its operations in projects that were largely self-organised within
goals set for quality, cost and time. Below we discuss in more detail how projects were
operated and how they were complemented by the competence networks.

PROJECTS ACTION AND INTERACTION


In the new structure, projects made up the core part of the organisation. Projects in CT
were fairly short-lived and new projects all had a unique mix of different competences.
Well-functioning project work was imperative to survival. The project leaders were
fully accountable for attaining the project goals. To a great extent, the project leaders
exerted an influence over who should work in the project. As stated by one project
leader, getting the right mix of competences in the project was extremely important. It
was also recognised that due to the complexity of the problem-solving processes
involved, it was not possible to know the right mix with precision initially. The project
leaders had to guess' who should be able to contribute, get a broad enough mix and
hope that the team as a whole would manage the task challenge.
...in development work the important thing is to collect those you believe might
contributeyou take some of them and some of them . . . and when they start to 'thrash
it out' they come up with a solution . . . but if you have forgotten any of them it does
not work.
However, the team composition was not seen to be a haphazard undertaking. The
potential project members had a reputation regarding professional competence, their
ability to work with others, etc. acquired during earlier project engagements. Although
project leaders did not know in great detail what kinds of problem might appear during
the project, the)' had good intuition as to which individual members anti which mix of
members could manage a given development task.
The reliance on the capacity of the individuals to merge into a self-organised team
engaged in communal problem solving also lent a distinctive emergent character to the
project. Initial parameters, such as the mix of participants, a specification of goals and
perhaps some general rules or policies, were set initially. But then, due to the specific
competences and idiosyncrasies of the participants and the local or situational
circumstances, the project, to some extent, would develop its own trajectory and take
on a logic of its own.
The project team also had full discretion in project execution within certain set limits.
The goals were then broken down into a more detailed project plan, identifying certain
phases of the projects and milestones. Essentially, evaluations during project execution
and the final report' that had to be written after project completion centred around the
project plan measures. In addition to those feedback measures, more technical
development reports' were written. covering testing activities - including specification
of equipment used, results and conclusions. These were all stored in a central database
system.

PROJECTS KNOWLEDGE PROCESSES


The projects were conceived of as team activities bounded by certain goals. The
clearness and tightness of the deadline forced the project members to engage in time-
paced problem solving. This meant that swift judgement often had to replace analysis.
Therefore, the project leader had to encourage action' and an action orientation among
project members.
In projects, people had to learn how to use their expert knowledge in a practical
context, where action and results as well as swiftness were the dominant governing
norms or values. They had to develop their abilities to work together with others in
complex problem solving, and had to learn how to become valuable employees. In
doing that, they also learnt a lot about the other members' specialties and interface'
areas between the different functional areas.
Much of the knowledge generated within the projects was hard to formalise and
incorporate into the development reports, final reports or other kinds of written
material. Another problem was the real-time-action' character of most of the project
work. With the time focus being strong, reporting and ex-post reflective activities were
suppressed. The goals of the projects were so strong that individual orientations as well
as reporting practices were adapted to the basic project logic of moving forward
towards the goals - as fast as possible.
Projects are very focused on their goals and nothing else. It's like there is an abyss
after its completion.
we write a report but it might well be insufficient... if there was a problem we only
write we solved it, you don't write how you perhaps tried two hundred thousand other
things that did not work.
This did not mean that written documentation was not used at all. In setting up a new
project, during the pre-study phase, many looked at previous development reports and
final reports. The purpose in reading these reports was to find out who had experience
of what area and with whom problems could be discussed in an informal way. Both in
the start-up phase of the project and during project execution, informal communication
was a major medium. This was facilitated by tire fact that the organisation was
relatively small and that many of the employees had been with the organisation for
years. One project leader remarked: Should we take this [informal communication]
away, it would immediately die.
CO-ORDINATION AND CO-OPERATION
Since Tetra Pak carried out its operations in projects, concerns about producing high-
quality products at low cost, time considerations and deadlines were of special
importance. There was a project plan in which activities were designated to certain
phases with various tollgates and milestones. Although such plans conveyed a very
simplistic and unproblematic picture of projects, more or less ignoring the uncertainties
and complexities of the real-world context of project work, such measures were vital in
order to achieve co-ordination.
The organisational change introduced also affected the individuals relation to the
organisation in fundamental ways. They no longer belonged to specific, permanent
units, had no traditional boss, and no longer belonged to a competence network. With
fewer instructions and guidance, they had to take more initiative themselves, both
within projects and in the context of those networks. From the managing director and
the mentors, they also learned that the aim was to have a truly knowledge-based
organisation. Their pay was thus related to their competences and especially their
ability to use their competence in solving the problems of the projects. In addition, this
required that they had social competences, and a willingness to share their knowledge
with others.

COPMETENCE NETWORKS
Within CT there were a number of competence networks covering the key
technologies involved in the entire converting process, such as lamination, printing,
automation, etc. There was also a project leadership network. Membership in those
networks was voluntary. Most members were connected to one of these, but some were
involved in several of them. The network members chose a leader, who had no formal
authority or accountability, acting more like a technical mentor. Yet it was clear that
they were expected to, and did, feel responsible for developing a deep enough
competence within their specialist area. This included both a concern for the total
amount and depth of specialist knowledge and judgement of strength and weaknesses
of each of the members. They could have also initiated development activities as well
as recruitment when needed. Apart from constituting an arena for exposing a broad
knowledge resource base for the projects, the network meetings were also important as
arenas for discussions of current problems or experiences that members had in project
work.
[knowledge] follows the individual persons leaving the project. So here we have a job in our
network to recognise what we work with in different projects.
These networks constituted formalised arenas for cross-talk between the projects and
for discussion about more technical competence needs. Unlike project work, the
networks had a longer-term orientation and were engaged in exploring new
technological ideas. They were also connected to the visions or strategies about the
competences of the entire organisation and their leaders met the managing director
regularly in the PPM (Project Portfolio Management) group, where the technological
strategies of CT were matched against the project mix and where changes in either of
these were considered.

LEADERS AND MEMBERS


In CT there were leaders (a managing director, mentors, project and network leaders)
but no bosses. This was the message sent by introducihg the new organisation structure.
Obviously this did not mean that decisions regarding strategy, recruitment and wage
setting were left to the employees, with only supporting guidance from the leaders. Yet
the new structure and philosophy in most other areas brought about substantial changes
which affected the individuals relation to the organisation in fundamental ways.
In the old, basically functional organisation, information flowed along hierarchical
lines, with considerable selection and filtering processes involved on its way up and
down. These ideas of information distribution were abandoned, and instead, every
individual was made responsible for searching for the kind of information s/he needed
or wanted, in the newly installed conference system and other electronic media, or
elsewhere inside or outside the organisation. This reliance on the individual to be the
one with the best knowledge of what information s/he needed was paralleled by the
policy of everybody having access to everything, the maps of all networks, including
letters, documents, etc. in uncondensed form.
This information-seeking philosophy was generally accepted, and a climate emerged
in which people tended to share their knowledge with others. Opportunism in this
respect was thus seen as a very minor problem.
We work together to build a good reputation for the firm and all must participate and all who
know something must share this with others.
the climate now is that everybody wants to help everybody.
One explanation had to do with the change in focus from functional units to projects.
In the latter context, this kind of knowledge opportunism was less likely to pay off.
... in the line organisation you could keep some information to yourself and use it to your own
benefit later on, but in a project you have no use for it, because it is likely to be a long time before
you are in a similar position again, so all information has to come out all the time
A helping attitude was also rewarded in the wage-setting procedure. The mentor
talked to the project leaders about employees, not only about their specialist
competences, but also about their ability to use their knowledge and their social
competences. Since the project work was rather public and transparent, there was thus a
non-negligible risk that opportunism would be detected. Getting a reputation for such
non-cooperative behaviour would have been devastating in this organisation, since that
meant that nobody would ask you to participate in projects or ask for your advice.
Individuals did not seem to have a very strong sense of belonging to or identification
with CT. For some individuals, the projects represented an important social collectivity,
for others, the competence networks were seen as more important. Instead of relating
their membership identity strongly to the organisation or parts thereof, they tended to
rely primarily on their competences.
there is no longer the same need to bclopg to an organisational unit. People identify' with their
competences they feel at home in their working activities
Neither was there any management intention or expectation that the individual should
feel more like they were integrated parts of the organisation. As expressed by one of the
leaders, you should take care not to glorify the organisation too much.
the focus on the organisational unit may become so strong that you forget why you are here ...
a reduction in customer focus.
In many ways, CT was a very individualised organisation. It was up to ever)'
individual to seek relevant information and to see to it that their competences
(including both specialist competences and social competences) were strong enough,
and developed as needed. If they did not do so, they risked a reputation of having
obsolete knowledge, lack of practical or social ability'. As a result, demand for that
employees contributions tended to diminish, and nobody asked that employee to join
new projects or wanted his/her advice on problematic issues. Moreover, in such a small
community' as CT, it was not hard to observe how this demand structure was evolving.
The wage-setting procedure reinforced this emphasis on the individuals responsibility
to develop appropriate and in-demand competences. The members were granted great
autonomy, but it was a matter of freedom and responsibility, as expressed by one
leader.
CT provided a highly motivating social context for the members. One leader
suggested that, although people were very different, the need for confirmation seemed
to be basic to most of them. Another leader noticed how these confirmation/demand
issues were connected to the construction of status differences within the organisation.
... a fundamental need for confirmation, when somebody asks: 'could you join our project, you
feel like a prince
Status I guess is to be needed . . . The worst thing that can happen to a person is not to be needed
and inversely it has to be a kind of status to be in demand. Everything else such as having an
extravagant car or high salary is merely exterior signs of that.
Moreover, those working in the organisation, due to recruitment policies and self-
selection mechanisms, liked to be engaged in knowledge development and to work in
project teams. They all tended to emphasise strongly that they were primarily driven by
curiosity, and by their own interest in discovering and learning about new things.
Several also said that they got a kick out of managing a difficult project, and some
appreciated that project work meant that you actually finished something and could
then start anew with other things. Most of the employees were happy to work in CT -
and they accepted its basic philosophy and image as a project-based, knowledge-based
and individual- based organisation. For the individuals, the key to their career
development was to have adequate knowledge or competences and to prove that in the
real- life context of project work.

KPMG (A): Strategic change in the 1990s

Gerry Johnson
KPMG is one of the major accounting firms worldwide. In the 1990s it underwent
Significant strategic change. The case is primarily concerned with the management of
strategic change processes in this firm during this period and includes verbatim
explanations of the challenges they faced and how they were handled. The case
provides a context in which to consider the extent to which these change programmes
succeeded in effecting strategic change.


By 2001 KPMG was one of the largest professional services firms in the world. Its fee
income for the fiscal year to September 2000 was US$13.5bn, of which Europe, Middle
East and Africa accounted for US$5.7bn and the Americas S6.6bn. The UK accounted
for SI.8 bn (or 13 per cent of world fee income). Within the UK. KPMG employed
11.130 staff.
KPMG was. undeniably, a success story; yet this was a business facing an
increasingly competitive environment on a global basis. KPMG had experienced a
decade of change: and knew that it faced more in the future.

THE PARTNERSHIP HERITAGE


KPMG was a partnership. Over the years the firm had grown, prospered and
amalgamated with others to become the huge enterprise it was. From 1993 to 1997
Colin Shannon was the UK senior partner of KPMG and had been responsible for the
review of strategy' and the programme of change that had taken place in the UK in the
1990s.
In common with many partnerships, KPMGs legacy was an emphasis on powerful,
influential individual partners, skilled in their areas of professional expertise and with
strong personal relations at senior level with clients. At the beginning of the 1990s a
partner would ty pically have been a chartered accountant who had spent 10 to 15 years
in the firm working his or her way up to a senior client management position in a
specialist area such as audit or tax. Given a successful record in developing business
with clients and providing first-class professional services, the appointment to partner
might take place, provided existing partners were in agreement. Thereafter the new
partner would seek to further a reputation for winning new clients, building
relationships with existing clients and ensuring excellence of service, by cultivating a
network of trusted managers and other partners with whom he or she would co-operate.
Attempts to formalise strategic planning in such a context were difficult. In KPMG in
the past, committees had been set up to do it; or partners given special responsibility for
it; but whilst planning procedures or plans themselves might appear, they did little to
change the way in which the firm developed. The successful growth in the 1970s and
80s had come about on the basis of excellence of professional advice given to clients
and through long-standing relationships built by experienced partners. The strategic
direction emerged from this. Where there were problems or disagreements these were
resolved between the partners themselves.
Colin Sharman believed that the situation had changed by the mid-1990s.
In practice, of course, we have moved a long way from the Victorian notion of part-
nership and we run ourselves increasingly on corporate lines. I am the senior partner,
the managing director, and I have a management team who make many of the opera-
tional decisions of an executive board. But the partners have to be consulted and have
to agree - or at least not disagree - with an) change.
But it is not just about partnership. Over 70 per cent of our total workforce are
graduates, a highly intelligent group of people who, quite rightly, need to be convinced
we are following the right strategy. This is not just an issue of drawing up some son of
plan and communicating it well through the organisation, but also of winning hearts
and minds.

KPMG IN THE EARLY 1990s


The review of KPMG's strategy began in 1992. when Colin Sharman took over
responsibility for KPMGs largest UK region (the South East) with 300 of the UK
partners at that time. He described what he inherited:
In many respects the way we did things had its benefits. It was based on a network of
very bright people, professionally trained and dedicated to providing quality advice to
their clients. But there were problems, especially if we remember that our primary
purpose was to provide services to our clients which may not always coincide with the
skills, experience and interests of the partner who dealt with that client historically.
We had a matrix structure. We had a delivery' structure for services along discipline
lines; different practice units for audit, for tax, for management consultants and for
corporate recovery'. Separately we focused on our market sectors through firm-wide
multi-disciplinary groups focusing on banking, insurance, manufacturing and so on.
But the dominant axis remained the discipline-based practice units, and that was the
primary interface to the market.
Our mission involved providing the highest quality of services to our individual
clients but our practice units were discipline based. The only way that' we focused
across disciplines was through our market sector groups, but they merely co-ordinated
and did not run the business. Hence there was a conflict between our stated goals and
our structure.
KPMG would have been characterised as professional, highly conservative and
sometimes complacent. There was also an attitude that our partners can, and will, 'do
anything' - different from a 'do well culture. And also a belief from right across the
firm that being a generalist, rather than a specialist, was the most desirable state.
Partners believed they should have a say in decision making. There was a widespread
network of committees - the answer for most things in the organisation was to set up a
committee, a retreat into collectivism at the drop of a hat. Alongside that, the
responsibilities of individuals within the organisation were so ill-defined that it made
achieving change very difficult. Our control systems were full of paradoxes. At lower
levels our staff saw controls as bureaucratic, taking time away from the real business of
being a professional services firm; but at the higher levels there was a belief that we
had poor controls and poor management information to run the business. Both of those
were probably right - we spent a lot of time collecting and controlling the things that
didn't help us to run the business. Alongside that, we had too much poor discipline - a
lack of rigour and not caring about doing it right the first time; not surprising if we
were asking people to spend a lot of their time on data that were never used to manage
the business. But poor discipline, endemic through an organisation, was a major barrier
to new ways of working. For example, there was too little value placed on managing
carefully to timescales. It was regarded as much better to whirl around in frenzied
activity at the last minute. That applied whether we were serving clients or trying to do
something that contributed towards managing the business. You would hear people
bragging about the extremely long hours that they worked, doubtless to reinforce the air
of crisis that they were managing (though never creating!).
The 'mystique of partnership' didn't always help. Promotion to partner was seen as the
summit of a KPMG person's career with virtually no second prizes for those who did
not make it - we had a culture of up or out'. Partners, once created, were quite distinct
and elevated people within the organisation. There were also problems with the
discipline structure of audit, tax, consultancy and so on being dominant; problems
illustrated, for example, by the tales people told about how awful one of the other
disciplines was. Nor was the cult of the individual' always helpful. The kinds of people
who were lionised were mavericks - people out of the mould; people who had broken
the mould: people who didn't conform - there were lots of stories about individuals.
You can imagine the way some of this expressed itself; especially when it came to
'them and us' - partners and the rest or, at lower levels, senior managers and the rest.
For example, in our London office we had three levels of dining room and partners got
their tea brought to their desks in china pots and silver trays.

THE COMPETITIVE POSITION IN THE EARLY 1990s


Colin Sharman explained the competitive position of the firm in the early 1990s;
The accountancy profession had been in a period of turbulence and change for some
time. It was threatened by litigation, subject to 'low-bailing', increasingly governed by
rules and regulations and lacking a recognised market leader. The market was
dominated by six large firms. In the 1980s the leading firms underwent a series of
international mergers and diversified into a range of professional services - corporate
finance, consulting, investigations and forensic accounting. There were portfolio
differences - for example, KPMG was clearly a leader in corporate finance and the only
player in career consulting, but the similarities were far greater than the differences.
The players were broadly similar in size and in their range of resources, consequently
there was no natural leader to direct and structure the market. Even where the
professional offerings were similar, effective relationships could provide a competitive
edge through understanding the business and client needs.
The ability to co-ordinate and integrate people to create a real benefit for the client
would also be a distinguishing factor since this is the area that accountancy firms have
been notoriously bad at. The result was that teamwork, relationship management and
integration are the competences that may distinguish one firm from the pack given their
equivalence in many technical aspects. One of the fascinating aspects of this struggle of
the giants was that success lay not necessarily in the originality of the idea or strategy
but in the ability to implement the idea effectively.
In the early 1990s the expectations of clients were changing: however, they expected
their advisers to understand the problems they faced, and to be able to provide a range
of services to meet their needs. The issue for KPMG was, therefore, to ensure that
partners were seen as, and performed the role of, business advisers.

THE IMPETUS FOR CHANGE


Colin Sharman saw the need for change. The problem was that many - perhaps most -
of his colleagues did not. After all, the firm had experienced years of growth and was,
clearly, very successful. Moreover, those who did think change was needed disagreed
about what it should be. Sharman explained what he did in these circumstances.
In 1992, we organised a series of eight strategy' workshops for the region's partners;
around one-third went through them. Quite deliberately, those who attended the
workshops, particularly the early ones, were partners with a desire for change and
views about what those changes might be; and they were not necessarily my views.
What those workshops did was to work through the strategic position of the firm, what
the competitive strategy should be, what the blockages to change were, what the critical
success factors were and crucially what actions needed to be put in place.
In fact the workshops achieved some ownership' of the problems the firm was likely
to face if it did not change. The partners, working together in groups, came to see the
extent to which the services offered by the main firms were largely undifferentiated;
and the consequent likelihood of eventual price-based competition leading to reduced
fees was a powerful stimulus for change.
I personally attended a de-briefing session at the end of each of the workshops. The
messages that came out of them were remarkably consistent. They confirmed the need
for increased client focus. Major issues of specialism and integrating our service
delivery also emerged.
At the end of the series of workshops 1 arranged for some more detailed feedback
sessions for all of the partners. 1 held ten evening sessions with all but a. small handful
of partners coming to one of the sessions. There we took the main messages from the
workshops, discussed the main directions of the firm and tried to surface any real
concerns. Those proved a very useful way of building the consensus that we needed
and also reinforcing the fact the change was definitely coming. I also used the senior
management conference, which was an annual ritual for our senior managers to
complain about the firm, as a way of getting them into strategic issues. The managers
worked through much the same process as the partners had done on the workshops. At
the end of that, the senior managers produced a serious analysis of the issues facing the
firm and the kind of actions that were needed.
I tried to capture that enthusiasm, that commitment, that sense of change by holding a
series of briefing sessions for partners and senior managers together to spread some of
the messages. The messages 1 wanted to get across were that we were serious about
change; that we needed to become a much more open organisation; that we needed to
involve people at all levels in the development of the organisation and that we needed
to communicate very much better than we had done in the past. To make them have a
real impact I had the sessions designed to reinforce the underlying message, which was
that we are going to do things very differently in future. For example you might think
that the visuals |see Exhibit 1) we used were pretty ordinary but my KPMG audience
was accustomed to nothing more exciting than slides with a KPMG-blue background
and logo. So if nothing else my pop-art images made an impact. People started talking
openly about wanting to change, wanting to try new things and wanting to succeed.
The workshops had, then, helped identify the main elements of the strategy. Colin
Sharman had also developed his views about the required approach to change.
The key was to get client focus into our organisation. Initially I thought that I could
operate successfully by changing only the behaviour and skill sets of our people, in
particular our partners. But 1 came to the conclusion that was not going to work, if we
changed the behaviour of partners and staff to become more client focused, more
market sector focused, more knowledgeable about the marketplace, that w'ould rapidly
fall apart. We would need to reinforce it by measurement systems to ensure that our
people were measured by these new ways of doing things; and by a structure which
aligned with what people were being asked to do. If people, accountable in one
direction, were told to focus their efforts in another, it was likely that one or other
would lose out; and if our measurement systems and reward systems measure
something other than the new behaviour we are asking for, it is fairly clear what would
happen. So I concluded that we needed what 1 call a virtuous circle of change
consisting of three interlinking elements - structure, measurement and behaviour - all
needing to operate on each other.

THE LAUNCH OF 20:20 VISION


Following the strategy workshops in February 1992, many partners within KPMG had
become impatient for action. Colin Sharman was rather more cautious. He believed it
might take three to four years to put proposed changes into effect. However, a plan
which set out structural changes had been put together by the end of April 1992. This
plan was central to the guiding vision of the future and became known as 20:20
Vision.
The underlying strategic thrust of 20:20 Vision was to move to an industry- based
focus for service delivery to clients; to develop teams of auditors,
Exhibit 2 Visuals for the presentation

______________________________________________________________________
Exhibit 2 UK structure of KPMG, 1993

consultants, tax specialists and so on, who were experts by industry sector, not just by
discipline. To do this a new structure for the firm was introduced made- up of four
industn-based business units and four skills-based business units, headed by senior
partners reporting to two partners in charge of operations, one for Industry Units and
one for Skills Units. These were directly accountable to Colin Sharman (see Exhibit 2).
There was a mixed response to these moves initially. Some parts of the firm were
enthusiastic; others were not. As Alan Reid, the partner in charge of the Skills Units,
explained:
It was audit that went hell for leather into it; it was a way of getting the audit prac tice
managed. I don't think they recognised that 20:20 Vision was for the whole firm.
However, on the tax side 49 out of 50 partners did not want it because they had been
going through three years of change themselves, had only just come to the end of it and
felt well poised to drive forward. What they thought they could do was to co-locate
rather than merge. They accepted they had to work together but there was a question of
whether they were managed by tax people. They had come out of subservience to the
audit practice and they thought that this was a magnificent ruse to get them back into
that position. Consultancy never really debated it.
In the initial stages the staff were probably the most supportive and that's perhaps
worth learning from. The staff saw the reality of the vision quicker than partners. In
fact, as staff became more excited the whole thing accelerated, but quite a few partners
lingered behind. I think some partners thought that all this might cancel itself out in due
course.
By 1993 the structure was in place and co-location had occurred. However, the extent
to which the new strategy had become accepted and put into effect was mixed. In some
industry units it was being pursued energetically. One of the heads of the industry-
based units established a co-located multi-disciplinary team, with team briefings,
tailored training in the strategic analysis of clients for all partners and managers,
whether consultants, auditors or tax specialists; and was able to demonstrate the
effective working of the unit in half the time initially planned. In others it was little
more than co-location at that time. As one audit manager put it: I had moved my office
but nothing else had changed. As far as I was concerned I was dealing with the same
clients in the same way.
Changes to established control procedures were also slow. For example, it was
unclear who would be allocated fee income for an assignment between business units
and skills-based units where joint teams were operating. This lack of clarity was
exacerbated by the concentration of some of the partners on the traditional monitoring
of chargeable hours on client business. The new structure was also sometimes unclear,
especially in sorting out turf disputes' which arose, for example, between industry-
based and skills-based units.

THE LEADERSHIP PROJECT


In 1993 Colin Sharman was appointed to UK Senior Partner. At that time there were
other developments taking place. At an international level in KPMG there were the
beginnings of an international strategy to position KPMG as the leading advisory
firm rather than an audit firm. This took shape in the UK in what became known as the
Leadership Project.
In his address to the UK partners meeting in October 1994, Colin Sharman
announced KPMGs aim to become the leading accountancy firm in the UK.
Our research shows that clients are saying: 'know me, know my business. Give me
advice, help me to compete. I want frequent contact, robust and independent opinions,
proactive advice and fast reactions to changes in my business. 1 want value for
money.'... They want a trusted and valued relationship. If KPMG can succeed in
genuinely making the transition from audit firm to business adviser, it can pull ahead of
its competitors rather than being just one among the leaders ... I want us to be
indispensable to our clients because we give robust opinions, offer advice and provide
business solutions that they simply could not get for themselves. I want us to attract the
best people and to be the best firm to work for. The best firm because we have the most
interesting clients, and the most attractive careers, the most demanding assignments. 1
want us to employ people who will make a real difference to their clients business. I
want us to be the firm that other leading advisers want to work with. We want the
merchant banks, the lawyers, the specialist-consultants to be alongside us. 1 want us to
be the leading firm in the new markets business transformation, forensic accounting -
right at the cutting edge. I want us to foster a culture that sees opportunities and not
problems, strengths not weaknesses, team work and not just individuals.
He explained how this would be put into effect:
The concept of having a leader on a client account - the lead partner - is not new.
However, in KPMG, the role historically adopted has been that of a senior audit partner
with the key relationship at the finance director level. It is now much more than this.
The role is defined as an account management role that carries the ultimate
responsibility for management of the client relationship, particularly at the chairman
/chief executive level. The aim is to allow a single individual to be the integrator of all
the firms services to a client and of the people supplying those services. There is also a
leadership aspect to the role as it includes responsibility for effective teamwork and
managing internal relationships. This is not the role that all the partners should aspire to
since specialist partners and engagement partners are essential to ensuring that the
service deliver)' and advice are first class and this is the must have' of any professional
service firm. It would not be commercially sensible to use the time of leading-edge
specialists in what is essentially a generalist role.
Each project or piece of work performed for the client will be led by an engagement
partner whose role is to deliver that specific piece of work. Take an audit for example;
the audit engagement partner retains responsibility for the independent opinion.
However, all services and relationships are co-ordinated through the lead partner.
HUMAN RESOURCE STRATEGY
The Leadership Project also provided a vehicle to roll out some of the changes already
made in the South East to the rest of the UK and to develop human resource practices
and policies in line with the changing strategy. Important here was a focus on
behaviour. A competence framework was established and developed in 1993- David
Westcott then (HR Partner) explained that:
The starting point for this framework was the question - what are the characteristics
we need in our future partners? External consultants conducted a whole series of
interviews which asked clients, partners in key positions together with younger partners
what they thought the behavioural characteristics should be for the future success of the
company.
From this, six categories of competence emerged (see Exhibit 3).
Reward systems were also revised. David Westcott:
Pay had been largely a matter of how long anyone had been in a particular grade.
We set out to introduce a pay structure and review system which sought to reward
improvement and achievement rather titan time in grade.
Colin Sharman explained the basis of the system:
We changed all our systems to move everybody into just five bands so that instead of
having everybody promoted every year, which was the old system, we had a situation
where promotion meant something.... Promotion would only be between the bands, on
the basis of performance in terms of the competences. Eventually, we completely
restructured the reward system for partners, right the way across the UK.

Exhibit 3 The Competence Framework


______________________________________________________________________

Client responsiveness
1. Relationship building - establishes rapport and builds long-term relationships with
key decision makers.
2. Professional judgement - knows who the 'real' client is at all times and uses this
knowledge to operate effectively for KPMG.

Business skills
1. Commerciality - relates all aspects of KPMG's service to client's business perspective
and commercial drivers.
2. Business development - is seen by existing clients to market effectively and
appropriately.

Management
1. Task management skills - controls the process of delivery to the client.
2. Team skills - encourages openness and co-operative working.
3. People development - gives staff responsibility and autonomy appropriate to their
level of competence.

Personal effectiveness
1. Drive and commitment to results - goes beyond client's expressed requirements and
meets their real need.
2. Resilience - recovers crisis situations; is resourceful at times of pressure and stress.

Social skills
1. Communication skills - speaks clearly and with impact.
2. Social confidence - is perceived to enjoy the company of a wide range of people.

Thinking skills
1. Analytical thinking - analyses large amounts of complex data, extracts essentials.
2. Proactive thinking comes forward with ideas unprompted by clients.
There were problems on these changes, as David Westcott explained:
A language problem existed because we were talking about performance, which had
never really featured before. Time was no longer an issue. Disquiet around this was
driven by the uncertainty' many people were feeling - they knew where they were under
the old system. Suddenly the whole thing was turned upside down.
Development centres were also established to which newly promoted senior managers
were sent to identify personal development plans to prepare them for the role of partner.
David Westcott explained their purpose:
There had been some concern within the practice that the role of the senior manager,
which is a very important one within KPMG but is largely a production and opera-
tional job, did not prepare people for partnership, which is more about relationships and
social skills. So we ran a development centre as people were promoted to senior
manager. It was initially seen as being to do with judgement, assessment and appraisal
rather than development; but they have now been accepted and people find them very
valuable.
In the past, appointment to partner was seen by many in the firm as dependent on a
senior manager being seen by existing partners as the right sort of chap. However, in
1994 Partner Assessment Centres were also introduced:
Before anyone is admitted to partnership in any of the regions of the firm they have
to have the approval of the UK board. The UK board had for some time expressed
concern that their job had become one of a rubber stamp. Another concern was that a
number of partners around the UK had been asked to leave the partnership within five
years of their becoming a partner. We need something more rigorous. We needed to
ensure that the competences we had defined for future partners were those in evidence
or they had the potential to be. So in 1994 the board agreed to establish nationally two
processes for partner admission. One was an assessment centre and the other was an
interview panel which represented the board. Its much clearer now what it takes to
become a senior manager and to become a partner because there is a greater openness
in terms of the sort of behaviour expected of people. There are those who are upset that
the patronage system has gone but by and large there is a general belief that it is a
better way of doing things.

Colin Sharman commented:


It was the most unfair thing we've done really. What we were saying was the old syt
tern finishes here. Very justifiably a lot of the guys said until today I knew how to
become a partner: you attach yourself to a powerful guy, keep your head down and you
dont make mistakes; and he will see you all right'. That was the problem, there was
enormous patronage in the system and at a stroke we took that away. For the first time
the board was not going to accept someone bullying through his boy - and that had
never happened before. Down the line people are saying 'OK the rules have changed
but I know what I have to do and I can still make it even if I dont have a patron'. It is
one of the key things helping us get behavioural changes.

Assessment centres were also adopted for recruitment. David Wescott:


We asked if we were happy about the quality of the graduates that we were getting?
So we introduced a new selection process, which incorporated a mini assessment centre
whereas previously we, like all other firms of accountants, had relied exclusively on
interviews. By introducing a new and very much more rigorous selection process for
the 600 graduates that we take on we are getting a much higher acceptance rate of
people we offered positions to. Our feedback from them is, (a) we seem to know what
we want from a new recruit, and (b) we have made it difficult to join - and that has an
attraction.

INTEGRATION INTO INDUSTRY BASED UNITS


It was Colin Sharmans belief that:
Where we have been able to integrate things into the industry-based business units
we have had unparalleled success. Consulting volumes delivered through the industry
groups are growing like topsy. Where we have failed is in those bits we left in the skills
groups.
There were certainly problems in integrating the consultancy practice. Alan Reid
explained:
There were very few consultants put into the industry business units originally. Two
consultants headed up industry units because it was important that not all the business
units were headed by auditors. But I would say maybe 70-80 consultants went into
industry business units and 600 were left in the skills unit. So there was a very- strong
force of consultants left. I don't think that they wanted to be submerged below auditors.
Our auditors are very suspicious of our consultants. If you actually assess them as
separate business units, some of our most talented people are in our consultancy, but
audit has performed better than consultancy. It is a lot to do with their marketplace and
the nature of their work. We have to win 2 million of new work every week for our
consultancy - our audit practice has a more recurring base of work. There is a lot of
concern that they- just don't understand each other. We had also grown consultancy by
just adding on services; little cottage industries and boutiques here and there. They
went in and sold the service they had to a client, worked hard in doing it, then came
away again and left it instead of nurturing the relationship and trying to sell other
services. They acted as 35 cottage industries.

COMMUNICATIONS AND FEEDBACK


Colin Sharman believed that one of the most significant means of change was
communications:
For example, internally we now do a report on the partners conference. In the past it
would have been a paragraph in the house magazine saying we had a partners' con-
ference. What we now do is take a video of it, interview the partners as to what they
think and then we roll that right out immediately after the partners' conference to tell
everyone about it. I exercise very- little editorial control over that.
Then there is the UK-wide staff opinion survey. Some people say 'we shouldn't ask
because they will tell us we are not very good. Interestingly enough, the survey work I
have seen shows that an awful lot of them identify with what we are trying to do, but
that they think some of the partners need to change their behaviour. One of the things
we are doing for this year's partners conference is to give some feedback from the staff
to the partners about partner behaviour and about what the partners are doing. The other
thing that is being developed is upward appraisal. That's becoming accepted throughout
the organisation.
The surveys conducted at this time showed mixed results.
In 1995, an internal KPMG attitude survey on the progress of the Leadership
Project showed that staff and partners saw KPMG as above average compared with
the rest of the Big Six, as a firm with a successful future and that job satisfaction was
above average for a professional firm. However, KPMG was not seen as a people-
oriented firm and development and career opportunities were still not clear. The
Leadership Project had not yet impacted in a practical way on the way most staff
worked day to day. Teamwork was not yet fully effective. And whilst relationships
between partners and staff were seen as good locally, barriers still existed: there was
still a sense of us and them'. This was borne out in a survey of the consultancy
operation reported in Accountancy Age in February 1995:
Over half of the 74 staff questioned said they would not recommend KPMG as a
good place to work, nor did they expect to be with this organisation two years from
now' . . . And well over 60 per cent said they only knew what was expected of them to a
slight' or 'moderate' extent... A huge 82 per cent of staff named avoidance as a key
feature, involving 'shifting responsibility, procrastinating and avoiding issues. Power
was another dominant characteristic with 'empire-building' at the fore. And while 90
per cent said that winning is valued and staff feel they have to outperform each other,
just 20 per cent believed there was any value placed on constructive interpersonal
relationships, friendliness and openness within the KPMG culture. Similarly, just 16
per cent felt that any regard was given to coaching and developing people, being
supportive and constructive.
However, Colin Sharman argued that from a client point of view the benefits were
clear:
Clients love it. We asked them what they wanted and then we were able to sell it to
them and they bought more of it. We've gone back and said, do you like what youre
getting? and by and large our clients are very positive about what wc have done. We
have put six points on our market share in the last four years.

INCORPORATION
In 1995 KPMG announced that it planned to incorporate that part of its audit practice
dealing with companies listed on the UK stock exchange or in the regulated financial
services industry. One reason for this was the need to protect the personal assets of
partners from increasing threats of litigation affecting the profession as a whole,
especially in the USA. However, as the Financial Times reported early in 1996, KPMG
believed the move would provide competitive advantages:
KPMG felt that a stronger corporate management structure would give it an edge in
competing with the looser partnerships of the other Big Six firms. With incorporation
comes disclosure. Accounts will have to be published for the audit company but KPMG
has pledged that it will go further - it will produce full financial results for the whole
firm. This has wrong-footed the competition, most of which are still pondering a
response . . . KPMGs focus on auditing is a strategy which sets it apart from many of
the other big firms. While some firms have boosted volumes by entering markets such
as out-sourcing and information technolog)' - and the implementation of services -
KPMG is seeking to preserve the pre-eminence of auditing. (Financial Times, 25
January 1996)
The FT reported the publishing of 50,000 copies of KPMGs annual report for the UK -
the first major accountancy firm to do so:
Why has KPMG become the first to disclose so much about what is still, legally, a
private business? Whatever the truth, the firm's chutzpah is admired by most - albeit
privately. The firm admits that it would have had to publish full results for the audit pic,
but that its decision to open all the books was prompted by a desire to present a
transparent business to clients and the general public. It feels the public has a legitimate
interest in an organisation which audits 400 listed companies.

RESTRUCTURING: A UK FIRM
In October 1996 a new UK board was established. Its brief was strategic rather than
operational, with board members selected for their ability to contribute
Exhibit 4 UK structure of KPMG, 1997

to the strategy of the firm. It was non-representational, in that it did not consist of the
heads of parts of the organisation: and it institutionalised the separate role of chairman
and chief executive. Colin Sharman moved to the role of chairman with Mike Rake
taking over as chief executive. Following the establishment of this board,
reconsideration of the structure of the firm took place with the intent of bringing the
UK firm together more. The result was the structure for the UK as a whole shown in
Exhibit 4. Under the UK board was established a UK management team with
operational responsibilities for running KPMG UK. This structure w'as explained in the
firm as follows:
KPMG's move to becoming an advisory firm is about creating a clear leading
position in the market. The old regional structure provided a strong presence in local
geographic markets, but insufficient UK investment and focus on the industry and spe-
cialist needs of clients (our lines of business) and strong but not always consistent
processes or disciplines. The challenge is to balance the matrix of geography, line of
business and discipline in a way which builds on KPMG strengths. Balancing the
matrix has to be complemented by better working together across the UK. This
necessitates robust UK support functions and effective reward systems. Structural
change is merely the most visible sign of change; cultural changes and business- driven
strategies will help us achieve our business goals.
THE VALUES INITIATIVE
In early 1997 Colin Sharman took over as the international chairman of KPMG (see
Case B). He was succeeded as UK senior partner by Mike Rake. Both knew that the
challenge of change remained high. By late 1997 this was especially so because they
knew that KPMG would face a major change in the structure of competition. Coopers
and Lybrand and Price Waterhouse, two of its major competitors, had announced their
intention to merge to form a partnership twice KPMGs size. The importance of being
clear about the bases of KPMGs competitive edge therefore became increasingly
important. Colin Sharman believed this was fundamentally linked to change in the firm.
Our main problem in changing behaviour is that we do not have a problem. We have
had continual growth: we have not had a poor year for some time; so it is difficult to
change peoples behaviour. In many respects the problem starts at the very top. There
are still senior colleagues of mine who believe they can solve behaviour problems by
changing a structure, going on a course or sending someone else on a course. We have
to get away from the idea of change as a project, with a beginning, middle and an end.
Change is continuous, and my prime objective is to turn KPMG into an organisation
which continually renews itself. That's the only way we will be able to maintain our
leadership position. I have just provided the 'push' which gets that process going. Once
the momentum gets going, change will be independent of me, and unstoppable by
anyone else: it will simply become part of the way we do things in KPMG.
As International Chairman Sharman, with the assistance of a small support team,
began work on the Values Initiative.*This involved widespread research into the values
and behaviours in KMPG as they related to client relationships. What emerged from the
research and their discussions was a clarity about KPMGs values as at 1997. Many of
these were highly positive to the future direction of the firm. However, Sharman and
his team recognised that each of these also led to potentially negative behaviours.
Desirable as it was, client centredness could sometimes mean accommodating the
client or doing what the client requested without question. Individualism could also
mean self-interest and therefore undermine teamwork. Technical excellence could
sometimes mean lengthy attention to a technical report without enough questions as to
what was of real value to the client. However, integrity was taken as centrally important
and unquestionably positive.
The question then arose as to what, if anything, needed to change. It was out of this
that the new mission statement arose. It had been:
KMPG shall be the worlds leading accounting and consulting firm. We shall achieve
this by delivering the highest quality sendees that provide significant added benefits to
our clients and that meet or exceed their expectations. We shall thereby build enduring
relationships and be always worthy of our clients', our peoples and societys trust.
The view was that this was laboured and non-memorable. It was revised to:
KMPG is the global advisory firm whose aim is to turn knowledge into value for the
benefit of its clients, its people and its communities.
The change team then organised a series of activities and support tools to help put the
values programme into operation. This included work with partners at a series of events
throughout 1997 and 1998, with a growing emphasis on the implementation of the
values. Implementation support included written material as an implementation guide,
with tools and techniques on issues such as leadership, team development,
communications. It also included a board game - the Values Game - which was
designed as a fun way of communicating the need for behaviour in line with the values
across the firm.
The Values Initiative was also picked up in national firms, not least in the UK. Mike
Rake had attended the Harvard programme on Leadership in Professional Services
Firms. The programme convinced him, too, of the importance of powerful and enduring
organisational values, and that it was important for KPMG to be clear about these
values and the behaviours associated with them. Since his appointment he had spent
time listening to partners and managers about what was needed. He believed that there
was a consensus around the needs for a clearer vision, clear leadership and above all
else, behavioural change. All of these needed to be linked to a clarity about the values
of the firm. This gave rise to the Values Charter which was launched at the UK partners'
conference in Birmingham in 1998. Here Mike Rake argued that success would be
dependent on the ability to share values across the firm in such a way as to achieve
KPMGs vision. The Charter consisted of ten key values (see Exhibit 5). At the
Birmingham conference the partners worked in small groups to craft the statements in
this charter and to identify the appropriate behaviours to support such values. At the
end of the conference individual partners, including Mike Rake, stood up to make
commitments about how they would personally change in line with the identified
values and behaviours. Partners at the conference were enthusiastic: they believed that
there had been a real attempt to translate values into behaviours: and to try to ensure an
acceptance of this across the firm. Some admitted that the problem could be that they
would all revert to type but nonetheless believed it was an important step forward.
Geoff Gaines was then given responsibility for taking the values programme
forward. Mike Rake charged Geoff with developing a programme to make the Values
Charter a reality. Geoff explained:
How do we take values into action? If you take all these values there are synergies
but there arc also dilemmas. For example, bollocking someone for not sharing
knowledge is rude, but it is also about encouraging knowledge sharing. I pushed the
idea of this sort of dilemma being the basis of the conversation; and we developed- a
dilemma workshop for partners and senior managers.

Exhibit 5 The Values Charter


______________________________________________________________________
To achieve our overall vision and apply our values, we will conduct ourselves in line
with this charter.
We will put KPMG's interests above our personal business agendas.
We will remain courteous and good humoured in all of our dealings, thus creating an
environment where cynicism, oppression and rudeness are not acceptable.
We will be proactive and innovating with our clients, and will respond to their needs
quickly, effectively and objectively.
We will listen to and aim to understand alternative perspectives and put our own
points of view across openly, honestly and constructively.
We will support our leaders, encourage our peers and develop our people.
We will openly and proactively share knowledge.
We will respect all of our people and the contribution they make to the firm.
We will obtain the facts before making judgements on people or issues.
We will respect our own and our people's needs to balance personal and business
lives.
We will learn from our experiences and will take the time to enjoy our successes in
the company of those we work with.
In early 1999, Eddie Oliver, who was developing a blueprint for the integration of the
European consultancy business, asked me how the values work could help. 1 suggested
that values could create conversations about business issues. When such conversations
take place, they help identify practice, i.e. what people would really do in a given set of
circumstances. We ran two events and it surfaced the sort of typical dilemma situations.
The underlying idea was to relate the values to real life.
By 2000 Geoff Gaines believed the Values Charter had achieved some real benefits: but
he was also conscious of outstanding issues:
Its now OK to talk about things such as work/life balance that people felt they
couldnt talk about before; the level of awareness of values is still high: newcomers are
attracted by our values so that would have an effect on the mix over time. But its
behaviour that matters. We have to sustain the programme if were to make an enduring
impact on that. The Charter emerged out of what we do in the UK. But we need values
to do with a global firm. We have to avoid those values being sent down by
management, rather than emerging from what is actually done in the practice. Values
are not a decision: they are a discovery.
Eddie Oliver, a senior partner in the UK, added.
So far we have all the old management control levers and have added the values but
some of us believe we can rely on values drivers much more than controls. There is a
view that the winning organisation of the future will need to be more diverse in terms
of people and more organic. The values work is of central importance to this. But,
around the world, KPMG has some leaders who adhere to scientific management'. We
need to guard against the UK getting out of step as we apply the principles of self-
organising systems.

FURTHER CHANGES IN STRUCTURE


20:20 Vision had moved the firm towards a structure based on lines of business', which
focused on particular industries or sectors. However, in the second quarter of 1999 it
was announced that the day-to-day management control of the firm in the UK would be
through functions: audit, tax, corporate recovery and so on. Eddie Oliver explained:
It was only some countries that implemented 20:20 Vision: and there was a feeling
that there had to be a common arrangement around the globe. KPMG's market posi-
tioning varies from country to country and we needed a framework which would
accommodate this. So we decided on a structure within which resources are managed
by function but go to market via lines of business. The Sharman philosophy - focus on
markets and clients' needs - has not been changed but the organisation structure has.

THE SITUATION IN 2001


Mike Rake, senior UK partner and chairman of KPMG Europe, reflected on the
changes he had seen in the firm over the past decade:
The firm has changed significantly. /Although we've always had very talented people,
ten years ago we operated as generalists and were reliant of our past success. Today we
have a more professional approach to the way we deliver services to out clients and the
way we run our own business, with a particular focus on specialisation.
A decade ago we were in danger of stagnation. KPMG was a great Cits firm but it's
market share and influence were being challenged. It had to become more flexible and
fiister to respond to the changes happening all around.
As I look back on the great strides we've made, a number of themes emerge as the
key drivers to the overwhelming change to and success of the firm in the last five or six
years:
Openness: externally, through the publication of our annual report and accounts and
internally, through oui communications architecture, appraisal systems and so on.
Integration: of geography, function, etc to harness our potential and focus it on our
strategic priorities.
Widening horizons: as the forces of globalisation, e-business, etc. have removed the
old market certainties.
Values: our values programme has helped open peoples minds. Weve moved from a
hierarchical mindset to one focused on what the team can do to add value to our
clients' businesses.
It's worth mentioning a few of the specific changes we've made:
We've integrated our network of regional partnerships into a single UK partnership
and successfully moved to integrate our practice in Europe.
We've recruited, and continue to recruit may direct-entry partners (unheard of 15
years ago).
The combined effect of these changes has been dramatic. And yet, in other ways the
firm hasn't changed at all. The people are as dedicated as ever. And we still place per-
sonal integrity above all else.
I wouldn't want to give the impression that the job is done. It never is. Ten years ago
KPMG was great for its time but not ready for the future - today our challenge is to
make KPMG a truly 21 st century organisation.

KPMG (B): Developing a global firm

Gerry Johnson
In the late 1990s expectations of global clients and international opportunities for
development were prompting greater global co-ordination and the need for a clearer
global strategy in KPMG. The case allows these developments to be considered in the
light of the context of KPMG as a worldwide partnership but with a history of localised
service delivery.


In January 1997 Colin Sharman received a telephone call front Jon Madonna,
international chairman of KPMG, asking to get together for an urgent meeting. They
met for breakfast the next morning in London. At this meeting Madonna announced
that he was leaving KPMG within the next two weeks and was nominating Colin
Sharman as the next international chairman. Sharman took over on 1 February 1997.

THE CHALLENGE OF THE GLOBAL FIRM


In 1997 KPMG had practices in 156 countries throughout the world; more than their
competitors. However, the US, UK, Netherlands, Germany, France, Canada and
Australia accounted for 80 per cent of fee income (see Appendix 1 for further
descriptive statistics of KPMG worldwide). Exhibit 1 shows the revenue and personnel
distribution for the firm internationally at that time.
In 1997 the view was that the main challenges for KPMGs international strategy into
the millennium were twofold. The first was how to develop a coherent strategic
approach to service deliver)' across the world, given the globalisation of so many
existing and potential clients. The second was that many of the major opportunities for
growth were in areas of the world in which neither KPMG nor their competitors had
well-established practices - for example, eastern Europe.
Standing still was not seen as an option because, as competitors sought growth
internationally, this would effectively mean losing share and market standing in the
eyes of international clients. A lack of growth would also, very

Exhibit 1 KPMG revenue and personnel, 1997


______________________________________________________________________
REGIONS* (US$M) PARTNERS PROFESSIONA ADMINISTRATI TOTAL
LS VE

Africa 100 231 2,320 766 3,317

Asia Pacific 858 841 10,052 2,324 13,217

Europe 4,181 2,769 26,674 8,594 38,037


Latin America 203 268 3,088 1,137 4,493

Middle East 34 71 767 222 1,060

North America 3,624 2,381 16,762 6,024 25,167

Total 9,000 6,561 59,663 19,067 85,291

likely, have implications on the ability to attract the best people into the firm; slow
growth would mean diminishing opportunities - or at least perceived opportunities - to
advance in the firm. Sharman admitted that the growth rate of KPMG worldwide was
not good enough. He explained:
Growth will come in the developing world: in Asia Pacific, eastern Europe and Latin
America. But even if we are growing at 40 per cent in those regions, the impact on our
overall growth rate can be only marginal because of the composition of KPMG. If the
US, the UK, the Netherlands, Germany and France are growing rapidly, that will put
our growth rate right. So first and foremost, the task is to get the big practices growing
quickly; especially the US where our position is not as strong competitively as it needs
to be. That means that weve got to diversify into the faster-growing services in those
countries.
By 1997, there were already some global initiatives under way to try 7 to address this.
Project Globe was about trying to achieve a consistent international approach in
management consulting and speed up the international development of higher added
value consulting projects. Audit 2000 was seeking to develop a risk-focused audit by
building elements of strategic analysis into auditing. The Global Tax Vision was, again,
attempting to provide a consistent international dimension on the tax practice. As far as
the US was concerned, it was concentrating on organic growth and looked set to
achieve a 25 per cent growth rate in 1997 (50 per cent in consultancy).
Weve then got to look at the developing areas of the world - Asia Pacifics tiger
economies, the restructured economies in eastern Europe - and achieve very', very
dynamic growth there.
There was also the question of the required investment internationally. Despite
KPMGs size, Sharman believed that the challenge was finding the money to spend for
international development and information systems infrastructure. This included the
development of a global knowledge management system, automation of audit systems
and up to $100 million on India and eastern Europe alone. KPMG knew that at least
one other firm had spent a similar sum developing their global consulting business.
By the end of 1997 a new mission statement had developed from the Values Initiative
(see Case A):
KPMG is the global advisory firm whose aim is to turn knowledge into value for the
benefit of its clients, its people and its communities.
Sharman explained that:
The fundamental purpose is to turn knowledge into value. We then need to consider
what this means in terms of the values, product range, processes and infrastructure in
the firm. To be honest, we have done very' little on any of these so far. We have set up
project teams to look at them. Some points are clear. As far as the product range is
concerned it means we have to be clear about what we dont do as well as what we do.
We shouldnt be into health systems in Manchester or car leasing in Puerto Rico or
architecture in Switzerland, for example. They do not help provide a uniform image of
what KPMG is about in line with our mission.
In an address to the International Board in May 1997 Colin Sharman made this quite
clear:
We need clear, agreed criteria by which we judge whether a service should be core to
all KPMG practices worldwide, optional according to local markets, or forbidden to all
practices.
As far as the infrastructure was concerned, Sharman believed it was necessary to
develop quickly a more common international approach to IT, HR and marketing.
That means that some of the bigger firms have got to have a bit of give and take. And
I include the UK firm in that. We are not going to be able to have it all our own way:
neither is anybody else. Weve got to come to common approaches and then weve got
to manage them sensibly from the centre. I dont think its a structural issue. I think this
is about behaviour. We need common processes across disciplines, because we need to
get people to work the same way wherever we are. It doesn't matter whether you are a
consultant in Ecuador, a registered accountant in the Netherlands, a chartered
accountant in the UK, an IT specialist in Malaysia or a tax lawyer in Nigeria, you need
to approach client work through a set of common processes. That melds us together as
one firm. The fact that your ownership structure is different is not terribly relevant.
However, the realities of a successful federated partnership structure of KPMG had to
be recognised. His view at that time was that:
The easiest way to waste our time and energy would be to attempt to reorganise the
international firm. We have seen some of our major competitors fall into this trap. We
will clarify the role and responsibilities and sharpen the focus of our committees and
other bodies - including the Board, Executive Committee and International HQ. We
will strengthen and centralise the support functions. But we will not spend the next
three years wrestling with the structure of the international firm. This would not be
successful. We will aim to become a 'virtual global entity in the knowledge business.
This means we will look and act like one organisation while retaining our individual
member firm structure.

A GLOBAL MERGER?
Coopers and Lybrand and Price Waterhouse announced their intention to merge in
September 1997, and this prompted KPMG to consider its options. In considering the
possibility of KPMG merging, Colin Sharman explained:
In terms of our global development, the option of doing nothing was really not
acceptable. In the US, for example, bigness matters. You don't get into major com-
panies if you are not in the top four; and following merger we would have been fifth
out of five; and we could not get back into a top four position through organic growth
in the US. You also have to be one of the biggest to operate in eastern Europe, China
and Russia. Andersen and a combined Coopers and Price Waterhouse operation would
be bigger there too and with more to invest. So we would be disadvantaged in
developing markets too. So the drive for us to consider a merger too was nothing to do
with the UK but to do with international markets.
By the end of 1997, KPMG and Ernst & Young were in merger negotiations.
Sharman explained:
A merger with Ernst & Young seemed most sensible, particularly in the US. Ernst &
Young are strong in the US; KPMG are strong in Europe. Moreover, we are both
industry-focused firms. I believe we will be able to work together well with them.
There are differences. They are more centrally managed than we are at KPMG, for
example. They focus more on the short term than we do. Had we moved down the route
of integration further there would have been problems. But I believe that if we ensure
that the two practices are mixed up well and we do not leave pockets of separate
activities it will work.
Not everyone saw the proposed merger in the same way. In December 1997, the FT
Lex column warned:
If the mega mergers proceed, shrinking choice, customers may be less keen to have
all their eggs in the same few baskets.
The European Commission also expressed concern about both the KPMG/ Ernst &
Young and Coopers/PW mergers. Karel Van Miert, the EU competition commissioner,
said his office had been overwhelmed by the amount of concern generated by the
announcement. Regulator)' authorities elsewhere, particularly in the USA, were also
concerned, especially about the KPMG/Ernst & Young merger which, it was argued,
would give too great a share of key markets to the merged firm.
As negotiations proceeded in the first few months of 1998 it also became clear that
the operationalisation of this merger was giving rise to doubt amongst partners in both
firms. In March it was announced that the merger would not proceed.

LEARNING FROM THE MERGER NEGOTIATIONS


The fact that the merger was not to proceed magnified rather than diminished the need
for the global development of KPMG; indeed Sharmans belief was that there was a
massive momentum for change resulting from the idea of the merger. They had also
seen Ernst & Young at close quarters. It faced similar challenges and it too had been
through significant changes; but it was much more centralised than KPMG. As one
partner said: It was rather like holding a mirror up to ourselves.'
By spring 1998. Sharman was sketching out whai he believed had to be done:
I believe we have learned a lot over the last few months in these merger negotiations.
We have realised that we have quality in depth throughout the firm and probably more
cohesion than we thought. What we need is more focus on what we do well across the
world, better alignment with global strategies and greater investment in global
intrastructure. We need to give attention to a number of priorities.
The first is our international structure This needs to be clearer in order to manage a
global strategy more effectively. In particular we need to focus our management
activities on a number of regions, witli people responsible for implementing global
policy, especially the development of emerging markets and identifying investment
opportunities. I am also proposing we have managing partners responsible for the key
services we provide. Again they will be responsible for ensuring the implementation of
global strategy but from a sendee point of view. They should determine and manage our
portfolio of sendees to be offered by member firms and make sure there are common
business process methodologies. I believe we need full-time, international. senior-level
executives for these roles. These appointments will be senior people who might be
located anywhere but who will report into a central worldwide office in Amsterdam.
This international executive team w ill report to an international board, responsible for
reviewing and endorsing the vision and policy for the global firm and monitoring the
implementation of strategy. The Council will be the firm's ultimate governing body.
Exhibit 2 shows the structure. In 1998. an International Executive Team, with Paul
Reilly, a LIS partner, as CEO. was appointed with responsibility for managing the
global strategy. This team reported to Sharman and his international board, which had
on it senior partners from the major country-based partnerships around the world.
Sharman continued:
We also need to clarify the agreements and arrangements we have across the world
with our various partnerships and licensees. They need to have a stronger alignment to
our goals, a clearer definition of their rights and responsibilities; and we need to
develop their commitment to the important role they play in providing a coherent range
of services internationally. I think there needs to be clarity, for example, on the use of
the KPMG name and brand: the acceptance of lead partner authority for international
assignments; the mandatory acceptance and delivery of core services; and we need to
ensure their acceptance of global policies on investment, technology, knowledge
sharing, human resource development and our business processes. Not least, we need
globally enforced standards in quality, risk management and management information,
and I believe we need the approval by the international board for national senior partner
appointments.
None of this will be possible without making quite clear what the international centre
of KPMG is responsible for. I believe the priorities of the centre are:
knowledge management across the world: and in particular means of ensuring that
we extend the frontiers of our shared knowledge:
Exhibit 2 The international structure, 1998

information technology on a global basis not only for purposes of control but also to
share the knowledge upon which we will develop;
global human resource policies and, in particular, international partner development;
marketing and. in particular, our global image and positioning;
finance and investment planning;
global communications both within the firm and outside.
These priorities formed the agenda for the first meeting of the International Executive
Team (IET) in mid-1998: and they were priorities which continued to guide global
development.

GLOBAL MARKETS
One of the major priorities the IET addressed was how to serve global clients.
Responsibility for this on the IET lay with Alastair Johnston:
We decided the underlying raison detre of KPMG was to sene its global clients.
There had been a lack of focus on just how important that list of clients was. We
decided we had to give them the very' best service we possibly could and we had to
grow market share at the highest level. We decided to re-focus on the major clients and
targets and the sectors within which they' operate.
We began by establishing best practices with regard to the management of major
clients. We then brought together international client teams for training and planning
sessions. These core client teams were the 8-10 key people from around the world
dealing with a particular client. There were 100 of these teams and each of them went
through a programme focused on identifying opportunities and building relationships.
This whole programme was launched at the end of 1998 event at our Monaco partners'
meeting. Since then over 1,000 partners and senior people have been through the
programme.
Four global lines of business' were also established: financial sendees, consumer
markets, industrial and automotive and information, communications and entertainment
(ICE). Within these global lines of business are 95 per cent of our global clients. The
chairs of these global lines of business report to me and, within the lines of business,
global lead partners for particular global clients report to those chairs. The chairs are
responsible for the plans for that line of business globally.
The role of the centre is to support the work on global clients and also to support
targeting and proposals to win and retain more global clients by providing a central
impetus to the energy and quality of such proposals.
For example, best practice for global client service teams had been codified,
emphasising seven key principles (see Exhibit 3). Alastair Johnston believed such
efforts had paid off:
In 1998 in Monaco I said that we needed to achieve a doubling of revenue on global
clients. Our revenue with them in 1998 was SI.2 billion, which accounted for about 12
per cent of our fee income for the firm. In 2000, the figure will actually be $2.1 billion -
not quite double, but impressive growth nevertheless.
At the next level below the Top 100 global clients, we also now have national
account programmes across the world headed in each country by a national account

Exhibit 3 Best practice for client service teams


______________________________________________________________________

1. The right team in the right place


All Lead Partners are empowered to draw on the specialist resources they need to
ensure we have Client Service Teams that can exceed the expectations of our clients.
Functions and Lines of Business should be included on every Client Service Team. This
should ensure that the client is aware of all our products and services, including those
that are being developed.
Global and National Lead Partners are empowered to draw at any time from the top
ranks of our people anywhere in the world to meet the needs of our Global and
National Clients.
We also recognise that longer-term international relocation may be the best solution and
Lead Partners and key members of Client Service Teams should be prepared for such
moves.

2. Sharing and applying our knowledge of the client's business


Lead Partners and key members of the Client Service Team have a responsibility to
keep at the forefront of their Line of Business through attendance and participation in
industry conferences, trade events, KPMG's business schools and other forums where
industry expertise is developed and shared. Pius encourage active use of K-World.

3. Knowing the state of our relationships


The nature of the relationship - formal or informal, demanding or relaxed, social or
business - needs to be carefully matched to the culture and expectations of the client.
We can gain an impression of the state of our relationships by continuously seeking
informal feedback.

4. Account planning
Systematic account planning, which takes into consideration all our current products
and services, is essential if we are to serve our clients effectively and develop the
account to the full.

5. Performance management
Clear and unambiguous personal targets are the foundation for success.
It is vital that we think and act globally. This is why an element of the financial
remuneration of Lead Partners is now based on global as well as national peformance.

6. Communication and collaboration


Lead Partners represent to their clients a single, accessible, top-level point of contact
with the power to make things happen.
A suite of collaboration tools is being made available to help Client Service Teams. For
example, the Web-based software called KClient provides a powerful means of
engagement management and communications with the client.

7. Sharing and adopting best practice to win business


However, it is important that our Client Service Teams seek out and make use of the
best practice that is available and that the best practice they develop or come across is
similarly shared. Again the use of K-World was recommended.
partner. These teams are going through the same development programme as for global
clients These arrangements are not forced on countries but it is now self- sustaining
because they see the benefits. The focus has been on the quality of the relationship with
the clients. It is not just about technical adequacy, which is regarded as essential, not a
differentiator.
Reward systems had also been changed. Rewards for lines of business chairs and
global lead partners were at least partly based on global performance. Alastair Johnston
believed that it was recognised that a global lead partner is one of the top roles in the
firm. It is no longer the case that to get to the top of KPMG you have to go into line
management.
At the International Partners' Conference in Berlin in 2000, Alastair Johnston
was able to report considerable success: 100 global client teams had been set up: 200
workshops on best practice had been conducted: there were account plans for 70 per
cent of global accounts and these plans crossed KPMG disciplines and functions; over
50 per cent of proposals they put forward for new clients had been won with very' low'
attrition of current clients. He believed that the main reason for this was that they were
getting the power of alignment: we are all more visibly singing from the same song
sheet'.

KNOWLEDGE AND KNOWLEDGE MANAGEMENT


A second major priority for development by the IET was the management of
knowledge across the firm. Peter Chivers, head of know ledge management in the UK,
acknowledged that the attempted merger with Ernst & Young (EY) had made a
significant impact in KPMG:
One realisation was that EY was much more centrally controlled. Decisions were
taken at its centre which committed the world: whereas a decision in KPMG required
consultation with 40 senior partners.
EY had also made high levels of investment in technology and infrastructure What
that allowed them to do was to share knowledge across the world KIMG saw it was
weak on technology and the sharing of knowledge In KIMG there were 13 different e-
mail systems at the time and lots of local knowledge management initiatives. There was
me in the UK, someone in the US and in Amsterdam, that was it on knowledge
management EY had over 300 people on knowledge management in Cleveland
Prior to the negotiations with EY. Colin Sharman had realised that know ledge man
agement was important because there was potential for reusing and learning from what
we had done Moreover, clients were requiring that we were better informed about their
industries. Also, global clients were expecting common levels of service across the
world. For example, we lost SAS/Volvo audit because the client demanded that KPMG
could demonstrate knowledge sharing within tile firm and with them and we were seen
wanting.
Following the decision not to merge, in February' 1998 there was a decision taken to
identify' and establish what should be done. The firm has allocated $100m a year since
then to develop knowledge management and K-World. K-World was to do with
knowledge sharing through the Internet, collaboration with clients and the ability to
communicate with clients and potential clients. It provided a facility which can be
accessed by 90,000 people around the world to get at the best information available
within the firm. So it is valuable from an assurance point of view. And there is tangible
evidence within KPMG that we are doing something on knowledge management. There
have been some real benefits: with proposals it takes five hours rather than five days to
get together information. It is difficult to get measures of success: but if we didn't have
it, we would be behind others. Certainly previously EY and PWC would attack us on
this as a weakness.
However, there were some problems arising from what some saw as exaggerated
claims for K-World by its US architects. Peter Olivers:
There is a lack of recognition from the US of different cultures around the world. For
example, some of the advanced publicity was about how great it was. My impression
was that in the US if you promise a Rolls-Royce they dont expect one: but in Europe
they do. In practice, the incremental benefit depended on how advanced national
systems were. Those countries who had little in the way of knowledge management
thought it was marvellous. Those who already had effective national arrangements
found it offered little incremental benefit over > hat already existed except as a portal to
other systems. So there was some loss of credibility.

GLOBAL RESTRUCTURING
Increasingly the potential conflict between global management of the firm and the
traditional national federated structure had to be resolved. For example, Eddie Oliver
recognised the achievements of the IET but commented:
It has been a remarkable achievement under the circumstances. If you looked at
KPMGs constitution you would think you could not operate globally. The fact that we do is a tremendous
tribute to the individuals who achieve it. But we've got to get the global structure right so that it doesnt take
such Herculean efforts to serve global clients.
Increasingly it was recognised that any form of global strategy was vulnerable to
national decisions. For example, in 1999 the Canadian partnership announced that it
intended to leave KPMG. It was only the timely intervention of Paul Reilly and the IET
that prevented this.
There had already begun to emerge the idea that there were, in fact, three major
regions within KPMG: the US, Europe and Asia Pacific. Steve Butler, who had taken
over as International Chairman from Colin Sharman in 1999, announced a restructuring
of the firm to transfer power from national practices to these three regions at the
partners conference in Berlin in September 2000, stating that 'the tradition of allowing
national practices a high degree of autonomy was outdated and increasingly unwieldy
{Financial Times, 18 September 2000). In an interview with the Financial Times he
went on to comment that none of the big professional services firms offered the global
sen ices increasingly demanded by clients. He insisted that KPMG was moving
towards this but there was still need to improve the ability to bring expertise together.
The decision to move to the three regions would mean: we are not going to destroy the
existing national organisations, but they are going to become less and less meaningful
in terms of how we manage the business'.
In fact, in Europe, there had already been moves towards further integration: but not
without its problems. Eddie Oliver explained:
In Europe there were two stages envisaged for integration. The first was establishing
the Anchor Practice. The idea was that the UK. Germany, Holland and France would
integrate. The second stage was that all the other European practices would join it. It is
under way but is it moving fast enough? There is a shared view of where were going
but different opinions about how quickly we need to move - influenced, no doubt, by
the different characteristics of national economies. The UK view is that time is of the
essence.

THE CONSULTANCY IPO1


As this move towards global restructuring occurred, there developed another
restructuring issue: the separation of the consultancy practice from the rest of KPMG.
Eddie Oliver explained:
The US firm decided on an IPO of consultancy - driven by commercial and
regulatory pressures. There was a need for finance for investment in systems
integration and to acquire other organisations, which it wanted to pay by paper and not
cash. Also in the US there was an inability to offer recruits slock options. KPMG in the
US also needed money for its pension funds and an IPO was a way of getting this. Also,
they saw the regulator getting more concerned not to allow audit firms to do consulting.
These trends were spotted by KPMG in the US earlier than the other big firms.
They formed consultancy' into a separate organisation and incorporated it. Cisco took
a 20 per cent stake. The original idea was that it would still somehow be linked to
KPMG. An independent firm but part of a KPMG family. Step by' step we have realised
that this will not be possible. They will be separate.
It then became clear that if US consulting did this, the situation became untenable for
others. Our whole consultancy strategy was geared to being a UK arm of a US-led
global company because so many of our clients have US headquarters or have huge
interests in the US. If we cannot do US work, we cannot do global work.
At the moment, we are operating under a co-operation agreement with the US con-
sulting firm. But we intend to bring global consulting together in a single entity. One
way of achieving this would be for the US practice to buy other consulting practices.
There will then be a global US-led consulting firm.

FUTURE CHALLENGES
The restructuring into regions and the IPO gave rise to significant challenges by 2001,
not least for Europe. However, there were other challenges. Eddie Oliver:
If you take consulting out of KPMG US, revenues from the European firms are
greater than those of the US. So KPMG is not then a US-dominated firm. The three
powerful countries are the US, the UK and Germany. The big opportunity is the chance
for a global firm which is not US dominated. The difficulty is that the US, the UK and
Germany have to agree and there are huge cultural differences. For example, the way
audit has developed is different. The accountancy profession in the US has not gained
the standing that it has in the UK. In the UK we aim to be the CEO adviser: they are a
more traditional audit practice. They don't always seem to share our aspiration to move
up the value chain. Corporate finance is critical to KPMG in the UK but not in the US.
Some European practices have successful legal practices and we're building one in the
UK. The US firm doesnt do it. These differences are barriers to globalisation and
hence regionalisation makes sense.
But there were other challenges:
The world out there is US led with firms with more command and control: and 1 think
they are all ahead of us in globalising their operations. PWC dominates the market and
is US dominated. EY have sold consulting and are US led: they are ahead of us on glo-
balisation. Deloitte-Touche is US led and is advancing strongly currently.
Some people in KPMG think that it is possible that the big five accountants will
choose strategic paths which are truly distinctive anti differentiated. The firms would be
different in management. For example. KPMG would be non US-dominated. They may
also be different on products such as whether they all continue to do statutory audits. It
might also be that one goes for value added, dropping statutory audits, and another gets
really smart on low margin, volume work. I could see a scenario where KPMG could
be a global leader in five years or just as credibly another where it would not survive.
Some of these forces are in its own hands and some arc not.
One of those factors was the future of auditing: Eddie Oliver again:
If the regulators insisted on the separation of audit from everything else it would be a
real problem. The present model has two key advantages. It gives clients access to
multi-disciplinary services. And it enables us to offer the variety of experience that
talented knowledge workers are seeking. Separated from the rest of KPMG. statutory
audit would soon become a low value-add commodity.
It was an issue echoed by Peter Olivers:
In audit you will get a file electronically from the client. You will be looking for value-
added services on risk, on benchmarking, on profit improvement, on profiling versus
competitors. There is an issue for the profession of whether the statutory audit remains
the best springboard for the provision of these value-added services.
By 2001 it was clear that the traditional accountancy profession was in a state of
significant change: and change which was, in the view of Peter Olivers, highly
unpredictable:
For years I thought I could sec two or three years ahead. I'm doing well now if I can
see much beyond six months.
(The Appendix sets out the fee split for major accountancy firms in 2000 by region and
services offered.)

APPENDIX FEE SPLIT FOR MAJOR ACCOUNTANCY FIRMS IN


2000
Regional fee split for leading accountancy firms (%)

EUROPE,
MIDDLE
TOTAL
FEES EAST
$ 8 AFRICA AMERICA ASIA OTHE
FIRM MILLION S PACIFIC R
KPMG (Sept. 2000) 13,500 42% 49% 9% -
Arthur Andersen (Aug.
2000) 8,400 33% 49% 13% 5%
PricewaterhouseCoopers
(June 2000) 21.500 41% 49% 10%

Ernst 8 Young (June -


2000) 9,200 N/A N/A N/A
Deloitte Touche
Tohmatsu (May 2000) 11,200 N/A N/A N/A -

Notes:
KPMG: figures are taken from year end press release.
AA: figures are taken from year end press release. Corporate finance revenues are not
broken down geographically and are shown in 'other'.
PwC: figures are taken from year end press release.
EY: figures are taken from year end press release; no fee split is available for DTT
globally.
DTT: figures are taken from year end press release; no fee split is available for DTT
globally.
International fee split for leading accountancy firms (%)
FIRM ASSURANCE TAX 8 LEGAL CONSULTING OTHER

KPMG (Sept. 2000) 41 21 29 9


Arthur Andersen

(Aug. 2000) 45 30 19 6
PricewaterhouseCoopers
(June 2000) 39 19 31 11
Ernst & Young (June 2000) 57 34 - 9
Deloitte Touche Tohmatsu
(May 2000) N/A N/A N/A N/A

Notes:
KPMG: figures are taken from year end press release The 'other' data largely comprises
FAS revenues.
AA- figures are taken from year end press release. The 'other' data largely comprises
CF revenues. PwC: figures are taken from year end press release. The 'other' data
includes FAS, BPO (Business Process Outsourcing) and GHRS (Global Human
Resource Solutions) revenues.
EY: data is estimated by the International Accounting Bulletin EY sold their consulting
arm to Cap Gemini in May 2000.
DTT: no fee split is available for DTT globally.

Marks and Spencer


Nardine Collier
Marks and Spencer became a household name, first in the UK and then internationally.
However, in the late 1990s it suffered a reversal in its fortunes. This case study gives an
account of how commentators explained that decline, and how the management at
Marks and Spencer sought to introduce and manage changes to improve performance.


Michael Marks began what was to become one of the most recognised brands in the
UK and eventually across the world by establishing a penny bazaar in the late 1880s. It
was a huge success, with the majority of products only costing one penny. Marks
rapidly expanded his business, and soon decided that he needed a partner to help
perform all the responsibilities a growing organisation brings. Tom Spencer, a cashier
of Marks supplier, was recommended and from this partnership Marks and Spencer
(M&S) steadily grew.

THE M&S FORMULA FOR SUCCESS


Sinton Marks took over the running of M&S from his father. He was aggressive with
his ideas for the organisation, and went to America to investigate how they were
running their stores. On his return to Britain he made a number of changes to the penny
bazaars, firstly by turning them into stores, establishing a simple pricing policy and
introducing the St Michael' logo as a sign of quality. There was a feeling of camaraderie
and close-knit family atmosphere within the stores, and this was compounded by
employing staff whom the managers believed would fit in and become part of that
family. The staff were also treated better and paid more than sales assistants in other
organisations. The family nature of this firm dominated top management too: until the
late 1970s the board was made up of family members only.
Simon Marks was renowned for his personal control over the business and his
attention to detail. According to a Channel 4 TV programme (25 February 2001) his
was a style of top-down management which could often take the form of shouting and
even bullying. This concern for control also manifested itself in the way Marks dealt
with suppliers. He always used the same UK-based suppliers and meticulously ensured
that the goods were exactly to specification; a relationship designed to ensure high and
consistent quality.
Until the late 1990s M&S had been hugely successful in terms of both profit and
market share. It worked to achieve this esteem by applying a structured formula to all
its operations and maintained it by establishing a set of fundamental principles which
were held as core to the organisation and used in all of its business activities. In his
book Marks and Spencer: An anatomy of Britain's most efficiently managed company.
Tse (1982) described these principles as being:
1. to offer our customers a selective range of high-quality, well designed and attractive
merchandise at reasonable prices under the brand name St Michael;
2. to encourage suppliers to use the most modern and efficient production techniques;
3. to work with suppliers to ensure the highest standards of quality control;
4. to provide friendly, helpful sendee and greater shopping comfort and convenience to
our customers;
5. to improve the efficiency of the business, by simplifying operating procedures;
6. to foster good human relations with customers, suppliers and staff and in the
communities in which we trade.
Other components of this formula were developed. M&S always used British suppliers,
believing that they delivered the highest quality' products, whilst most other retailers
sourced merchandise from overseas to keep costs down. Its specialist buyers operated
from a central buying office from which goods were allocated to the stores: a formula
which stood M&S in good stead for most of its years. The store managers followed
central direction on merchandising, layout, store design, training, and so on. Every
M&S store was identical in the procedures it followed, leading to a consistency of
image and a guarantee of M&S standards. However, it also meant conformity, with
very' little local discretion. Store managers were severely restricted in how they could
respond to the local needs of customers and could do little that departed from central
direction.
During M&Ss growth period there were few' changes in its methods of operation or
to its strategies. It stocked generic clothing ranges with a wide appeal to the public:
buyers often made choices which would outlast the current fashion and trends seen in
other high street retailers. Its reputation for good quality clothing was built on basics,
the essentials which every customer needed; for example, its reputation for
womenswear was built on underwear, jumpers and skirts. As it did not have fitting
rooms until the 1990s. all assistants carried tape measures with them and M&S would
give a no quibble refund to any customer who was unhappy w ith the product he/she
had purchased. Because its products remained in the stores all year round for most of
its history' it never held sales. It priced its goods at a reasonable' level while
emphasising the products high quality: a claim which it believed was readily accepted
not least because of its insistence on using British suppliers. (More than 90 per cent of
the suppliers M&S used were British.) It liked this relationship as it felt it could
develop the suppliers skills and it would not be able to do this with inaccessible
overseas manufacturers. It also believed its customers thought that they

Exhibit 1 Marks and spencer customer satisfaction survey results

MARCH 1995 MARCH 1998 SEPT 1999


Viewed positively 71% 62% 45%
Value for money 69% 57% 45%
received higher quality from British suppliers. This often led to the situation where the
supplier was reliant on M&S as M&S bought up all the stock the supplier could
manufacture: but it also meant that M&S came to be reliant on particular suppliers.
The success of M&S continued into the 1990s, with ever-rising profits and share
prices. Richard Greenbury, the chief executive from 1991, explained this success as
follows:
I think that the simple answer is that we followed absolutely and totally the principles
of the business with which I was embued I ran the business with the aid of my
colleagues based upon the very long-standing, and proven ways of running it.
(Radio 4, August 2000)
This commitment from the very top to the M&S way of doing things had been evident
since the time of Simon Marks and for succeeding chief executives. Indeed, chief
executives of M&S were renowned for their attention to detail in terms of supplier
control, merchandise and store layout: and it had seemed to work. The success of M&S
under Simon Marks was often attributed to his understanding of customer preferences
and trends. However, because of this same phenomenon, it could also mean that buyers
tended to select merchandise which they knew chief executives would approve of. For
example, the BBC's Money Programme (1 November 2000) reported that, since it was
known that Richard Greenbury did not want M&S to be at the cutting edge of fashion,
buyers concentrated on the types of product they knew he would like - 'classic,
wearable fashions'.
The same programme also reported on the problems of centralised authority: on one
occasion Richard Greenbury had decided that to control costs there would be fewer
full-time sales assistants in stores. Although this led to an inability in stores to meet the
service levels required by M&S. when Greenbury visited those stores, store managers
ensured they were fully staffed by bringing in all full-time, part-time and Saturday staff
so that it appeared that stores were giving levels of service that, at other times, they
were not.
It also meant that there was sometimes little disagreement with policies sent down
from the top, so that decisions might remain unchallenged even when executiv es or
store operations managers were concerned about negative effects of policies and
decisions. The same Money Programme claimed that customer satisfaction surveys
which showed decreasing satisfaction throughout the late 1990s (see Exhibit 1) were
kept from Greenbury by senior executives, who felt that he might be annoyed by the
results.
Commenting to the Money Programme, Greenbury stated that he never saw the
results from customer surveys, and used sales figures and visits to stores as the basis to
make judgements on how M&S was operating.

A HITCH IN THE FORMULA


M&Ss problems began to hit the headlines in October 1998 when it halted its
expansion programme in Europe and America.
The expansion programme had begun in the early 1990s when M&S had moved into
a number of overseas markets, where it implemented its tried and trusted formula. In
America M&S operated as Brooks Brothers, and in Canada it opened 22 stores by
entering into a joint venture. It also opened in France as a basis for expansion
throughout Europe. It had previously stated that it would spend 130m a year on the
expansion until 2001, as it was essential for the organisations long-term progress.
However, in 1998 it instructed its US subsidiary Brooks Brothers to cut spending. It
was also known that M&S was considering whether to abandon the expansion plans in
the US, where it had wanted to increase retail space by 17 per cent. Indeed, it admitted
to having financial difficulties worldwide, having been hampered by tough trading con-
ditions which had seen many retailers have sales even though their new ranges had just
been released.
In November M&S announced a 23 per cent decline in first-half profits, causing its
shares to fall drastically. Sir Richard Greenbury, chairman and CEO, blamed the
competitive environment, saying that it was turbulent and that M&S had lost sales to its
competitors. Competitors were eroding market share, from the top and bottom ends of
the retail market. Competitors at the top end of the market were niche organisations
such as The Gap, Oasis and Next, offering similarly priced goods, yet more design
focused with up-to-date fashions, and from which obvious comparisons could be made
against the more traditional M&S merchandise. Furthermore, these stores were
attracting the customers who would have naturally moved on to become M&S
customers. At the bottom end of the market there was competition from discount stores,
such at Matalan, and supermarkets, such as the George range at Asda. These stores
were competing against M&S by offering essential and basic ranges of clothing, but at
significantly lower prices. Moreover, Tesco and Sainsbury's moved into offering added
value foods, which had been pioneered by M&S.
It was frequently reported in the press that M&S no longer understood or reacted to
its customers' needs. It had misread its target market, and could not understand that
those customers who purchased its food or underwear might not necessarily want to
buy products from its home furnishings range.
It was seen to have been too complacent and ignoring changes in the domestic
market which have now caught up with it.
(Financial Times, 16 January 1999)
Analysts commented that M&S had continued too long with its traditional risk-
aversive formula and ignored the changes in the marketplace. Its competitors,
meanwhile, were being praised for improving their performance as they quickly reacted
to the changes.
Although Greenbury had blamed the competitive environment for the difficulties
M&S had been experiencing, a Channel 4 programme (25 February 2001) felt that it
was his focus on the day-to-day operations of the organisation rather than long-term
strategy that had been the problem. The programme also highlighted that M&S was
firmly placed in the middle ground', tied to a generalised view of the market, instead of
trying to understand and tailor that offering to the various segments in the market and
how they were emerging and growing.
Commentators tried to make sense of what had happened. M&S did not have a
loyalty card at a time when almost every other retailer did. It was accused of having an
inward-looking culture. Almost all M&S managers and executives were promoted
internally, starting at the bottom of the organisation, and becoming immersed in the
routines and established traditions of M&S. a culture that had been established, and
continually reinforced, since the creation of M&S. Observers also pointed to the fact
that, although a large proportion of M&S customers were women and much of the
merchandise was womenswear, top management was hugely dominated by men. There
had never been a CEO of M&S who had not been a member of the founder's family or
a lifetime employee. It was believed that the culture was also strongly reinforced by
Greenbury and not helped by his autocratic approach. This was, however, denied by
Greenbury:
I would strenuously deny that I was autocratic, what I would say is that I was
extremely demanding, I was considered to be tough but fair. When I became chairman,
I introduced to the business a method of discussion in the boardroom, and outside of
the boardroom that was far reaching down the business in terms of discussing what we
were doing. I was like any chairman, I had strong views and if I could persuade people
of my views then obviously I tried to do ... I was chairman and chief executive almost
by accident because I was appointed chief executive in 1988 and I became chairman
and chief executive in 1991.
(Radio 4. August 2000)
In November 1998, after months of speculation and boardroom arguments, Greenbury
announced that he would be stepping down from the CEO position. There then ensued
a series of heavily publicised arguments between Keith Oates, Greenburys deputy, and
another senior director, Peter Salsbury, whom the media suggested was Greenburys
favoured successor. The in-fighting at M&S came to a conclusion when Greenbury'
returned to Britain after a sudden end to his holiday. Greenbury held a five-hour
meeting with the board and nonexecutive directors to determine who would be the
successor. However, at the voting the next day, Oates did not attend and elected to take
early retirement. Salsbury was appointed as chief executive. This was poorly received
by shareholders and the City, where M&S shares fell 25 p. Analysts commented that,
as Salsbury had only worked in womenswear, one of the worst-performing units in
M&S, it might have been wiser to bring in an outsider (Channel 4, 25 February 2001).
During this period of boardroom scuffles, the problems M&S where encountering
were further compounded by its 192m purchase of 19 Littlewoods department stores,
on the grounds that they were situated in prime locations and complemented the
existing M&S stores. M&S had acquired the stores with the aim of refurbishing them
(at a cost of 100 m) so that their full range of products could be stocked at city central
locations. However, the difficulties began to arise during the refurbishment programme,
as not only were Littlewoods being refurbished but so were the existing M&S stores.
The disruption caused by the double refurbishment had a far worse effect on the
customers than M&S had predicted, leading Greenbury to describe the clothing section
as a bloodbath'. In hindsight he thought that the problems M&S faced had compounded
upon each other:
We decided, as a board, to invest very heavily in the next decade, so from 1997 to
1999 we embarked upon a massive capital investment programme, set at well over 2
billion ... It comprises all sorts of things: infrastructure, expenditure, distribution,
tilling, it involved the purchase of selected Littlewoods stores to increase our footage in
major city centres, property acquisitions, all on top of what was a fairly aggressive
investment and expansion plan already. We then decided to accelerate our business
overseas, so I think it is very clear that it became an even more competitive market than
certainly any of us had anticipated.
(Radio 4, August 2000)
In January 1999 M&S announced its second profits warning. This caused a rapid sell-
off of M&S shares. M&S blamed customers, who, it believed, had been unwilling to
pay full price for products over the Christmas period, especially when they could buy
similar clothes at cheaper prices from some of M&Ss competitors. Furthermore, it
overestimated its sales and bought 250m worth of stock. The excess stock then had to
be heavily discounted for a quick sale so that storage space could be freed for the next
season s stock. There were also a number of problems with its European operations.
M&S had been pursuing a series of rapid expansion initiatives in the European market.
Many of the European countries were difficult to expand in, for example Germany
where M&S reacted to any opportunities for expansion that arose. However, these
stores performance had been worsening over the previous months, totalling a cost
of25m. They continued to show no signs of improvement, and so a programme was
put in place to gradually close most of the European stores.

NEW TACTICS
To overcome the difficulties M&S had been facing, and in an attempt to regain
confidence, Salsbury began to implement a reorganisation strategy, splitting the
company into three: UK retail business, overseas business and financial services. His
plans also involved establishing an organisation-wide marketing department to break
down the power of the traditional buying fiefdoms which were established around
product lines. Salsbury wanted the marketing department to adopt a customer-focused
approach, rather than allowing the buyers to dictate what the stores should stock.
By April 1999 Salsbury had devised a large-scale promotional campaign to try to
restore its image as an innovative retailer offering unique quality' products. To coincide
with this, M&S launched new clothing and food ranges. Salsbury also issued a
memorandum explaining that he wanted to make changes to M&S which would move
the organisation away from its bureaucratic culture. One way Salsbury felt this could be
achieved was by creating a decision-making environment that wasn't encumbered by
hierarchy. He wanted to challenge the traditional ways that M&S operated, as he
believed these could be the root cause of its problems. However, by May Salsbury was
forced to announce a severe drop in trading and a halving of profits. He then outlined
more measures he would take in order to alter the perception of M&S. As well as
stripping away further layers of hierarchy, M&S would take a lifestyle approach to
buying and presenting products. For example, previously M&S had placed together all
types of trousers, even to the extent of separating suits. One analysis commented:
.M&S has behaved more like a wholesale buyer of products . . . rather than thinking
about the sort of person that was buying the item and what else they could sell to that
customer.
(financial Times, 19 May 1999)
M&S also established a property division to enable it to charge rents to the individual
stores; this was done to make store managers more accountable for their branches
actions, failures and achievements.
In mid-June Greenbury retired a year earlier than in his contract; a decision which
came just before the board were meant to enter a three-day meeting to discuss a few
hundred pages of its new strategy'. Salsbury commented;
What we are doing has moved away from his [Greenbury'sl methodology and
thought processes and decisions were reached without him being able to have an input.
(Financial Times, 23 June 1999)
In another attempt to slow its decline in profits, July saw the closure of six of M&Ss
European stores, a reduction in the size of its head office, and the closure of all its 38
Canadian stores, which had been operating at a loss for 24 out of 25 years of trading
(Financial Times, 10 July 1999). Meanwhile, in the UK market M&S began to
implement a costly store change strategy. It commissioned design consultants to create
a new store image. The pilot store displayed new lighting and flooring to create a mood
which looks to the future with the anticipation of creating change.

. . . AND MORE PROBLEMS


In September 1999 M&S announced further changes as a result of a strategic business
review conducted over the previous 18 months. It stated that it was in the process of, or
was, implementing:
overseas sourcing while severing links with UK suppliers;
streamlining international operations;
diversifying into home and Internet shopping;
creating a department dedicated to identifying new business opportunities.
Shortly after this, there followed yet another profits warning, despite the major
investments which had been put into making the stores appear more friendly to
customers, a new well-received fashion range, and more staff working on the shop floor
to improve customer service. Customers continued to voice their concerns regarding
the clothing range, however, commenting that it was difficult to see the difference in
the positioning of work and casual-style clothes. Customer comments were reported in
the press, such as:
There are so many items here to find and they don't tend to segregate it out, so there's
something I might like next to something my granny might like.
(Financial Times. 28 September 1999)
In November 1999 M&S had more bad news for its shareholders when it revealed
that its shares had fallen to 250 p, the lowest price since 1991. By December there
were stories of acquisitions. Some of the groups cited as being interested in acquiring
M&S were Tesco, American pension fund companies, and Philip Green, the retail
entrepreneur. One analyst stated:
If it wasn't for these take-over stories the shares would be down to about 200p now
and the business would be looking very vulnerable.
(Financial Times, 14 December 2000)
However, other observers believed that an acquisition would not really be the answer.
They felt that there continued to remain deep structural problems in the marketplace, as
there were high costs of entry and maintenance to remain in the clothing market.
In an effort to counteract the acquisitions, and to restore the wavering faith in the
company, M&S set about implementing another management restructure to become
more customer focused. It attempted to achieve this by splitting into seven business
units: womenswear, menswear, children's wear, lingerie, food, home, and beauty'.
Executives were appointed at just below board level to head the units, reporting directly
to Salsbury, who believed that the flatter structure allowed it to be more responsive to
market changes and customer needs.

A NEW HORIZON
January' 2000 did not just bring a new millennium, but also a new chairman for M&S.
Belgian-born Luc Vandevelde was appointed with a two-year contract (most executives
only received one year), a 2.2m golden hello, and a salary' of1.3m a year plus share
options. The 48-year-old Vandevelde was employed in the position of executive
chairman. Salsbury was to remain in charge of the day-to-dav business.
In taking the position at M&S, Vandevelde left his managing director role at
Promodes, the French food retailer, which ranged from operating convenience stores to
hypermarkets. There he had achieved a sixfold increase in the value of its stock, and
before leaving, had finalised the sale of Promodes to Carrefour, thus creating the
second largest retailer in the world. This was the first time that anyone front outside
the organisation had been appointed to the position of chairman at M&S, and many
commented that it showed an indication that M&S had plans to develop as more of an
international retailer.
Vandevelde said that he wanted to revitalise the domestic brand and then go overseas
with an extensive expansion plan. Further, he wanted M&S to become a multi-format
retailer, as was Promodes. Analysts observed that this would certainly require a major
culture change for the organisation.
By February, M&S promised an extra 4,000 staff who would operate on the shop
floor. By directly serving and helping customers, M&S felt it was offering a more
personal and improved service. It also entered into deals with two football clubs as part
of its plan to tailor stores geographically and unveiled a new collection of clothes
designed by haute couture fashion designers exclusively for M&S. Purchasing of the
clothing range was also shifted to almost 100 per cent Asian sources.
In March 2000, M&S declared a dramatic overhaul to its brand. It planned a new
corporate image. It stopped using its famous green carrier bags and downgraded the
once acclaimed, and seemingly invaluable. St Michael brand, in a move which would
have shocked the founders and past CEOs of the organisation. The plans encompassed
a complete overhaul of the organisation, as the stores, uniforms, packaging and
labelling all had to be altered to fit with the new image. Vandevelde said he thought the
changes were evolutionary rather than revolutionary (Financial Times, 13 March
2000).
M&S stated that it had identified that customers were confused about the differences
between the St Michael and Marks and Spencer brands and felt that it needed to use one
distinctive brand which everyone could understand. The new-look M&S brand was
then displayed, in a range of colours each indicating different departments. The St
Michael brand was relegated to inside clothing labels as a symbol of quality and trust.
Vandevelde also began to change M&S's supply chain. He grouped the stores on the
bases of demographic characteristics and lifestyle patterns, instead of operating with the
old system whereby stores were allocated merchandise dependent on floor space. Under
the old system, stores of the same size were sent the same clothes regardless of location
or customer profiles. This new move was widely accepted and received positively as
being one of the first major steps to becoming customer focused.
Vandevelde conducted numerous interviews with widely regarded newspapers and
publications in an effort to raise his and his organisations profile and awareness,
mainly with the City, investors and shareholders. In an interview with the Financial
Times (4 April 2000) he admitted that in the past M&S had lost its way in a fast-
changing market where new competitors wrere making the rules. He argued that the
strategies he intended to implement would not involve drastic changes to the board or
the structure of the organisation, and added:
think in the glory days of M&S everybody felt proud to be associated ... it drove our
reputation and our share price up to levels that we may not have deserved. Whereas
when things started going slightly sour I guess everybody just exaggerated and we
probably were punished a bit more than we deserved as well. Understanding that is
important
There is one general theme and that is that we are probably too push and not enough
pull orientated this is echoing a theme that the group was not focused sufficiently
on the customers. Today it is much more difficult to come up with real unique
propositions and customers are much more intelligent and have minds of their own. so
they don't wait for a retailer to tell them to come by. We have got to start with the
customer and work our way backwards
It was only when 1 started getting ideas about the stores in Germany and Belgium
and later on in the US that I started to have a benchmark to be able to compare practices
to see what worked better and where there might be some possible leverages. I think
that because of geographic distance [of the overseas stores] and because they have been
less influenced by whatever atmosphere may have been created in the UK, they have
probably felt free to start experimenting with a certain number of ideas that were
probably difficult to get done here.
(Financial Times, 4 April 2000)
He explained that stores outside the UK had developed their own strategies which
were tailored to the needs of the local market. Vandevelde hoped that the ideas and
strategies which had been implemented overseas would provide leverages which could
also be exploited in the UK stores.
In May 2000 M&S announced its figures for the year, reporting 8.2bn of sales, the
same as the previous year, and a fall in profit from 628.4m to 557.2m. So despite the
new measures and strategies there was no visible improvement. M&Ss stakeholders
were also unimpressed after receiving the first cut in their dividend, seeing it fall to 9p
from I4p. Salsbury commented that they had managed to slow the sales decrease, and
that customers had noticed a difference in the stores and products: the dividend cut was
made so that future investment capacity was not compromised.

THE FUTURE
Vandevelde wanted to look towards the future instead of concentrating on the past.
Once he had stabilised M&S in the UK he planned to relaunch the organisation
internationally. He also outlined his strategy for the year, beginning with four
overarching priorities, which again had the objective of moving the business closer to
the customer.
1. Creating clear profit centres
2. Creating a customer-facing organisation
3. Restoring overseas profitability
4. Building the financial services sector
He was confident that this would enable M&S to start on a path of sustained
recovery'. He aimed to achieve these objectives by a further restructuring of the
organisation into five operating divisions: UK retail; international retail; financial
services; property and ventures. Within the UK retail division seven customer business
units were established, and to ensure customer focus each unit would have dedicated
buying and selling teams. M&S also created a Customer Insight Unit (CIU) after
reviewing with customers the perceptions of the M&S brand. The CIU would perform
in-depth research with customers to gain an understanding of shopping habits and their
demographics. Vandevelde said that after starting in-depth research they had identified
that one in five items from the clothing range was the wrong type of offering for the
stores local market.
As for the stores, a series of different formats would be launched; there would be
further modernising of stores; more customer advisers on the shop floor; and the
opening of three prototype stores where all new initiatives and concepts would be
tested.
At the end of 2000 M&S disclosed its plans to offer clothes at a discounted price of
30 per cent in factory outlet malls. The malls would be used to sell excess stock,
something which its more aggressive competitors had been doing for a number of
years. Although this would mean that M&S could clear space in stores for new stock
and recoup money from slow-selling items quicker than if they had to wait for sales,
commentators wondered what loyal customers would think when the clothes, to which
they attributed a certain standard of quality and price, were being sold ,30 to 50 per
cent cheaper.

WHERE FROM THERE?


In September 2000 Salsbury retired from M&S. Analysts, journalists and com-
mentators agreed that the road ahead for Vandevelde and M&S would be a tricky one,
especially when trying to serve the local needs of nearly 300 stores, while at the same
time embracing the benefits of globalisation. Although Vandevelde was extremely
optimistic, Greenbury did not believe M&S would ever regain the position it once held:
Do I think in the foreseeable future that it will go back to making those kind of
returns? The answer is, 1 think, it is extremely unlikely.
(Radio 4, August 2000)
At the end of March 2001, M&S announced its plans to withdraw from Europe and
America. Brooks Brothers was put up for sale, as were the remaining 38 branches
which were operating in Europe. Its stores in Hong Kong were sold to franchises. M&S
also closed its Direct catalogue operations at a cost of 300m. Vandevelde explained
that the disposals were necessary so that M&S could focus on its core domestic
clothing. To complement this, George Davies, founder of Next and creator of the
'George at Asda clothing range, was brought in to design a new range of clothes for
M&S.

Sources
BBC2 'Sparks at Marks, The Money Programme, 1 November 2000.
Beaver, G. (1999) 'Competitive advantage and corporate governance: shop soiled and
needing attention, the case of Marks and Spencer pic'. Strategic Change, 8, 325-34.
Channel 4 inside Marks and Spencer, 25 February 2001.
Radio 4 Interview with Sir Richard Greenbury, 22 August 2000.
Rees, Goranwy (1969) St Michael: A history of Marks and Spencer, Wiedenfeld and
Nicolson, London.
Tse, K.K. (1985) Marks and Spencer: Anatomy of Britain$ most efficiently managed
company, Pergamon Press, Oxford.

APPENDIX MARKS AND SPENCER GROUP FINANCIAL


RECORD, 1997-2000
2000 1999 1998 1997*
(M) (M) (M) (M)
Profit and loss account
Turnover 8,195.5 8,224.0 8,243.3 7,841.9
Operating profit/loss before exceptional 543.0 600.5 1,050.5 1,700.2
operating costs
Exceptional operating costs -72.0 -88.5 53.2 -
Total operating profit/loss 471.0 512.0 1,103.7 1,037.9
Profit/loss on sale of property/fixed assets -22.3 6.2 -2.8 -1.8
Net interest payable 14.2 27.9 54.1 65.9
Profit/loss on ordinary activities before taxation 417.2 546.1 1,155.0 1,102.0
Taxation -158.2 -176.1 -338.7 -346.1
Profit/loss on ordinary activities after taxation 259.3 370.0 816.3 755.9
Minority interests -0.6 2.1 -0.4 -1.3
Dividends -258.6 -413.3 -409.1 -368.6
Retained profit/loss for the year 0.1 -41.2 406.8 386.0

Balance sheets
Fixed assets 4,298.4 4,448.7 4,034.5 3,646.5
Net current assets 3,717.1 3,355.9 3,401.5 3,204.2
Short-term creditors 2,162.8 2,029.8 2,345.0 1,775.1
Long-term creditors 804.3 772.6 187.2 495.8
Provisions for liabilities and charges 126.6 105.0 31.0 31.8
Net assets 4,921.8 4,897.2 4,872.8 4,548.0
Equity shareholders' funds 4,905.3 4,883.9 4,853.7 4,529.3

Statistics
Earnings/loss per share (p) 9.0 13.Op 28.6p 26.7p
Adjusted earnings/loss per share (p) 13.2 15.8p 27.3p 26.7p
Dividends per share (p) 9.0 14.4p 14.3p 13.Op

* Marks and Spencer altered its accounting practices in 1998 and therefore the figures
for 1997 are not strictly comparable with those from 1998, 1999 and 2000.

DOWNFALL AT XEROX
This case study is based substantially on the cover story in Business Week, 5 March
2001. It is concerned with the decline in fortunes of the Xerox Corporation; and in
particular with the role of strategic leadership, CEO succession and boardroom
activity in this.


One morning in May 2000, G. Richard Thoman arrived for work to find an urgent
summons from Paul A. .Allaire, the man he had replaced as chief executive of Xerox
Corp, just 13 months earlier. Allaire, who had remained as chairman, was waiting next
door in his office at Xerox headquarters. A man of few words even on happy occasions,
Allaire delivered the bad news without preamble. He said that Thomans colleagues had
lost confidence in him and that the next afternoon the board would announce his
resignation. In other words, Thoman, who had left IBM in 1997 to join Xerox as heir
apparent to Allaire, would be out of a job in about 30 hours. Thoman was livid, but
obligingly fell on the sword Allaire handed him. Late the next day, after the board had
announced Allaires reinstatement as CEO, Thoman sat alone in a Xerox conference
room and fielded calls from the press. The board and I agreed that it made more sense
to implement our strategy with an internal team, he told one caller. Actually, he could
only guess at what his fellow directors wanted. Thoman had not been invited to the
board meeting or even asked to defend himself by speakerphone. He had been fired in
absentia, the bizarre but perhaps inevitable outcome of a CEO succession that had
begun so promisingly yet ended in utter disaster for Allaire and Xerox no less than for
Rick Thoman.

HUGE GAP
Xerox bungled CEO succession is an object lesson in the difficulty of reinventing an
old-line company. For a good 20 years now, Xerox executives have been restructuring,
revamping, and repositioning virtually non-stop. But in the last analysis, Allaires
Xerox has been far better at proclaiming the need for change than actually making
change. There was always a huge gap between the visionary aspirations the company
nominally was pursuing and what it actually drove employees to do,' says a former
senior Xerox executive.
______________________________________________________________________
Once synonymous with corporate success and technological innovation, Xerox is now
struggling with losses and leaden stock - not to mention a reputation for fumbling high-
tech opportunities.
1938: Chester Carlson produces first xerographic image in his lab in Astoria, Queens.
1959: Launches the Xerox 914, the first automatic, plain-paper office copier - which
becomes the top selling industrial product of all time.
1961: Shares listed on the New York Stock Exchange. Xerox becomes one of the great
growth stocks of the go-go era.
1970: Opens Palo Alto Research Center, birthplace of the personal computer, laser
printer, and ethernet; much of the technology goes unexploited by Xerox.
1982: Visionary leader David T. Kearns becomes CEO, facing a dire competitive threat
from Japanese rivals pioneering low-cost copiers.
1983: Begins a disastrous foray into financial services with purchase of Crum &
Forster insurance group; later buys brokerage and life insurance companies.
1990: Launches line of digital presses, creating lucrative new market; Paul A. Allaire
named chief executive. 1993: Decides to quit financial services; announces first major
layoffs, reducing workforce by 10 per cent. 1995: Introduces digital copier, opening
vast new market and creating a $3 billion-a-year business. But success blinds it to
threat of desktop printers.
1997: Rick Thoman leaves IBM to become president and COO.
1998: Sells Crum & Forster at huge loss; slashes an additional 9,000 jobs, taking $1
billion write-off.
1999: Shares hit peak of $64 as Thoman is named CEO. But quick attempts to overhaul
hidebound culture backfire. Earnings and shares plummet. US inkjet printer sales hit
$5.2 billion, with 50 per cent controlled by Hewlett-Packard. Xerox logs 2 per cent
share.
March 2000: Announces 5,200 more layoffs.
May 2000: Allaire ousts Thoman and returns as CEO.
December 2000: Reports largest quarterly loss under Allaire. Stock hits $7.
January 2001: Announces 4,000 layoffs. Company again forced to deny it has plans to
file for Chapter 11 bankruptcy. Leveraged buyout firms begin serious discussions for a
minority stake in Xerox.
There was a time when Xerox embodied visionary aspirations realised. Throughout
the 1960s, the company was as potent a symbol of the transformational power of
technology innovation as Apple Computer Inc. and Microsoft Corp, would be later.
(Exhibit 1 outlines Xerox's histoiy.)
Xerox is descended from the Haloid Co., a photographic supply company founded in
Rochester, NY, in 1906. Under Joseph C. Wilson, its long-time leader. Haloid spent 14
years and virtually all of its income to develop the 914, the first xerographic copier.
Introduced in 1959, the new copier was a money machine nonpareil. By the time the
914 was retired in 1973, it was the biggest- selling industrial product of all time, and
Xerox was in the dictionary as a synonym for photocopy. Success spoiled Xerox, in a
sense. To sustain its rapid growth, it needed to move beyond copiers, but what could
ever measure up to the 70 per cent gross profit margins of the 914? Xerox was defined
as the copier company' in its very DNA, blinding it to the enormous commercial
potential of Palo Alto Research Centers many innovations. Attempts to buy its way
into new businesses were equally unsuccessful. Whether it was mainframe computers
or financial services, Xerox tended to buy the wrong company at the wrong price and
then run it into the ground. Novelty in any form simply was no match for the well-
heeled copier bureaucracy - or Burox - spawned by the phenomenal success of the 914.

CUT-PRICE COMPETITION
Burox almost was the death of Xerox. The companys xerography patents began
expiring in the early 1970s, and its 95 per cent share of the market dwindled. By 1982,
its portion of the US copier business had declined to 13 per cent under an onslaught of
cut-price copiers imported from Japan. Through sheer force of personality, CEO David
Kearns, a former IBM marketing executive, inspired the Xeroid masses to commit to
elaborate Japanese- style programmes to improve product quality and pare
manufacturing cost. Rejuvenated, Xerox reclaimed lost market share at home and by
1990 was even taking business away from Canon and Ricoh in Japan.
In keeping with Xerox tradition, Kearns stepped down as CEO in 1990, when he
turned 60, and yielded to Allaire. The son of a Massachusetts vegetable farmer turned
quarry operator, Allaire had joined Xerox in 1966 and worked his way up through the
finance and administration ranks. Kearns remained as chairman, but not for long. Just
nine months after Allaire became CEO, Kearns resigned from the board to accept the
No. 2 spot at the Education Dept. in the Bush Administration. I had zero involvement in
Xerox during the two years I was in Washington, Kearns says now'. And I never went
back on the board.
Free to act on his belief that Xerox needed new blood, Allaire remade senior
management with executives imported from the outside. The two Allaire recruits who
would rise to the highest rank were Romeril, formerly finance director of British
Telecommunications, and William F. Buehler, an affable sales executive from AT&T.
Allaire developed close relationships with both men, especially Buehler, who spent so
much time with the boss socially that they were presumed inside the company to be
best friends. Buehler, who recently retired, declined to be interviewed.
Kearns brought Xerox back from the abyss in the copier business only to jeopardise
its future anew' by putting the company into property and casualty insurance on a grand
scale. By the time Allaire took over, Xerox' balance sheet had been crippled by billions
of dollars in insurance liabilities. This time, Allaire saved Xerox, methodically
disentangling the company from insurance and other financial-services businesses. He
also got Xerox stock moving again with a Street-pleasing mix of cost-cutting and new
product introductions, including the first digital copier - Document Center. With great
fanfare, Xerox rebranded itself as The Document Company in 1994, signalling its
ambition to move far beyond copiers as the growth of desktop computing stimulated
huge increases in the number of documents being created.
In keeping with accepted management practice, Allaire had discussed succession
prospects with his board a couple times a year since the early 1990s. There were several
internal candidates for a time, but none panned out. In late 1996, the board decided to
create the new position of president and chief operating officer and to go outside to fill
it with someone who could move up to CEO in a year or two. Through the executive-
recruiting firm Ramsey Beirne Associates, Xerox found Thoman, the 52-year-old chief
financial officer of IBM. Says Allaire: We were looking for a change agent, and he
seemed to be a perfect match.

BEST SHOT
Thoman had spent his entire business career working for Louis V. Gerstner, first at
McKinsey & Co., then American Express and RJR Nabisco. At IBM. Thoman ranked
just below Gerstner in the hierarchy but was only a few years younger than his mentor,
whose retirement was not imminent in any event. After much soul-searching, Thoman
concluded that joining Xerox might be his best shot at becoming CEO of a major
company. He met not only with Allaire but with several other executives and directors,
impressing one and all with his knowledge and intensity. We had such an engaging dis-
cussion, recalls Nicholas. Three hours went by like that, he adds, snapping his
fingers.
Thoman boasted a gilt-edged resume. He had collected four advanced degrees from
four different institutions of higher learning, including a PhD in international
economics from Tufts University. In 1992, the French government had awarded
Thoman, a devoted Francophile, the Legion of Honour for helping build American
tourism in France as an executive of American Express. His breadth of business
experience also set him apart at Xerox, which was filled with managers who had joined
straight from college and never left. Thoman had been chief of corporate strategy at
AmEx, president of Nabisco International, and the leader of IBMs restructuring of its
personal-computer operation. Xerox shares rose $2 on Thoman's hiring in June 1997.
Dispensing with the false modesty usually spooned out on such occasions, Thoman
emphasised that he was no mere Mr Fixit. I see myself as more of a leader, someone
who can size up a situation and act on it quickly, Xerox new president declared. I
came to Xerox to be chief executive.'

BIG DISADVANTAGE
At once cerebral and passionate, Thoman is the corporate equivalent of the Washington
policy wonk. Long-time colleagues say he is someone who continually walks around
with a hypothesis in his head that he is only too happy to share with anyone he
encounters, regardless of corporate station. Thoman likes nothing more than
freewheeling, intellectually charged discussion. However, he can at times become
overbearingly blunt in his criticism, and, like Allaire, is all but incapable of small talk
or water-cooler bonhomie. Rick can seem haughty,' says a former Xerox colleague
generally sympathetic to Thoman. He is not really a warm person.'
Inbred Xerox needed Thomans intellectual energy and outsider's perspective, but in
terms of personality this charm-challenged brainiac was a bad fit, as he himself
realised. To be successful at Xerox, you have to be liked,' he says. While everyone
likes to be liked, for me it was more important to get things done.'
It didn't take Thoman long to start violating decorum. One of the first things he did
was order up a review of the economics of the existing Xerox product line. He was
presented with charts showing that Xerox was world class' in terms of manufacturing
and development costs. My response was How do you know?' he recalls. They told
me theyd get back to me. The third time he got this answer, he put his foot down. It
turned out that staffers had relied on a sampling of 1994 market data so limited as to
exclude most of Xerox Japanese competitors. Thoman ordered them back to the
drawing board. Weeks later, he finally was presented with evidence that Xerox had
failed to maintain its hard-won parity with the Japanese. Says Thoman: It was clear to
me that we were at a large and material cost disadvantage against the Japanese across
the copier market.'
There was not much that could be done to alter the underlying economics, since
research and development accounted for two-thirds of total product costs. But the new
president did begin agitating for sharp reductions in Xerox' bloated payroll and
overhead, which, in Thoman's view, left the company dangerously exposed to price-
cutting by more efficient competitors. Allaire, who had engineered a major cost-cutting
early in his tenure, recognised the need for further cutbacks, but swift, pre-emptive
action had never been his style. Instead, 50 different Xerox management teams spent
six months hashing out a complex restructuring plan finally unveiled in April 1998. It
set forth 150 different initiatives aimed at saving $1 billion a year in cost cuts and
productivity gains. Some 9,000 jobs were to be eliminated, 10 per cent of Xerox'
workforce.
Internal tensions were rising but did not appear to be hurting Xerox' performance.
Operating income was bounding upward in regular quarterly increments, while
revenues now were rising at a double-digit rate. Allaire's early 1990s decision to
reorient the companys office-product strategy around digital multi-function machines
(copiers that also scanned, faxed and printed) seemed about to pay big dividends.
But Thoman was uneasy just the same. For the time being, Xerox had no competition
in digital copying, but the Japanese would bring their own digital machines to market
soon enough and if form held, would probably offer comparable quality at lower cost.
Could Xerox sustain its revenue growth when it no longer had the market to itself? The
burgeoning popularity' of the inkjet printer posed an equally dire threat to Document
Center's rosy unit sale and revenue projections. By now, inkjet sales were exploding in
the so-called SOHO (small office, home office) market, which Xerox had studiously
ignored for years in maintaining its focus on high-margin, high-end equipment.
By mid-1998, Thoman had concluded that Xerox had to make changes in its business
strategy to deliver on its emphatic promises of double-digit revenue growth. He
wanted to push hard into colour and take on mighty HP in inkjet. At the same time, he
believed that Xerox' direct-sales force had to shift emphasis from pushing hardware to
selling output management solutions. As Thoman envisioned it, Xerox' best long-term
growth opportunity lay in helping big companies create new ways to use documents
more creatively and efficiently. In practical terms, this meant signing companies to
outsourcing contracts or selling them special Xerox-written software. This, in turn,
required turning Xerox box-sellers into systems consultants and reorganising the sales
force around industry groups rather than geographic areas.
Some of these notions had been circulating through Xerox for years but had been
acted on only sporadically because of opposition from one Burox faction or another.
Thoman articulated his vision with a clarity and an urgency new to Xerox. If, after
countless management meetings, Thomans ideas eventually prevailed, it was because
Allaire agreed with him, not because he had won over anything close to a majority of
his colleagues. Within the ranks, opposition was steadily building, though rarely was it
expressed overtly. Burox had always excelled at passive resistance. I kept putting
groups of people in rooms to work on fixing a problem, but it wouldn't get fixed
because someone would disagree and the issue would not be settled, Thoman says.
Thomans frustrations were momentarily forgotten when he was named CEO at
Xerox annual meeting in April 1999. I'll always remember it as a summit moment, a
wonderful feeling of arrival,' says Thoman. The happy man hardly gave Allaire's
decision to remain as chairman a second thought. This was not his only mistake. As a
consolation prize for Buehler and Romeril. Allaire proposed giving each a seat on the
board and the title of vice-chairman. Thoman didn't like the idea but went along. I felt I
couldnt say no. I really thought this was Paul's way of making sure everyone felt OK
with my promotion. Of course, it strait-jacketed my ability to make changes.'
Thoman was able to make some executive changes. He moved the companys
European president aside to make way for Pierre Dancn, a dashing Frenchman who was
considered Xerox most aggressive home-grown executive. He replaced Danon as head
of retail distribution with James Firestone, a former IBM colleague. He brought in
Michael Miron, a 39-vear-old cellular-telephony executive as head of corporate
strategy. When the head of Xerox outsourcing subsidiary retired. Thoman recruited
Michael A. Ruffolo, the 36-year-oId chief information officer of NCR. These digital-
sawy executives and a handful of other senior leaders believed in Thomans change
agenda but did not come close to changing the balance of power. Says one ally, who
resigned even before Thomans dismissal: The challenge of changing Xerox was so
profound that Rick needed eight or nine senior people pushing hard along with him as a
group day after day.'

INVESTOR FLIGHT
In the third quarter of 1999, Xerox posted an 11 per cent drop in income instead of the
healthy gain predicted. Investors deserted Xerox in droves, slicing nearly 25 per cent
off its value in a single day. It was as if everything had gone wrong at once. Document
Center revenues were falling behind projections as lower-priced alternatives cut into its
market share. The heavy expenses of entering the inkjet business were really starting to
bite, and competitors were even beginning to eat away at Xerox' monopoly in high-end
digital publishing. The Brazilian subsidiary, long the companys largest source of profit
outside the US, was reeling from colossal currency translation losses and soaring
interest rates. In North America, productivity was deteriorating as the sales force braced
for the reorganisation scheduled to begin in January.
Xerox' business woes brought the simmering tensions between Thoman and other
executives to a boil. By all accounts, there wasnt a lot of yelling and screaming. But as
Buehler and Romeril complained with increasing vehemence to Allaire, the fissures
within top management became apparent to the board. Says one director: Sure, we were
alarmed - alarmed as an eight-alarm bell.' In mid-December, Allaire circulated a memo
to senior management affirming his support of Thoman. The board is unanimously
supportive of Rick despite the clearly disappointing performance of the company, he
wrote. Behind the scenes, though, Romeril, Buehler and other executives were coming
to Allaire and threatening to resign unless Thoman was removed. In the first quarter of
2000, Xerox actually exceeded the Streets expectations, modest though they were. But
the die was cast. There was no last straw, no flash of lightning, no thunder,' Allaire
says. Rick had clearly lost the confidence of me, the board, and his extended
management team. When that happens, you have to make a change.'
There seems little doubt that Thoman did lack feel for the human and political
realities of the Xerox family' he had only recently joined. And he shares responsibility
for the crippling strategic error of spending heavily to belatedly challenge HP at a time
when Xerox would have been better off husbanding its cash. On the other hand, digital
markets wait for no old-line company. It is likely that the pace of change that Thoman
tried to dictate was in fact the pace Xerox needed to play in the Digital Age. The lesson
of Xerox is that halfway measures dont work,' says a former executive. If you bring in
a change agent, then let him make change - or dont even start. Xerox probably will
survive. It might even return to solid profitability. But its hopes of becoming an import-
ant player in the office of the future probably have been dashed for good.

GLOSSARY
Acceptability is concerned with the expected performance outcomes of a strategy (p.
390)
Acquisition is where an organisation develops its resources and competences by taking
over another organisation (p. 375)
Balanced scorecards combine both qualitative and quantitative measures,
acknowledge the expectations of different stakeholders and relate an assessment of
performance to choice of strategy (p. 437)
Barriers to entry are factors that need to be overcome by new entrants if they are to
compete successfully (p. 113)
Best-in-class benchmarking compares an organisation's performance against best-in-
class' performance - wherever that is found (p. 174)
A business model describes the structure of product, service and information flow's
and the roles of the participating parties (p. 496)
Business unit strategy is about how to compete successfully in particular markets (p.
11)
A cash cow is a business unit with a high market share in a mature market (p. 285)
A change agent is the individual or group that effects strategic change in an
organisation (p. 549)
Coercion is the imposition of change or the issuing of edicts about change (p. 547)
Collaboration or participation in the change process is the involvement of those who
will be affected by strategic change in the identification of strategic issues, the setting
of the strategic agenda, the strategic decision-making process or the planning of
strategic change (p. 545)
Competitive rivals are organisations with similar products and services aimed at the
same customer group (p. 118)
Competitive strategy is the bases on which a business unit might achieve competitive
advantage in its market (p. 319)
An organisations configuration consists of the structures, processes, relationships and
boundaries through which the organisation operates (pp. 420, 455)
Consolidation is where organisations protect and strengthen their position in their
current markets with current products (p. 363)
Convergence is where previously separate industries begin to overlap in terms of
activities, technologies, products and customers (p. 110)
Core competences are activities or processes that critically underpin an organisation's
competitive advantage (p. 156)
Corporate-level strategy is concerned with the overall purpose and scope of an
organisation and how value will be added to the different parts (business units) of the
organisation (p. 11)
The levels of management above that of business units and therefore without direct
interaction with buyers and competitors are referred to as the corporate parent (p.
268)
Corporate social responsibility is concerned with the ways in which an organisation
exceeds the minimum obligations to stakeholders specified through regulation and
corporate governance (p. 220)
Cost efficiency is a measure of the level of resources needed to create a given level of
value (p. 166)
Critical success factors (CSFs) are those product features that are particularly valued by
a group of customers and. therefore, wrhere the organisation must excel to outperform
competition (p. 151)
The cultural web is a representation of the taken- for-granted assumptions, or
paradigm, of an organisation and the physical manifestations of organisational culture
(p. 230)
Data mining is about finding trends and connections in data in order to inform and
improve competitive performance (p. 493)
The design lens views strategy development as the deliberate positioning of the
organisation through a rational, analytic, structured and directive process (p. 41)
Devolution concerns the extent to which the centre of an organisation delegates
decision making to units and managers lower down in the hierarchy (p. 444)
A differentiation strategy seeks to provide products or services unique or different
from those of competitors in terms of dimensions widely valued by buyers (p. 322)
Diffusion is the extent and pace at which a market is likely to adopt new products (p.
515)
Direction involves the use of personal managerial authority to establish a clear future
strategy and how change will occur (p. 547)
The directional policy matrix positions SBUs according to (a) how attractive the
relevant market is in which they are operating, and (b) the competitive strength of the
SBC in that market (p. 288)
Direct supervision is the direct control of strategic decisions by one or a few
individuals (p. 433)
Diversification is typically defined as a strategy which takes the organisation away
from its current markets or products or competences (pp. 297, 373)
Dogs are business units with a low share in static or declining markets (p. 285)
A dominant strategy is one that outperforms all other strategies whatever rivals
choose (p. 342)
Education and communication involve the explanation of the reasons for and means
of strategic change (p. 545)
Effectiveness is the ability' to meet customer requirements on product features at a
given cost (p, 168)
In game theory', equilibrium is a situation where each competitor contrives to get the
best possible strategic solution for itself given the response from the other (p. 343)
The ethical stance is the extent to which an organisation will exceed its minimum
obligations to stakeholders and society at large (p. 216)
The experience lens views strategy development as the outcome of individual and
collective experience of individuals and taken-for-granted assumptions (p. 43)
Feasibility is concerned with whether an organisation has the resources and
competences to deliver a strategy' (p. 398)
In financial control the role of the centre is confined to setting financial targets,
allocating resources, appraising performance and intervening to avert or correct poor
performance (p. 448)
The five forces framework helps identify the sources of competition in an industry' or
sector (p. 112)
A focused differentiation strategy seeks to provide
high perceived value justifying a substantial price premium, usually to a selected
market segment (p. 328)
A forcefield analysis provides an initial view of change problems that need to be
tackled, by identifying forces for and against change (p. 544)
A functional structure is based on the primary activities that have to be undertaken by
an organisation such as production, finance and accounting, marketing, human
resources and information management (p. 422)
The governance framework describes whom the organisation is there to serve and
how the purposes anti priorities of the organisation should be decided (p. 195)
Hard human resource approaches are about how systems and procedures can he used
to acquire, utilise, develop and retain people (p. 479)
Historical comparison looks at the performance of an organisation in relation to
previous years in order to identify any significant changes (p. 172)
A holding company is an investment company consisting of shareholdings in a variety
of separate business operations (p. 426)
Horizontal integration is development into activities which are competitive with, or
complementary to, a company's present activities (p. 299)
A hybrid strategy seeks simultaneously to achieve differentiation and a price lower
than that of competitors (p. 326)
Hypercompetition occurs where the frequency, boldness and aggressiveness of
dynamic movements by competitors accelerate to create a condition of constant
disequilibrium and change (p. 122)
The ideas lens sees strategy as the emergence of order and innovation from the variety'
and diversity which exist in and around organisations (p. 50)
Individual experience is the mental (or cognitive) models people build over time to
help make sense of their situation (p. 44)
An industry is a group of firms producing the same principal product (p. 110)
Industry norms compare the performance of organisations in the same industry or
sector against a set of agreed performance indicators (p. 172)
Intended strategy is an expression of desired strategic direction deliberately
formulated or planned by managers (p. 75)
Internal development is where strategies are developed by building up an
organisation's own resource base and competences (p. 374)
Intervention is the co-ordination of and authority over processes of change by a
change agent who delegates elements of the change process (p. 546)
A joint development is where two or more organisations share resources and activities
to pursue a strategy (p. 378)
Key rigidities are activities that are deeply embedded and difficult to change and out of
line with the requirements of new strategies (p. 179)
Knowledge is awareness, consciousness or familiarity gained by experience or learning
(p. 150)
Leadership is the process of influencing an organisation (or group within an
organisational its efforts towards achieving an aim or goal (p. *&9)
A learning organisation is capable of continual regeneration from the variety of
knowledge, experience and skills of individuals within a culture which encourages
mutual questioning and challenge around a shared purpose or vision (pp. 72. 583)
Logical incrementalism is the deliberate development of strategy by learning through
doing' (p. 69)
A low price strategy seeks to achieve a lower price than competitors whilst trying to
maintain similar value of product or service to that offered by competitors (p. 322)
Market development is where existing products are offered in new markets (p. 370)
Market mechanisms involve some formalised system of contracting for resources (p.
438)
Market penetration is where an organisation gains market share (p. 367)
Market segmentation identifies similarities and differences between groups of
customers or users (p. 127)
A matrix structure is a combination of structures which could take the form of product
and geographical divisions or functional and divisional structures operating in
tandem (p. 427)
A mission statement is a generalised statement of the overriding purpose of an
organisation (p. 239)
A multidivisional structure is built up of separate divisions on the basis of products,
services or geographical areas (p, 425)
A 'no frills' strategy combines a low price, low perceived added value and a focus on a
price-sensitive market segment (p. 319)
Objectives are statements of specific outcomes that are to be achieved (p. 241)
A one-start shop deals with client enquiries by c/z- gnosing the clients needs and
referring them to the most appropriate provider (p. 454)
A one-stop shop is where a physical presence is created through which all client
enquiries are channelled (p. 453)
Operational strategies are concerned with how the component parts of an organisation
deliver effectively the corporate- and business-level strategies in terms of resources,
processes and people (p. 12)
Organisational culture is the basic assumptions and beliefs that are shared by
members of an organisation, that operate unconsciously and define in a basic taken-
for-granted fashion an organisation's view of itself and its environment' (p. 45)
An organisational field is a community of organisations that partake of a common
meaning system and whose participants interact more frequently with one another
than with those outside the field (pp. 126, 223)
Organisational fields are networks of related organisations which share common
assumptions, values and ways of doing things (p. 46)
A paradigm is the set of assumptions held relatively in common and taken for granted
in an organisation (p. 48)
The parental developer seeks to employ its own competences as a parent to add value
to its businesses (p. 280)
Performance targets relate to the outputs of an organisation (or part of an
organisation), such as product quality, prices, or its outcomes such as profit (p. 436)
The PESTEL framework categorises environmental influences into six main types:
political, economic, social, technological, environmental and legal (p. 102)
Planning and control is where the successful implementation of strategies is achieved
through systems that plan and control the allocation of resources and monitor their
utilisation (p. 433)
The political view of strategy development is, that strategies develop as the outcome of
processes of bargaining and negotiation amongst powerful internal or external interest
groups (or stakeholders) (p. 66)
A portfolio manager is a corporate parent acting as an agent on behalf of financial
markets and shareholders (p. 275)
Power is the ability of individuals or groups to persuade, induce or coerce others into
following certain courses of action (p. 212)
Primary activities are directly concerned with the creation or delivery of a product or
service (p. 160)
Product development is where organisations deliver modified or new products to
existing markets (p. 368)
A project-based structure is one where teams are created, undertake the work and are
then dissolved (p. 431)
Punctuated equilibrium is the tendency of strategies to develop incrementally with
periodic transformational change (p. 77)
A question mark (or problem child) is a business unit in a growing market, but without
a high market share (p. 285)
Realised strategy is the strategy actually being followed by an organisation in practice
(p. 75)
A recipe is a set of assumptions held in common within an organisational field about
organisational purposes and a shared wisdom' on how to manage organisations (p.
225)
Reinforcing cycles are created by the dynamic interaction between the various factors
of environment, configuration and elements of strategy; they tend to preserve the
status quo (p. 462)
Related diversification is strategy development beyond current products and markets,
but within the value system or 'industry' in which the company operates (p. 297)
Rents result from an organisation having resources or capabilities which permit it to
produce at lower cost or generate a superior product or service at standard cost, in
relation to firms with inferior resources and capabilities (p. 315)
Restructures are adept at identifying restructuring opportunities in businesses (p. 277)
Routines are the organisationally specific wavs we do things around here which tend
to persist over time and guide people's behaviour (p. 554)
Processes of self-control achieve the integration of knowledge and co-ordination of
activities by the direct interaction of individuals without supervision (p. 442)
A scenario is a detailed and plausible view of how the business environment of an
organisation might develop in the future based on groupings of key environmental
intluences and drivers of change about which there is a high level of uncertainty (p.
107)
In a service network the client may access all of the services of the network through
any of the constituent members of the network (p. 455)
In a simple structure the organisation is run by the personal control of an individual
(p. 422)
Social processes are concerned with organisational culture and the standardisation of
norms (p. 440)
Soft human resource approaches are concerned with peoplelttbehaviour, both
individually and collectively (p. 479)
Stakeholder mapping identifies stakeholder expectations anti power and helps in
understanding political priorities (p. 208)
Stakeholders are those individuals or groups who depend on the organisation to fulfil
their own goals and on whom, in turn, the organisation depends (p. 206)
A star is a business unit which has a high market share in a growing market (p. 285)
A strategic business unit is a part of an organisation for which there is a distinct
external market for goods or services that is different from another SBU (p. 11)
Strategic choices involve understanding the underlying bases for future strategy at
both the corporate and business unit levels and the options for developing strategy in
terms of both the directions and methods of development (p. 19)
Strategic control is concerned with shaping the behaviour in business units and with
shaping the context within which managers are operating (p. 448)
Strategic drift occurs when the organisation's strategy gradually moves away from
relevance to the forces at work in its environment (p. 81)
Strategic fit is developing strategy by identifying opportunities in the business
environment and adapting resources and competences so as to take advantage of
these (p. 5)
Strategic groups arc organisations within an industry with similar strategic,
characteristic, following similar strategies or competing on similar bases (p. 122)
Strategic intent is the desired future state or aspiration of an organisation (p. 239)
A strategic leader is an individual upon whom strategy development and change are
seen to be dependent (p. 65)
Strategic management includes understanding the strategic position of an
organisation, strategic into choices for the future and turning strategy into action (p.
16)
In a strategic planning style, the relationship between the centre and the business
units is one of a parent who is the master planner prescribing detailed roles for
departments and business units (p. 446)
The strategic position is concerned with the impact on strategy of the external
environment, internal resources and competences, and the expectations and influence of
stakeholders (p. 16)
Strategy into action is concerned with ensuring that strategies are working in
practice (p, 21)
Strategy is the direction and scope of an organisation over the long term, which
achieves advantage for the organisation through its configuration of resources within a
changing environment and to fulfil stakeholder expectations (p. 10)
Stretch is the leverage of the resources and competences of an organisation to
provide competitive advantage and/or yield new opportunities (p. 8)
Structural drivers of change are forces likely to affect the structure of an industry,
sector or market (p. 103)
Substitution reduces demand for a particular class' of products as customers switch
to the alternatives (p. 115)
Suitability is concerned with whether a strategy addresses the circumstances in
which an organisation is operating - the strategic position (p. 384)
Support activities help to improve the effectiveness or efficiency of primary activities
(p. 161)
A SWOT analysis summarises the key issues from the business environment and the
strategic capability of an organisation that are most likely to impact on strategy
development (pp. 134, 184)
Symbols are objects, events, acts or people which express more than their intrinsic
content (p. 555)
Synergy can occur in situations where two or more activities or processes complement
each other, to the extent that their combined effect is greater than the sum of the parts
(p. 278)
A team-based structure attempts to combine both horizontal and vertical co-
ordination through structuring people into cross-functional teams (p. 429)
A transnational corporation combines the local responsiveness of the international
subsidiary with the advantages available from co-ordination found in global product
companies (p. 460)
Unique resources are those resources which critically underpin competitive advantage
(p. 154)
Unrelated diversification is an organisation moving
beyond its current value system or industry (p. 302)
The value chain describes the activities within and around an organisation which
together create a product or service (p. 160)
A value network is a value system where the inter- organisational relationships are
more fluid (p. 165)
The value system is the set of inter-organisational links and relationships which are
necessary to create a product or service (p. 161)
Vertical integration describes either backward or forward integration into adjacent
activities in the value system (p. 298)
Virtual organisations are held together not through formal structure and physical
proximity of people, but by partnership, collaboration and networking (p- 452)

INDEX OF COMPANIES AND ORGANISATION


3M 282, 415
AA see Automobile Association Abbey National 307 About.com 281 Aldi 322
Amazon 114, 509
Ananova 54
Anheuser-Busch 138
AOL/Time Warner 3-12, 17-22, 23-4, 26, 27, 110, 373
ARM Holdings 485
Aroma 364
ASDA 372
Asea Brown Boveri 461
ASO68
AT&T 445
Atlantic 509
Automobile Association 171, 299, 302
Bass 140, 143
BAT 290-91
BBC 117, 469-73
Best Western 455
BMW 25, 330
Body Shop 133
Boots 372, 395
Boston Chicken 364
Bradford and Bingley 204 Brasseries Kronenbourg/Aiken Maes
140, 143
Brau & Brunnen 140
British Airways 12, 14-15, 323 British Coal Enterprise 567 British Rail 226-7, 450
British Telecom 62, 203, 273, 274,
444, 445, 509 BSA90
BSkyB 248-9, 250
BT Openworld 445
BT Wireless 445
Cadbury-Schweppes 395, 506 Canon 167, 178, 181, 282 Carlsberg 140, 370 Carphone
Warehouse 116 Cclltech 520 Chelsea Girl LLC 357 Chipotle Mexican Grill 364
Chiroscicnce 520
Churchill Pottery 387
Coca-Cola 381, 395
Colt 274
Concert 445
Coral 251
Daimler-Chrysler 182
Daler-Rowney 541
Danone 140, 143
Debonair 323, 335
Del) Computers 114
Deutsche Telecom 274
Diageo 140
Digital Animations Group 54
Dolby 338
Dolla 344-5
Donatos Pizza 364
Dorling Kindersley 111
Dunsmore Chemical Company 396-7
Eagle Star 290-91
easyjet 258, 323, 334, 335 Electrolux Home Products Europe
424
Energis 274
English Welsh and Scottish Railway 227
Ericsson 50, 116
Fiat 129
Financial Times Group 111 Ford 122, 169, 182, 300, 370 Fosters Brewing 140 France
Telecom 274
GEC 276-7, 278
General Electric 58, 181
General Motors 27, 169, 182, 370 General Motors (Europe) 300 Granada 197
Grand Metropolitan 143
Guinness 370
Halifax 204
Hanson 278
Harley Davidson 90, 129
Heineken 140, 142, 370
Hertz 300
Hewlett Packard 178, 482
Higher Education Funding Council 277
Honda 90-92, 129, 181
Hoover 114
IBM 337
ICI 11
IC1 Paints 11
Ignite 274, 445
IKEA 328, 329
Innova 344 -5
Intel 77, 337, 339, 352
Interbrew 140, 143
Jaguar 25, 321
Kasper Instruments 80
Kelda 204
Kellogg s 114, 333
Kcntex pic 399
Kindercare 253
Kingston Communications 509 KLM 323 Kraft 181 KwikFit 300
Lachema 188
Laker Air 258
Lexus 321, 328, 330
Lineo 36
Lloyds TSB 307, 395
Lonely Planet 405 - 8
Lonmin 279
Lonrho 278, 279
Lufthansa 395
Macys 357
Madonna 357-9
Manchester United pic 247-52 Marks and Spencer 48-9 Mars 333
Matalan 322
Maverick 357-9
Mazda 169
McDonald's 103. 208, 334, 364, 381, 447
MCI Communications 274 Media Partners 248, 249 Mercedes 25, 321, 330 Mercury
Asset Management 197
Metropolitan Police 559 Microsoft 35-6, 114, 337, 339, 357,
408, 514 Morgan Cars 122 Moto-Guzzi 90 Motorola 116
National Computer Systems 111 National Health Service 117, 202,
232-3, 236, 571-5 National Westminster Bank 307-8 Nationwide Building Society 204
Netscape 35-6
Netto 322
News Corporation 339
News International 248 NHS Direct 527-31 Nissan 183, 370 Nokia 116 Norton 90
NXT 338
OpenTV 36
Opera 36
Orange 54
Ordnance Survey 154-6 Oticon 556
Pearson 111
Penguin Group 111
Peugeot 169, 370
Pfizer 188
Pharmacia 520
Pilkington 106, 462
Pliva 188-91
Plixo 36
Polfa Krakow 188
Post Office 448
Premier Soccer League 153 Pret a Manger 364 Primedia 281 Proctor and Gamble 358
QNX 36
Railtrack 450-51
Redstone Telecom 509
Renault 182-3
Reuters 114, 395
RF hotels 197
Rockwater 439
Rosenbluth International 549 Royal Bank of Scotland 307-8 Royal Grolsch NV 142
Ryanair 323, 335
Saab Training Systems 430 Safeway 372 Saga 129
Scottish and Newcastle 140, 143 Sheffield City Council Social Services
Department 240 Shell 109, 282 Simon & Schuster 111 Skoda 129 Sky 339 Solectron
163 Sonoco Products Co. 435 Sony 50 SPAR 349 Standard Life 204 Standard
Photographic 303 Starbucks 133. 364 Stella Artois 140
Strategic Rail Authority' 451 Sun Microsystems 35
Tallman GmbH 210-11
Tata Tea 281
Telstra 395
Tetley Group 281
Time Warner see AOL/Time Warner Tomkins 278 Toyota 27, 182, 321,370 Triumph 90,
129
Unilever 282, 294-5, 297, 301
VHS 337
Virgin Group 171, 259, 311-14 Vodafone 116, 251, 274 Volkswagen 129, 182 Volvo
182, 429
Wal-Mart 371, 372, 406, 541 Warner Bros 357, 359 WH Smith 541 Whitbred 140
Wholesale 274 Wireless 274
Wisconsin Central International Inc 227
World Wide Web Consortium 36 WorldCom 274
Xerox 167, 178
Yahoo 218, 497, 509
Yankees 251
Yell 274, 445

GENERAL INDEX
acceptability 20, 29, 384, 389-98 access to resources 153 accountability 194
acquisitions 203, 363
corporate governance 295 corporate turnaround 369 cultural lit 377 expectations 375-7
financial consequences 377-8 hostile 306-8 integration after 375 meaning 375
methods of development 375-8, 385
motives for 375-7, 510 problems with 377 suitability 389 synergy 281 for tecltnology
519
action, strategy into see strategy into action
activities
combination of 159
competences 149
integration 465
matching to environment 5
political 75
primary 160
scope of 5
shared 278
support 161
value 160
adaptation 24, 537, 583
adaptive development 43, 536 adaptive tension 53. 59-60 added-value strategics 322-6
adhocracies 457 advantage
competitive see competitive advantage
through innovation 513 through tecltnology 522
advertising, digital marketing 494 advocacy for change 558 agencies, strategic planning
446 agents for change see change:
agents
air travel 323, 335
alien businesses 291
alliances
change, overcoming resistance to 561
technology development 518-19 see Zso strategic alliances
ambiguity, causal see causal ambiguity analyser organisations 237 analyses 16
of acceptability 389-98 of feasibility 398-400 of influences 40
aspirations 239
assessment of performance 480 assets
alliances 382 intangible 337 investment in 503 management 382 turnover 365-7
assimilation of cultures after mergers 377
attractiveness matrix 288-90 authorisation 412 authority 454
automobile industry 169. 300. 321. 326. 328
availability of resources 149, 152-3 awareness of strategic issues 411
backward integration 298 balance 118, 286-7, 332, 370 balanced scorecards 437-8, 439
ballast businesses 291 bankers 199-200, 511 banking 154
bargaining 434, 440, 504
barriers
building, hypercompetition 348-50
entry see entry exit 118 mobility 125
BCG box 284-6
behaviour business units 448 change agents 558 patterns 56 people 479
beliefs 228-9
benchmarking 156, 171-2 best-in-class 174 historical comparison 172 industry norms
172 internal 460
Best Value Initiative 201, 511 bias and experience 44-5 biotechnology industry 520
blockers 209. 566
boards, corporate governance role of 198-9
boundaries 421, 443-4, 449-50 networks 452-5 outsourcing 450-1 strategic alliances
452 virtual organisations 452 see also relationships
boundary rules 57
brands 367, 494
brewing industry 138-43 budgets 433
bureaucracies 272, 457. 498 bureaucratic control 420 business environment see
environment business ethics see ethics business failure 148, 150 business idea 94-5,
107
complexity 253-62 reinforcing cycles 462 strategic directions 363
business-level competition 20 business-level strategy 315-18
competition and collaboration
339-41
competitive advantage see competitive advantage
forces influencing 318-19 game theory' see game theory hypercompetition see
hypercompetition business models, changing 496-8 business policies 22
business unit strategy 11
buyer-seller collaboration 430 buyers
chains of 133
power of 117-18, 499, 504,
514
buying power, collaboration to increase 340
Cadbury Committee 205-6 capability 540
see also strategic capability capacity-fin |67 capacity for change 540 CAPEX (capital
expenditure) 504 capital
expenditure (CAPEX) 504 intellectual 153, 155-6 intensity 504
markets, environmental influences l(M)
requirements of entry 114 return on capital employed 390,
391
sources 504
working capital 167, 504 car industry see automobile industry cash cows 285-6, 507-8
causal ambiguity 175, 178-9. 336-7.
495
caveat emptor 201
centralisation 421, 432. 444-9 chains of buyers 133 chains of governance 195-8
challenge, rites of 55 challenging received wisdom 61 change 10, 21-2
agents 486, 534, 549, 558 big bang approach 536 environmental 79 incremental 43, 78-
9, 536 operational 534 power of effecting 540 relayers, middle managers as 487
resistance to see resistance to
change
speed of 53. 97. 420 structural drivers 103-5 technological 80 transformational 78, 82,
536
see also strategic change changing environment 52 channels 441 chaos, edge of 59
character-based trust 383 charismatic leaders 548. 550 Citizen's Charter Initiative 201
clarity of strategy 533-4 clients see customers clues 231
co-determination 198
co-operation 53, 453
co-ordination 6.3, 272, 423, 432 co-production 118. 340, 381 co-specialisation 337, 378
coaches, middle managers as 487 coaching 272
coercion, change management 546, 547
cohesiveness, culture 2.38 collaboration
business-level strategy 339-41 change management 545-6, 547 corporate parents 272
platforms 497-8
collective experience 45-9 combination 18, 159, 180, 181 command and control
systems 451 communicating purposes 238-42 communication 63. 545, 546, 562-5
communities of interest 55 eompatibility
alliances 383 technology 515
competences 40 activities 149 alliances 382
barriers based on exploitation of 350
case study 188-91 competitive advantage and 154.
324
culture, lodged in 258
development 371-3
development directions 362
diversification 373
embedded in culture 175, 179, 337
importance 93
inadequate 150
linkages 159-65
new 304. 369
of parents 282
processes 149
product development 368-9 rare 495
redundant 148, 150
robustness 156-7, 165
strategic capability 147-50, 156-65
strategic position and 18-19
synergy 278
threshold 148, 149, 152
trust based on 383
uncertainty 178
see also core competences
competition
barriers see barriers at business level 20 business-level strategy 339-41 corporate-level
306-8 critical success factors 152 cycles of 120-22 dynamics 120-22 environmental
influences 101 global 105, 106, 169 hypercompetition see
hypercompetition public sector 29 sources 112-20
competitive advantage 5. 20 competences and 154 core competences 152
differentiation 320, 322-6
versus legitimacy 331-2 failure strategies 320, 330-31 focused differentiation 320, 326,
328-30
hybrid strategies 320. 326-8. 329, 351
hvpercompctition see hypercompetition
knowledge 167 linkages, managing 177 low price strategy 320, 322 no frills strategy
319-22 through people 489-90 price-based strategies 319-22 resources and 154 service,
increasing importance
168-9
similarity of strategies 331-2 strategy clock 319-31 sustainability 315-16. 332-9
traditional bases, overcoming
347-50
competitive bidding 438 competitive performance,
information management 493 competitive power, collaboration to
gain 340
competitive rivalry 118, 499, 515 competitive situation, technology
513-15
competitive strategies 14. 316. 319. 346-53. 495-6
competitiveness 188-91 competitors 148. 171-4, 371 complementarity 455
complementary product and service
offerings 133 complexity
business idea 253-62 business models 496 core competences 495 creativity 52 design
254-5 diversity, importance 51 dynamism 84
complexity (.continued') environment 97 experience 256-8 ideas 258-60 imitation
difficulties 336 innovation 52, 56, 59-60 learning to cope with 84 limits of 305
rationality 40 robustness 177-8 strategic decisions 10 strategic leadership 66 strategic
management in conditions
of 82-4
strategy development 39 technology 515 variety, importance 51
compliance 241, 560
compromise 67
conceptualisation 16
confidentiality 205
configurations 420, 455-6 globalisation and 458-62 reinforcing cycles 462-3
stereotypes 456-8 strategy development 74
conflicts 427 of expectations 207-8 of interest 195-8, 205 reduction, rites of 557
conglomerates 427, 508
consensus 52
consistency, internal 386
consolidation 363-7, 385
consortia 380-1
consultants, strategic change 553 consumer protection 201 contexts 39, 448
human resources management 478-9
shaping 441
strategic change 534, 5.36,
537-43
of strategic management see strategic management
contingent configurations 455 continuity 78 control 13. 61
bureaucratic 420 change management 550 corporate strategy 269. 306 costs 505
distributors 504 financial see financial control mechanisms 577 mechanistic 420
operational 15
suppliers 504
systems 233. 234, 235. 433-6. 554, 577
top-down 420
value creation 505
see also strategic control
convergence, markets 103, 106, 110 copying, imperfect 582 core competences 13, 18
change over time 170 competitive advantage 152 complexity 495 embedded 495
innovation 152 knowledge as 151 meaning 149, 156-9 networks 455
opportunities, exploiting and creating 149-50
robustness 174-81, 495 strategic capability 148, 156-65 technology' 516-18
corporate control 269, 306 corporate diversity 269, 297
performance, diversification and 304-6
related diversification 297-302,
304, 305
unrelated diversification 302-4,
305
corporate governance 18, 193-4 boards, role of 198-9 clients, relationships with 201
creditors' rights 199-200 customers, relationships with
201
disclosure of information 205-6 governance chains 195-8 governance framework 195
information disclosure 205-6 lenders' rights 199-200 mergers 205 ownership forms
201-5 shareholders 198-9 take-overs 205
corporate-level competition 306-8 corporate-level strategy 11,19 corporate managers
460 corporate parents 268, 270-73 corporate planning 22 corporate portfolios 269, 283-
4
directional policy matrix 288-90 growth share matrix 284-6 management trends 296-7
parenting matrix 290-93 public sector, balance in 286-" relatedness matrix 293-6
corporate rationale 269, 273-5 parental developers 276, 280-3 portfolio managers 275-8
restructurers 276, 277-8 syneigy managers 276, 278-80
corporate social responsibility 194, 216. 220, 221
corporate strategy 4, 267-9 competition 306-8 control 306 diversity 297-306 parents
270-73 portfolios 283-97 rationale 273-83
corporate turnaround 369 cost-benefit 389, 392, 393 cost drivers 166, 503-5 cost
efficiency 166-8 cost leadership 332-4 costs
advantages 103, 106, 167-8 control 505 country-specific 103 decline 168 financing 503
fixed 118
product development 105 reduced 504 social 511 structures 504 sunk 176 supply 166-7
switching 337 unit 168, 505
counter-challenge, rites of 557 country-specific costs 10.4 creation of knowledge 179-
81,420 creation of new markets 302 creativity 52
creditors' rights 199-200
crisis 565-6
critical mass, alliances 378
critical success factors (CSF) 131, 157
change over time 170 definition 148
parents and business units 290 product development 369 strategic capability 147, 151-2
uncertainty 1~8 uniqueness 169 value 170-71
cross-channel mergers 224 cross-cutting teams 429 cross-pollination 460 CSF see
critical success factors cultural dimensions 64 culturnal fit 377
cultural forces blocking or facilitating strategic change 534, 536
cultural frames of reference 46, 222 cultural framework 19 cultural influences 19
cultural processes 75, 411 -13, 440-1 cultural webs 195, 230-36, 534,
540-43
cultures 194-5, 221-2 assimilation after mergers 377 characterising 236-8 cohesiveness
238 competences embedded in 175,
179, 258
context 194-5, 221-38, 481-4 cultural webs see cultural webs functional and divisional
229 graphic descriptors 236 hybrid after mergers 377 mergers 377
national 195, 223, 224 organisational fields 223-8 personal cultures 237-8 power
cultures 237-8 regional 223
robustness 179 role cultures 237-8 separate after mergers 377 sub-national 223
subcultures 195, 229 supranational 223 task cultures 237-8 see also organisational
cultures
current position, protecting and building on 363-8
customerisation 494
customers 212 change of emphasis 369 global 103, 371 identification 324-6
relationships with 201 sharing work with, collaboration in
340-41
as stakeholders 511
value 99. 130-32, 147, 150, 324
customisation 494, 496
cycles of competition 120-22
data mining 368-9, 493
DCF (discounted cash flow) 390, 391
de-layering 566-7
de-mergers 205
de-mutualisation 204, 205
debate 412
debtor reduction 505
decision-making 427
decision trees 386, 388
decline of costs 168
deep pockets 349
defender organisation 236-7 degradation, rites of 557 degrees of improvement 515 delta
model 337-9 demand-side models 515-16 demographics, environmental
influences 100 deregulation 205, 376 design 22
organisational 84 process 167 products 167 strategy as 23. 39-43, 60 structural 421 see
also design lens
design lens 24, 28. 38 complexity' 254-5 imposed strategy 73 logical incrementalism 71
organisational politics 66-7 strategic action 577-8 strategic leadership 65 strategic
planning systems 63-4 strategy development and 39-43.
60
strategy selection 409-10 developing solutions 412 development
competences 371-3 directions 362 internal 374-5. 385 technology see technology see
also strategic developments;
strategy development devolution 421,444-9 differential impact of environmental
influences 105-7
differentiation 115, 118, 320, 322-6 advantages, hypercompetition 347 competitive
advantage based on
336-7
focused 320, 326, 328-30 hypercompetition 347, 350 sustainable 336 versus legitimacy
331-2
diffusion of innovation 515-16. 517 digital marketing 494 dilemmas, organisational
464-5 direct-line selling 170 direct supervision, processes 433, 458 directional policy
matrix 288-90 directions 3. 317
change management 546, 547 of development see strategy
development

long-term direction 3, 4 strategic choices and 20


directors 198-9. 206
disclosure of information, corporate governance 205-6
discontinuities 112
discounted cash flow (DCF) 390. 391 discussion 412 distractions 296 distribution
channels 114, 349 distributors 504
diversification 297, 301-6, 373, 385 diversity 51. 59. 83, 97, 423, 538
see also corporate diversity divisional cultures 229 divisionalisation 425. 457 dogs 285-
6, 507, 508 dominant strategies, game theory
342-3, 344-5
dominated strategies, game theory 343, 344, 345
downsizing 365
drivers of globalisation 104
dualities 46-1
dynamic conditions 83, 84
dynamic environments 39
dynamic interaction 462
dynamics, competition 120-22
dynamism, complexity 84
e-auctions 497
e-banking 154
e-businesses, diversification into 301,
303
e-commerce 178 applications 170 models 496-8 relationships 165 strategy selection
410-11
e-mails 497
e-procurement 496-7
e-shops 496
ecology, environmental influences 101
economic environment 98
economic factors 102
Economic Profit (EP) 154, 315, 395 economies of scale 103, 114, 166,
349
economy, environmental influences 101
edge of chaos 59
edicts, change management 546, 547 education, change management 545,
546
effectiveness 168-9
efficiency 103, 271
electronic point of sale (EPOS) 434 elites 560, 561
embeddedness 175, 257-8, 337, 495 emergent configurations 455 emergent strategy 24,
75, 77 employees' liquidity concerns 511 enabling success 21, 475-7
integrating resources 522-3 managing finance 501-12 managing information 490-501
managing people 477-90 managing technology 512-22
enhancement, rites of 555, 557 Enterprise Resource Planning (ERP)
340, 434, 435, 450, 522 entrepreneurial processes 38 entry
barriers 113-15 collaboration to build 340 hypercompetition 350-51 IT 499
technology 513-14 collaboration to gain 340 overseas, alliances 382 threat 113-15
environment 39, 40, 97-9 alliances 381-2 changes 79, 373. 375-6 changing 52
industries and sectors 110-12 dynamics of competition 120-22 hypercompetition 122
sources of competition 112-20 strategic groups 122-6
internal development 374-5 macro
differential impact of environmental influences 105-7
PESTEL framework 99-103 scenarios 107-10 structural drivers of change
103-5
markets 127-32
matching resources and activities to 5
motives based on 362 opportunities and threats
chains of buyers 133 complementary product and
service offerings 133 new market segments 133 strategic gaps 132-4 strategic groups
132-3 substitute industries 132 SWOT 134
time 134
organisational fields 126-7 scanning 521
sectors see industries and sectors above
strategic position and 16, 19 threats see opportunities and
threats above unpredictable 52
environmental environment 98 environmental influences 102, 105-7 EP (Economic
Profit) 154, 315, 395 EPOS (electronic point of sale) 434 equilibrium 78, 343, 345
equity/debt ratios 199-200 ERP see Enterprise Resource Planning ethics 19, 194
corporate social responsibility see corporate social responsibility
ethical stance 216-20 individual level 216, 220-21 macro level 215-16 managers' roles
220-21 stakeholder mapping 209-10
European brewing industry 138-43 evidence 22-3 evolution 53. 583
alliances 383 diversity, importance 51 ideas generation 51 innovation 56, 59-60
strategic leadership 66 strategy selection and 414 -15 variety, importance 51
exemplars 256
exit barriers 118
exit rules 57
expectations 9, 18, 193-5 acquisitions 375, 376-7 alliances 382-3 corporate governance
see
corporate governance cultural context see culture development directions 362
diversification 373 ethics see ethics motives based on 362 new markets 373 product
development 369 stakeholders see stakeholders
experience 23 barriers to entry 114 bias and 44-5 change management 540 collective
45-9 cost advantage 167-8 curve 167, 332-3 dependency on 75
diversity 538 individual 44
information, making sense of 411 overlooking 64 sharing 180
strategic competence based on 84 strategy as 24, 43-9. 60 see also experience lens
experience lens 25. 38 complexity 256-8 imposed strategy 73 logical incrementalism
71 organisational culture 256 organisational politics 67 strategic action 578-80 strategic
leadership 66 strategic planning systems 63, 64 strategy development and 43-9, 60
strategy selection 410-14
experimentation 72, 515, 580 expertise 271, 550 explicit knowledge 179-80
exploitation 299. 302 exploiting information 495 exports 105 external images 2~2
external networks 272 extemalisation 180. 181
facilitators 209
failure strategies 320. 330-31 far-ranging implications 3 feasibility 20, 384. 398-400
feedback 55, 565, 577 feel 290
fight for survival 56
financial consequences of acquisitions 377-8
financial control 44~-8. 457. 459. -)98 financial feasibility 398-400 financial
management 501-12 financial ratios 389, 396 financial resources 153 financing costs
503 first-mover advantage 347-8 fit 5, 8, 93, 145, 147
cultural 377
parents and business units 290-91 public sector 293 technology development 521
five forces framework 99. 112-20, 499, 513-15
fixed costs 118
flat screen loudspeakers 338 flux 78. 580
focused differentiation 320, 326, 328-30
forcefield analyses 544-5
formal expectations 194
forward integration 298-9 franchising 381 functional cultures 229 functional structures
422-4 funds flow forecasting 398-400 future impact of environmental
factors 102
game theory 341, 347, 398, 410 changing rules 346 dominant strategies 342-3, 344-5
dominated strategies 343, 344,
345
equilibrium 343, 345 repeated games 343-6 sequential games 343, 345 simultaneous
games 341-3, 344-5
gate-keepers 487, 500
gearing 271, 508, 511
general managers' tasks 22 generic competitive strategies 316 generic substitution 117
geographical spread 370-71 global balance 370
global competition 105, 106, 169
global customers 103, 371
global operations, cost advantages of
103, 106
global organisations see multinational corporations
globalisation 103-7, 370-71, 421. 458-62
globally strategic markets 370-71 goals 13, 14, 383, 480 gossip 565 governance
chains 195-8, 510-11 framework 195
see also corporate governance governments
agencies 29 competition action 115 environmental influences 100 globalisation,
policies driving 105 imposed strategy 73 trade policies 105
graphic descriptors, culture 236 Greenbury Report 206 grocery retailing 152 growth
168
rates, markets 118 share matrix 284-6
guardians of performance and
reputation, middle managers as 487
Hampel Committee 196
healthcare 173, 202, 232-3, 571-5 heartland businesses 291, 296 hierarchies 40, 52,
195-8, 273, 465 historical comparison, benchmarking
172
holding company structures 426-7 home markets of global customers
371
horizontal integration 299 host governments 105 how-to rules 57 HR see human
resources human assets approach to change
management 550 human resources 153
advisory role 486 change agents 486 function 484-6 management 161, 477-8
competitive advantage through people 489-90
context, importance of 478-9 cultural context, people as
481-4
hard approach 479-80 middle managers 486-7 organising people 484-9 people as a
resource 480-81 performance management 480 political context, people as
481-4
processes 488-9 recruitment 480-81 relationships 488-9 roles 487-8
soft approach 479-80, 483-4 structures 487-8
service providers 486 hybrid competitive strategies .320,
326-8, 329, 351
hybrid cultures after mergers 377 hybrid hypercompetitive strategies
353
hypercompetition 99, 122, 147, 177, 318
competitive strategy 346-53
Icarus Paradox 82
ideas 23
generation of 51-3 instigators 487 managing by 54 new, taking root 53-6 stifling 64
strategy as 24, 50-60 see also ideas lens
ideas lens 25, 28, 38 complexity 258-60 imposed strategy 73 learning organisations
582-3 logical incrementalism 71 organisational politics 69 strategic leadership 66
strategic planning systems 63, 64-5 strategy development and 50-60 strategy selection
414-15
identification of customers 324-6 ideology 30, 219
imitation 174-5, 259, 326, 331-2, 336-7
*r
r

imperfect copying 582


imperfect mobility 337
imports 105
imposed strategy 39, 73, 75 improvement, degrees of 515 in-house development of
technology
518
inadequate competences 150 inadequate resources 148, 149 inbound logistics 160
incremental changes 43, 78-9, 536 incrementalism, logical see logical
incrementalism independence, networks 453 indicators of power 213 individual
experience 44 individual level ethics 216, 220-21 industries, environment see
environment
industry norms, benchmarking 172 industry recipes 46 industry standards 337-9
inertia 67, 80, 534, 579-80 influences, analyses of 40 informality 72 information
brokerage 497
disclosure, corporate governance
205-6
experience, making sense through
411
exploiting 495
gate-keepers, middle managers as
487
gathering 411 management 490-91
business models, changing
496-8
competitive performance 493 competitive strategy 495-6 managers, implications for
500-1 product features 492-3 robustness 495
information
management (conHnued ) service features 492-3 strategic capability 492-6 structuring
498-500
overload 64 strategy and 491
information intensive innovation 512 infrastructure 161 initial support 55 innovation
414-15
business models 496 complexity 52, 56, 59-60. 259-60 core competences 152 corporate
parents 272 dampening capacity for 64 diffusion of 515-16, 517 evolution 56, 59-60
information-intensive 512 knowledge creation and 181 scale-intensive 512 science-
based 512 strategic advantage through 513 strategic capability 147 strategies 56-8
technological 512-13, 515-16, 517 transnational corporations 460
innovatory organisations 28 input targets, resources 436 instigators of ideas, middle
managers
as 487
institutional norms 47
institutionalisation 46, 413-14 instrumental leaders 550 intangible assets 337 integrated
approach 10 integrating resources 522-3 integration 179-81. 298-9, 440, 465,
555-7 integrity' 220
intellectual capital 153. 155-6 intellectual exercise, strategic
planning as 63
intended strategy 39, 64, 75-7 intentions 239 interaction 53
interdepartmental liaison roles 432 interdependence 105 interest, conflicts of 195-8,
205 intermediaries, middle managers as
487
intermediate structures 431-2 internal consistency 386 internal development 374-5, 385
internal markets 438-40 internal transfers between units 440 internalisation 180, 181
Internet
banking 154 regulation 218
intervention 272, 546-7, 565 intrinsic value 365 intuitive capacity 52 investment
in assets 503 corporate parents 271
involvement 564-5
issue formulation 411
IT
five forces framework 499 information management see
information: management laggards 496
job losses 566-7
joined-up government 572-6 joint developments 378-83, 385 joint ventures 380-81
key players 209
key rigidities 179
key value and cost drivers 503-5 know-how 19. 162-5
see also competences: core competences
knowledge 147 base, complexity of 177-8 competitive advantage 167 as core
competence 151 creation 179-81, 420 explicit 179-80 importance 150-51 integration
179-81, 440, 465 management 147, 151, 188-91 one-start shops 454 organisational
162-5, 179 perfect 256
rare, dissemination of 176 resources, links with 150 sharing 420
tacit 179-80 knowledge workers 485
labour markets, environmental influences 101
labour productivity' 167
language used by change agents 558 LEA (Local Education Authorities) 273 leadership
see strategic leadership learning 75-6, 84, 272, 378 learning organisations 39, 71-2, 83,
537, 582-3 legal environment 98 legal influences 102
legitimacy 225-8, 331-2
lenders' rights 199-200
lenses 21-5, 37-8 see also design lens; experience
lens; ideas lens leverage 271, 508, 511 levers for change management see
strategic change licensing 381 life cycles 99, 119 lifestyle niche' marketing 169 line
managers see middle managers linkages 159-65, 177 liquidity 396. 511 lobbying 209
Local Education Authorities (LEA)
273
lock in 337-9
logic 577
logical incrementalism 38, 69-71, 74,
75-6, 410-11, 415 long-term direction 3, 4 long-term view of strategy 61 loudspeakers,
flat screen 338 low price competitive advantage
332-6
low price competitive strategy 320,
322
machine bureaucracies 457 macro environment see environment macro level ethics
215-16 manageability 296
management buyouts (MBO) 203 Management Charter Initiative (MCI)
42
management trends, corporate
portfolios 296-7
managers ambition 273 ethics roles 220-21 information management
implications for 500-1 middle see middle managers power 199
managing by ideas 54
managing for value (MFV) 394-5,
502-5, 506
manufacturing organisations 27-8 market-based strategic moves 347-8 market coverage
362
market development 370-73, 385 market growth 118, 284-6 market mechanisms,
processes
438-40
market penetration 363, 367-8, 385,
389
market research 494
market share
gaining see market penetration global markets 370 growth share matrix 284-6
maintenance 365 relative 168. 332-3
market strategists 460
market testing 205
marketing 160 competitive advantage 324 digital 494
expenditure 367 'lifestyle niche' 169 transference 103
markets 127 access 169
capital, environmental influences 100
convergence 103. 106. 110 customer value 130-32 entry see entry globally strategic
370-71 internal 438-40 labour 101
new 170-1. 302. 348. 350. 3"3 segmentation 99. 127-30. 133. 330.
370
static 368
see also entries beginning with market
mass customisation 496
master planners 446
matching
resources and activities to environment 5. 40
of strategy and dominant culture 238
matrix structures 427-9
MBO (management buyouts) 20.3 MCI (Management Charter Initiative)
42
mechanistic control 420
media for communicating change 564
mentors, middle managers as 487 mergers 3. 224
corporate governance 205 cultural lit 377
methods of development 375-8, 385
motives for 375-7 synergy 281
methods of development see strategy development
MFV (managing for value) 394-5, 502-5. 506
middle managers human resources management
486-7
strategic change 552 strategy into action 580-81
mimicry 413-14
mission statements 239-41 missionary organisations 457-8 missions 12-13. 14 MNC
see multinational corporations mobile phone industry 116 mobility 125. 3.37
momentum of strategy 48 motivation 441-3. 504 motives
for acquisitions 375-7 based on expectations .362 for mergers 375-7 for strategic
alliances 378 strategy development 362-3
multi-business companies 32 multidivisional structures 425-6 multinational
corporations (MNC)
configurations 458-60 culture 223
direct supervision 458-9 global product structures 459 imposed strategy 73
international divisions 459 international subsidiaries 459 strategic management 26. 31
strategy selection 411 transnational corporations 460-62
multiple processes, strategy development 7,3-4
mutual ownership 203
mutualisation 204
national cultures 195. 223, 224 nationalised companies 28 nationalised industries 199
needs, substitution of 115 negotiation 75
networks "2. 381. 421, 442. 461 boundaries 452-5 change, overcoming resistance to
561
co-operation 453 external 272 independence 453 nodal positions 455 one-start shops
454 one-stop shops 453-4 organisational dilemmas 465 professional 441 relationships
452-5 service networks 455
skills 455 social 72
transnational corporations 460-62 new arenas 149-50, 170-1, 382 new markets see
markets: new new product development see
products: development no frills competitive strategy
319-22
nodal positions, networks 455 non-executive directors 198-9 norms 47, 172. 440 not-
for-profit sector 30, 31
objectives 13. 19. 40, 241-2 one-start shops 454 one-stop shops 453-4 operating profit
395 operational change 534 operational control 15 operational decisions 9 operational
management 15 operational strategies 12 operations 160. 50.3 opportunistic alliances
381 opportunities 18. 40. 148. 149-50.
566
see also environment:
opportunities and threats
option theory 410
order-generating rules 56. 59 organic development 374-5, .385 organisation 15
organisational arrangement, alliances 383
organisational cultures 45-9, 228-9. 256, 540-43
organisational design 84
organisational dilemmas 464-5 organisational fields 46, 99, 112,
126-7, 195, 223-8, 339-41 organisational knowledge 162-5.
179
organisational level 55
organisational politics 66-9 organisational slack 72 organisational structures 233. 234.
235
organising for success 419-22 configurations 455-63 organisational dilemmas 464-5
processes 432-43 relationships and boundaries
443-55
structural types 422-32 organising people 484-9 outbound logistics 160
outcomes
of cultural and political processes 75
performance targets 436 social importance, public sector
29-30
strategic decisions as 412 outputs 29, 434, 436 outsiders' roles, strategic change
552-3
outsourcing 168, 176, 334, 421, 450-1
overall performance 475-6 ownership 63, 64, 201-5, 301, 510
paradigms 48 change 79, 534 cultural web 233, 235 strategy and 49
taken-for-granted assumptions 229 parental developers 276, 280-3, 290.
306
parenting 19, 282, 290-93 partial implementation 547 participation, change
management
545-6, 547 partnerships 30 passages, rites of 557 Patients Charter 202 patterns of
behaviour 56 patterns of strategy development 78 payback period 390, 391 peer groups
272 people 419
behaviour 479
as resource 480-81
see also human resources
perceived customer value 130-31 perfect knowledge 256 performance
assessment 272, 480 competitors, better than 171-74 diversification and 304-6
expectations, alliances 383 indicators (PI) 437, 457 management, human resources 480
overall 475-6
targets, processes 436-8 personal cultures 237-8 personal motivation 441 -3 persuasion
577
PESTEL framework 99-103, 105 PEI (Private Finance Initiative) 378 pharmaceuticals
case study 188-91 physical aspects 558
physical resources 153
PI (performance indicators) 4.37, 457
pigeon-holing 454
PIMS database 365-7
the plan 64
planning 16, 38 centralised 432 corporate 22 incrementalism 74 systems 433-6 top-
down 434
pluralism 72
political activity 75
political context, people as 481-4
political dimensions 64
political environment 98
political framework 19
political influences 102
political mechanisms, resources 560.
561
political processes 38, 72, 75, 411, 558-62, 563
political view, strategy development 66
population ecologists 258 portfolio managers 275-8, 306 portfolios, corporate strategy
283-97 positioning 5, 238
repositioning 148, 150, 209 strategic position 16-17, 18-19.
93-5
positive feedback 55
power 9, 40, 67 advocacy for change 558 bases, building 560, 562 of buyers see buyers
change, of effecting 540 competitive, collaboration to gain
340
cultures 237-8 groupings 561 indicators 213 knowledge workers 485 of managers 199
meaning 212-13 sources 213
of stakeholders 19, 212-15, 561 strategic change 558-62, 563 structures 233. 234, 235,
558 of suppliers see suppliers symbols of 213, 215
power/interest matrices 208-12 PPP (public/private partnerships) 378 preferred access
176
preservation 538
price-based competitive strategies 319-22
price-capping 437
prices 347, 505
pricing, digital marketing 494 primary activities 160 priorities 365 priority rules 57
Prisoners Dilemma 341-2 private companies 26-7 Private Finance Initiative (PFI) 378
privatisation 203, 205, 226-7 problem children 285-6, 507 processes 421, 432-3
competences 149 cultural 440-1 design 167
direct supervision 433 human resources management
488-9
market mechanisms 438-40 performance targets 436-8 personal motivation 441-3
planning and control systems
433-6
self-control 441-3 separate business 423 social 440-1
symbolic significance embedded in 557
technology development 521-2 procurement 161
product-for-product substitution 115
product strategists 460
products
complementary offerings 133 design 167
development 105, 348, 362, 368-9, 385
features 147. 148. 168-9, 492-3. 504
global 460 life cycles 132, 365 new markets 370-71 new uses 370
professional bureaucracies 457 professional networks 441 professional service
organisations
30-32, 175
profitability analyses 389, 390-92 project-based structures 431 project managers,
middle managers as
487
prospector organisation 236-7 prototypes 256
public/private partnerships (PPP)
378
public sector 29-30, 31 competitive strategies 322, 324,
331 fit 293
public sector (.continued) imposed strategy 73 local government changes 542 parental
developers 282 portfolio managers 277 portfolios, balance in 286-7 privatisation 203,
205, 226-7 stakeholders' financial expectations
510
strategic alliances 378-9 value destroying parents 273 see also public services
public services 29 benchmarking 172 boards 199
change management 571-5 co-production 381 competition 114 competitive strategies
319 critical success factors 152 outsourcing 168
punctuated equilibrium 78 purposes 19, 193-5
communicating 238-42 cultural context see culture
quality 169, 367, 429
quasi-markets 205, 451
question marks 285-6, 507 questioning received wisdom 61
railways 226-7, 451
ranking 386, 387
rare competences 495
rare knowledge, dissemination of 176
rare resources 495
rarity, and robustness 175-7 rationale, corporate see corporate
rationale
rationality 40-41, 346
readiness for change 540
real options 389. 392-4
realignment of strategy 536 realised strategy 39, 64, 75-7 recipes 46, 225
reconciliation 434
reconstruction 537
recruitment 480-81
redundant competences 148, 150
refreezing 580
regional cultures 223
regulation 441
reinforcing cycles 462-3
related diversification 297-302, 304,
305
relatedness matrix 293-6
relationships 421, 443-4 centralisation vs. devolution 444-9 dividing responsibilities
444-6 financial control 447-8 human resources management
488-9
networks 452-5 stereotypes 446 strategic control 448-9 strategic planning 446-7 see
also boundaries
relative market share 168, 332-3 reliability 169 renewal, rites of 557 rents 315
repeated games 343-6
repositioning 148, 150, 209
representation 213
resistance to change 534, 560. 561,
562
resources
access 153
acquisitions, motives for 376 additional 561 alliances 382 allocation formulae 434
availability 149, 152-3 bases, barriers based on 350 claims on 213
competitive advantage and 154, 348
dependence 215 deployment 400 diversification 373 financial 153
human see human resources importance 93 inadequate 148, 149 inputs 29, 436
integrating 522-3 intellectual capital 153 internal development 374 internal transfers
between units
440
knowledge, links with 150 major changes 8-9 market penetration 368 matching to
environment 5, 40 mergers, motives for 376 motives based on 362 physical 153
political mechanisms 560, 561 rare 495 required 577 robustness 165
strategic importance of 152-6 strategic position and 18-19
technology' developments 521 uncertainty 178
see also human resources; threshold resources; unique resources
responsibilities 209, 444-6 restructurers 276, 277-8, 306 retaliation 114-15 return 389-
95
return on capital employed (ROCE) 390, 391
revolution 537
rewards 480
Ricardian rents 315 right' strategy 65 rigidities, key 179 risk 272. 369, 389, 395-7. 511
rituals 231, 232-3, 234, 555-7 robotics 517 robustness 174-5
causal ambiguity 178-9 competences 156-7, 165 complexity 177-8 core competences
174-81, 495 culture 179
information management 495 knowledge creation and integration
179-81
rarity and 175-7 resources 165
ROCE (return on capital employed) 390, 391
role cultures 237-8
role models, middle managers as 487 routes, strategy development 76 routines 231,
232-3, 234, 554-5 routinisation 496
rumours 565
Russia 539
sales 160. 505
SBU (strategic business units) 11-12, 315
scale-intensive innovation 512 scale of operations 349-50, 351
see also economies of scale scanning business environment 521 scenario planning 83,
410 scenarios 99, 107-10, 386 schools 273
science-based innovation 512
scope of activities 5
scope of strategic change 534, 536
scope of strategic management 16
secretiveness 239-42
sectors, environment see
environment: industries and sectors
segmentation of markets see markets: segmentation
selecting solutions 412
selection mechanisms 55
selective attention 256
self-control 441-3
self-managed teams 429
self-perpetuation 238
senior management support, alliances 383
sense making, rites of 557 sensitivity analyses 389, 396-7, 410 sequential games 343,
345 service 160
complementary' offerings 133 corporate parents 271 departments 425
features, information management 492-3
increasing importance to
competitive advantage 168-9
networks 455 organisations 27-8, 30-32 providers, human resources as 496
service-level agreements (SI.A) 440 shareholder value analyses (SVA) 389,
394-5
shareholders, corporate governance 198-9
short-term wins 567
short-termism 198. 207
side payments 209
similarity of competitive strategies 331-2
simple conditions 82-3
simple configurations 457 simple structures 422 simplification 256 simultaneous games
341-3, 344-5 situation dependency 176 skills 19. 278, 455
see also competences; core competences
SLA (service-level agreements) 440
small businesses 26-7
social costs 511
social environment 98
social networks 72
social processes 440-1
social responsibility' 194, 216, 220,
221
socialisation 180, 181
sociocultural influences 100, 102 solutions 412 sourcing efficiencies 103 specialisation
465. 476 speculation 365
speed of change 53, 97, 420 stable environments 39 stakeholders 9, 93, 194
acceptability of strategy to 20. 29 definition 206 expectations 18. 206, 365
acquisitions 376-7 conflicts of 207-8 financial 502, 510-12 power 212-15
power/interest matrices 208-12 stakeholder mapping 208-12
mapping 208-12, 398 power 18, 212-15, 561 reactions, strategy development
389, 398
strategic change 553 standardisation 105, 337-9, 434, 440 standards, corporate parents
272 stars 285-6, 507
static conditions 82-3
static markets 368
status 213. 215
stereotypes 446, 456-8
stifling ideas 64
stock reduction 505
stories 231, 233, 234. 558 storytelling 565 strange attractors 56 strategic advantage
through
innovation 513
strategic alliances 363. 385, 421 boundaries 452 competences 382 forms 380-83
motives for 378 opportunistic 381 public sector 378-9 resources 382
successful, ingredients of 383 trust 383
strategic balance 332
strategic business units (SBU) 11-12, 315
strategic capability 18-19, 145-7 competence and core competences
156-65
critical success factors 151-2 information management 492-6 knowledge, importance
of 150-51 performing better than competitors
171-4
as relative issue 171-4 resources, strategic importance of
152-6
robustness 174-181 roots of 146, 147-50
technology 516-18 terminology 148 strengths and weaknesses 183 value for money
165-71
strategic change 533-4 consultants 553 context 534, 536, 537-43 cultural forces
blocking or
facilitating 534, 536 diagnosing situation 534, 535-45 forcefield analyses 543-5
framework for managing 535 levers for management 553
change tactics 565-7 communicating change 562-5 job losses and de-layering 566-7
organisational routines 554-5 power and political processes
558-62, 563
structure and control systems
554
symbolic processes 555-8, 559.
561-2
timing 565-6
visible short-term wins 567 middle managers 552 outsiders' roles 552-3 roles in
management 548-53 scope 534. 536 stakeholders 553 strategic leadership 534, 548-51
styles of management 534, 545-8,
549
f

types 536-7
strategic choices 16-17, 19-21, 263-5
business-level strategy 315-59 corporate strategy 267-314 directions and methods of
development 361-408 stakeholder acceptability 30 see also strategy selection
strategic competence based on experience 84
strategic control 15, 448-9, 457,
498
strategic decisions 4-10, 40, 44 strategic developments 3-4, 502,
505-10
strategic drift 39, 78-82, 257, 463,
537
strategic fit 5
strategic flexibility 57
strategic focus 392
strategic gaps 132-4
strategic groups 99, 122-6, 132-3 strategic initiatives 14, 55
strategic intent 239, 241, 562 see also vision
strategic leadership 38, 65-6, 534,
549-51
strategic management 4 characteristics 15 t itexts 26
innovatory organisations 28 manufacturing organisations
27-8
multi-business companies 31 multinational corporations 27, 31 not-for-profit sector 30,
31 professional service organisations
30-32
public sector 29-30, 31 service organisations 27-8,
30-32
small businesses 26-7 voluntary sector 30
meaning 15-16 scope 15
in uncertain and complex conditions 82-4
strategic planning 6l-5, 446-7, 459 strategic position 15-16, 17-19, 93-5 strategic
shapers 448
strategic space 125
strategy 4
acceptability to stakeholders 21 adaptation 24 definition 9-10, 13-14 design 23, 24, 39-
43, 60 elements of 14 emergent 24
as experience 24, 43-9, 60 feasibility 21 as ideas 24, 50-60 levels 10-12 nature 4-14
paradigms and 49 as study subject 22-5 suitability 20 vocabulary of 12-14
strategy approach to change management 550
strategy clock 319-31, 496 strategy development 37-8
complexity 39 design lens 39-43 directions 361-2, 363, 386
consolidation 363-7, 385 current position, protecting and
building on 363-8 diversification 373, 385 market development 370-73,
385 market penetration 367-8, 385 product development 368-9, 385
experience lens 43-9 ideas lens 50-60 implications for
intended strategy' 75-7 realised strategy 75-7 strategic drift 78-82 strategic management
in
uncertain and complex conditions 82-4
methods 20-21, 361, 374, 386 acquisitions 375-8, 385 internal development 374-5, 385
joint developments 378-83, 385 mergers 375-8, 385 strategic alliances 378-83, 385
motives 362-3
multiple processes 73-4
organisational culture and 45-9
patterns of 78
political view 66
processes in organisations 61
configurations 74 imposed strategy 73 learning organisations 71-2 logical
incrementalism 69-71 multiple processes 73-4 organisational politics 66-9 strategic
leadership 65-6 strategic planning systems 61-5
routes 76
strategy lenses 39-61 success criteria 363
acceptability 384, 389-98 cost-benefit 389, 392, 393 feasibility' 384, 398-400 financial
feasibility 398-400 financial ratios 389, 396 profitability' analyses 389, 390-92 real
options 389, 392-4 resource deployment 400 return 389-95 risk 389, 395-7 sensitivity
analyses 389, 396-7 shareholder value analyses (SVA)
389, 394-5
stakeholder reactions 389, 398 suitability 384-9
strategy into action 16-17, 21-2, 417-18
designing strategic action 577-8 enabling success 475-531 experience and strategic
action
578-80
ideas and learning organisations 582-3
inertia 579-80
managing strategic change 533-75 middle management 580-81 organising for success
419-73
strategy lenses see design lens;
experience lens; ideas lens; lenses
strategy selection
cultural processes, role of 411 -13 by doing 410-11
experience and 410-14 evolution and 414-15 design view' 409-10 idea lens 414-15
institutionalisation of strategies
413-14
logical incrementalist view 410-11 mimicry' 413-14 political processes, role 411 see
also strategic choices
strategy workshops 65, 410, 412-13
strengths 18, 40, 183
stretch 8, 93, 147, 272
strongholds 349, 351
structural design 421
structural drivers 98, 103-5
structures
costs 504 designing 577
human resources management 487-8
power, reconfiguration 558 strategic change 554 types
functional 422-4 holding company 426-7 intermediate 431-2 matrix 427-9
multidivisional 425-6 project-based 431 simple 422
team-based 429-30 structuring 21, 498-500 sub-national cultures 223 subcontracting
381 subcultures 195, 229 substitute industries 132 substitution 115-17, 340, 499, 514
subsystems 560, 561 success
alliances 383
criteria see strategy development enabling see enabling success hypercompetitive
strategies 351-3 organising for see organising for
success
reasons for 157
suitability 20, 384-9
sunk costs 176
supermarkets 152
superprofits 315
suppliers control 504
environmental influences 101 liquidity concerns 511 motivation 504
power of 117-18, 499, 504, 514 selection 504 technological innovation
dominated by 512 supply costs 166-7 supply-side models 515 support 55. 441 support
activities 161 supranational cultures 223 survival, fight for 56 sustainability of
competitive
advantage 315-16, 332-9 sustainable differentiation 336 SVA (shareholder value
analyses) 389,
394-5
switching costs 337
SWOT 134, 183, 387
symbolic processes 555-8, 559,
561-2
symbolic signalling of time frames
566
symbols
cultural web 231-5 definition 555
political mechanisms 560, 561 of power 213, 215
synergy 276, 278-80, 296, 304, 306 systems 557, 560, 561
tacit knowledge 179-80
take-overs see acquisitions takcn-for-granted assumptions 229,
231
taken-for-grantedness 45-9, 257, 555 talent spotters 460 task cultures 237-8 team-based
structures 429-30 teams 483
technical standardisation 105 technological change 80 technological environment 98
technological innovation 512-13,
515-16
technology
acquiring 518-19 advantages through 522
competitive situation 513-15 core competences 516-18 development 161, 518-22
environmental influences 100, 102 innovation 512-13, 515-16. 517 strategic capability
516-519
technostructures 457
tension, adaptive 53, 59-60 third-party marketplaces 497 threats 18, 40
three-theme approach 564 threshold competences 148, 149,
152
threshold product features 148 threshold resources 148, 149, 152,
153-4
tight-loose agendas 465
time available for change 538 time frames, symbolic signalling of
566
time pacing 53
time variation of value for money
169-70
timing rules 57
strategic change 565-6, 577 top-down control 420 top-down planning 434 Total Quality
Management (TQM)
429
Total Shareholder Returns (TSR) 395
trade creditors 200
training and development 441, 481
transaction costs 271
transactional leaders 550
transformational change 78, 82, 536
transnational corporations 460-62
triggering points 411
trust 383, 455
trust services 497
TSR (Total Shareholder Returns) 395 two-tier boards 198-9
.uncertainty 10, 52, 82-4, 178, 420 see also causal ambiguity
understanding the whole 64
unfreezing 580, 583
unique resources 13, 148, 149, 150,
152, 154-6, 175,455 uniquely competent individuals 481 uniqueness 168, 169, 324 unit
costs 168, 505
unpredictable environment 52 unprofitability, product development
369
unrealised strategy 75
unrelated diversification 302-4, 305 unsuitability 386
value
creation 502, 505 critical success factors 170 drivers 503-5 intrinsic 365
managing for 502-5, 506 value activities 160 value-adding corporate parents
270-72
value chains 151, 160-61 importance of concept 503 integration 163, 498 service
specialists 497
value-destroying corporate parents 272-3
value for money 165 cost efficiency sources 166-8 new markets and new arenas
170-1
product features 168-9 strategic capability 165-71 time variation 169-70
value networks 164-5, 178 value systems 161-2, 178 value trap businesses 291 values
9, 14, 49, 228, 239 variety 51-3, 59, 83 vertical integration 298-9 virtual communities
497 virtual organisations 452 visible short-term wins 567 vision 13, 38, 239
change, communicating 562 corporate parents 272 networks 455 see also strategic
intent
vocabulary of strategy 12-14 voluntary sector 30
weaknesses 18, 183
what if? analyses 389. 396-7, 410 whistleblowing 220 wider value systems 178
windows of opportunity 566 wine industry 325 withdrawal 365
work processes, standardisation 434
working capital 167, 504
yield 167