PART 01

The Scope
and Dynamics
of Strategic
Management
 What is
Strategy?
Integration
and Strategic
Alignment

Crafting and Executing Strategy: Creating Sustainable

High Performance in South African Businesses

Part 1: Part 2: Part 3: Part 4:

Scopa and Dynamics of Concepts and Crafti ng 11 St ratagy lo Executing and
Strategy Analytical Tools Create Sustainable Alignin g the
Hfgh Performance Stratagy

The Concepts
What l1 and Managerial
Strategy? Tools for Tallorlng Kays10
ln1egr1tlon Evaluating S1ratagy to Succanfullv
Organtzatlonal
and Slralagic a Company's Various Executing and
Performance
Alignment E•1ernal and C<impany Ahgning Ille
Management
Internal Situations Chonn
Environment Strategy

Chapter 1 Chapter2 Chapters Chapters

Chapter 7 Chapters
3 g, 4 5 Be 8 8, 9, Be 10

Sfngle Muftl·Buaino11
Business or Diversified
Comp anies Companies
4 Chapter 01 What is Strategy? Integration and Strategic Alignment
~'Strategy means making clear-cut choices about
how to compete. N
- Jack Welch
Former CEO, General Electric
1.1 Introduction ---
igh school graduates face five broad strategic issues 1 or questions.t? establish .
H themselves in adult life and to prepare themselves for the competitive worl~ out~1de
the safety of their home and school environment: What degree or diploma or university
programme to follow? What career to choose? Who to marry? To ha~e children or not?
Where to live? These issues are life changing and take careful planning and much_effort
and many decisions to ensure success in life, and we ;ill know that the best pl~n.mng
techniques in the world cannot gua rantee academic or career success and definitely not a
happy marriage or even intel ligent children ! . . . "hows" of strategy. Thus, some strive to improve their performance and market standing by
Correspol]Sti ngly, managers also face broad strategic 0 r central q~est1?ns m evaluating
their company's business prospects: What's the company s present s1tuat1on? W~ere does
1
the company need to go from here? How should it get there? Ho~ should we align our
strategies to ensure sustainable competitive advantage?~~ we. still com~ete all out or do
we need to create strategic alliances or make the compet111on irrelevant. ..
These questions force managers to evaluate industry conditions and compet1t1ve
pressures, the company's current performance and market standin~, its resource
strengths and gpabilities, and its competitive weaknesses. They will also need to
consider new or diITe~~t customer groups and customer needs w hich the company
should endeavour to satisfy, what market positions it should be staking out, what
changes i~ its business model and/or make-up are needed. Managers nee? to de~elop a
strategic outlook and execute a strategy capable of. mo~in~ the ~ompany m that intended
direction, always growing its business, and improving its financial , market, cu~t?mer,
process and people performances. The questions about alignment ~nd c_ompet1t1on ~eed
a new "take" on making concerted efforts to build alignment or cal1brat1on checkpoints
to make sure that the company's objectives, key performance areas or key result .ar~as
and technologies and internal processes are calibrated with its v ision and strateg1~ mt:nt
and that every employee can pinpoint her or his contribution to the company. This will
ensure "line-of-sight" throughout the company. . .
In this first chapter we define the concepts of strategy and describe its many facets. V'Je
shall indicate the kinds of decisions and actions that determine w hat a company's s~rategy
is, why strategies are partly proactive and partly reactiv~, a.nd why company strategies
tend to evolve over time. We will look at what sets a wmmng strategy apart from flaw ed
strategies and why the calibre of a company's strategy determines whether.it w ill enj~y a
competitive advantage or be burdened by competitive disadvantages. The important issue
of strategic alignment forms an integral part of this chapter. By the end of this ~hapte~ y~u
will have a clear idea of the generic strategy process and why the tasks of crafting, ahgnmg
and executing2 strategy are core management functions and why exce II ent execution · o fan
· · 1or
' turn ·mg a company ·mto a standout performer.
excellent strategy is the most reliable recipe
1.3 Defining Vision and Mission S
1.2 Definin Strateg_v.
A company's strategy is management's action plan for runni ng the business and
conducting operations. The crafling of a strategy represents a managerial commitment to
pursue a particular set of actions in grow ing the business, attracting and pleasing customers,
competing successfully, conducting operations, and improving the compan y's financial
and market performance. Thus, a company' s strategy is all about how- how management
intends to grow the business, how it will build a loyal clienteJe and outcompete rivals, how
each functional piece of the business (research and development, suppl y-chain activities,
production, sales and marketing, distribution, finance, and human resources) will be
operated, how performance will be boosted. In choosing a strategy, management is in effect
saying, "Among all the many different business approaches and wa ys of competing we could
have chosen, we have decided lo employ this particular combination of competitive and
operating approaches in moving the company in the intended direction, strengthening its
market position and competitiveness, and boosting performance."
In most South African industries companies have considerable freedom in choosing the
achieving lower costs than rivals, while others pursue product superiority or personalized
customer service or the development of competencies and capabilities that rivals cannot
match. Some target the high end of the market, while others go after the middle or low end;
some opt for wide product Jines, while others concentrate their energies on a narrow product
line-up. Some competitors position themselves in only one part of the industry' s chain
of production/distribution activ ities (preferring to be just in manufacturing or wholesale
distribution or retailing), while others are partially or fully integrated, w ith operations ranging
from components production to manufacturing and assembly to w holesale distribution or
retailing. Some competitors deliberately confine their operations to local or regional markets;
others opt to compete nationally, internationall y (several countries), or globally (all or most
of the major country markets worldwide). Some companies decide to operate in only one
industry, while others diversify broadly or narrow ly, into related or unrelated industries, via
acquisitions, joint ventures, strategic alliances, or internal start-ups. W hichever they choose,
all companies should ensure that their strategies take place w ith a regard to sound corporate
governance practices and ethical business practices.
CORE CONCEPT: A company's strategy consi sts of the competitive moves and business
approaches that managers are employing to grow the business, attract and please cus-
tomers, compete successfully, conduct operations, and achieve the targ eted levels of
organizational performance.
.3 Defining_Vision and Mission
Ta he distinction b 1
whereas a
eg1c v1smn po t
• • .
, r
•
strat . . . e ween a strategic v1 smn and a mission statement is fairl y clearTcut:
·
r rays a company s 1ulure business scope (" where we are going" )
company' · . . '
s m1ss1on typically describes its presenl busi ness and pu rpose
6 Chapter 01 What is Strategy? Integration and Strategic Alignment
("who we are, what we do, and why we are here"). Chapter 2 explores these concepts
in detail but ii is necessary to remember the following basics in terms of creating a
sustainable future business platform in any organization:
• The senior management team is responsible for making everyone excited about the
future of the business by developing a "picture" of the future destination.
• It is also their task to create a sense of urgency by identifying "burning platforms" in
the business.
• An integrated strategy framework across the organization and value chain is
necessary to drive the vision and mission of the business.
1.4 Strateg and the Quest for Com etitive Advantage
he heart and soul of any strategy are the actions and moves in the marketplace that
T managers are taking to improve the company's financial performance, strengthen
its long-term competitive position, and gain a competitive edge over rivals. A creative,
distinctive strategy that sets a company apart from rivals and yields a competitive advantage
is a company's most reliable ticket for earning above-average profits. Competing in the
marketplace with a competitive advantage tends to be more profitable than competing with
no advantage. A company is almost certain to earn significantly higher profits when it enjoys
a competitive advantage as opposed to when it is hamstrung by competitive disadvantages.
Furthermore, if a company's competitive edge holds promise for being durable and
sustainable (as opposed to just temporary), then so much the better for both the strategy,
the company's future profitability and the ability to become a high-performance business in
terms of revenue growth, ROI, positioning for the future, and duration of out-performance in
total return to shareholders and consistency. It's nice when a company's strategy produces at
least a temporary competitive edge, but a sustainable competi tive advantage is plainly much
belier. What makes a competitive advantage sustainable as opposed to temporary are actions
and elements in the strategy that cause an attractive number of buyers to have a lasting
pre ference for a company's products or services as compared to the offerings of competitors.
Competitive advantage is the key to above-average profitability and financial performance,
because strong buyer preferences for the company's product offering translate into higher
sales vo lumes and/or the ability to command a higher price, thus driving up earnings, return
on investment, and other measures of financial performance.
Four of the most frequently used and dependable strategic approaches to setting a
company apart from rivals, building strong customer loyalty, and winning a sustainable
competitive advantage are:
1 Striving to be the industry's low·cost provider, thereby aiming for a cost-based
competitive advantage over rivals. Capitec Bank and Kulula.com have earned strong
market positions because of the low-cost advantages they have achieved over their
rivals and their consequent ability to underprice competitors. Achieving lower costs
than rivals can produce a durable competitive edge when rivals find it hard to match
the low-cost leader's approach to driving costs out of the business. Despite years
of trying, other airlines like South African Airways have struck out trying to match
Kulula's operating practices, super-efficient distribution systems, and its finely honed
airplane turn-around times that allow it to offer lower prices.
1.5 The Relellonship Between a Company's Strategy and its Business Model 7
2 Qutcompeting rivals based on such differentiating features as higher quality, wider
product selection,. added p:rf~rmance, value·added services, more attractive
styling, technolog1cal superiority, or unusually good value for the money. Successful
adopters of differentiation strategies include Woolworths (product reliability),
Harley-Davidson (bad-boy image and king-of-the-road styling), Chanel and Rolex
(top-of-the-line prestige), Mercedes-Benz and BMW (engineering design and
performance), and Arm1 zon.com (wide selection and convenience). Differentiation
strategies can be powerful so long as a company is sufficiently innovative to thwart
clever rivals in finding ways to copy or closely imitate the features of a successful
differentiator's product offering.
3 focusing on a narrow market niche and winning a competitive edge by doing a
better job than rivals of serving the special needs and tastes of buyers comprising the
niche. Prominent companies that enjoy competitive success in a specialized market
niche include eBay in online auctions, McAfee in virus protection software, Mug and
Bean in premium coffees and coffee drinks, and DSTV in cable TV.
4 Developing expertise and resource strengths that give the company competitive
capabilities that rivals can't easily imitate or trump with capabilities of their own.
OHL and Sun Couriers have superior capabilities in next-day delivery of small
packages. Walt Disney has hard-to-beat capabilities in theme park management
and family entertainment. Over the years, Toyota has developed a sophisticated
production system that allows it to produce reliable, largely defect-free vehicles
at low cost. IBM has wide-ranging expertise in helping corporate customers
develop and install cutting-edge information systems. Hilton and Southern Sun
have uniquely strong capabilities in providing their hotel guests with an array of
personalized services. Very often, winning a durable competitive edge over rivals
hinges more on building competitively valuable expertise and capabilities than
it does on having a distinctive product. Clever rivals can nearly always copy the
attributes of a popular or innovative product, but for rivals to match experience,
know-how, and specialized competitive capabilities that a company has developed
and perfected over a long period of time is substantially harder to duplicate and
takes much longer.
r
CORE CONCEPT: A company achieves susta'inable competitive advantage when an attractive "
number of buyers prefer its products or services over the offerings of competitors and
when the basis for this preference is durable.
1.5 The_Relationship Between a Company's Strategy and its
Busmess Model
c 10s~ly related to the concept of strategy is the concept of a company's business model.3
c While the word model conjures up images of ivory-tower ideas that may be loosely
•sonnected to the real world, such images do not apply here. A company's business model
1 management' t I' ,
s s ory- me 1or how the strategy will be a moneymaker. The story-line sets
 1.5 The Relationship Between a Company's Strategy and its Business Model 9
B Chapter Dt What is Strategy? Integration and Strategic Alignment

forth the key components of the enterprise's business approach, i.ndicates how revenues.
will be generated, and makes a case for why the strategy can deliver value to customers in
a profitable manner. A company's business model thus explains why its bus!ness approach
and strategy will generate ample revenues to cover costs and capture a profit.
, capable of .prof1tab1hty: Companies that are in a start-up mode or that are losing money
CORE CONCEPT: A company's business model explains the rationale behind why its business
approach and strategy will be a moneymaker. Absent the ability to deliver good profitability,
the strategy is not viable and the survival of the business is in doubt
The nilly-gritty issue surrounding a company's business model is wheth~r the chosen
strategy makes good business sense. Why is there convincing reason to believe that the .
strategy is capable of producing a profit? How will the business generate its revenues? Will
those revenues be sufficient to cover operating costs? Will customers see enough value
in what the business does for them to pay a profitable price? The concept of a company's
business model is, consequently, more narrowly focused than the concept of a company's
business strategy.
A company's strategy re/ates broadly to its competitive initiatives and action plan for
running the business (but it may or may not lead to profitability). However, a com~~ny's
business model zeros in on how and why the business will generate revenues suff1c1ent to
cover costs and produce attractive profits and return on investment.
Absent the ability to deliver good profits, the strategy is not viable, the business model
is flawed, and the business itself is in danger of failing. Figure 1.1 illustrates a typical
business model. The differe~t parts (resources, market and financials) are interdependent
an? c r~ate a challenge to ahgn every process and every person with the key corporate
ob1ect1ves.
Companies tha~ have been in business for a while and are making acceptable profits
have a proven ~us1~~ss model- because there is hard evidence that their strategies are
have quest1?nable.busines~ models; their strategies have yet to produce good bottom-line
results, putting their story-hne about how they intend to make money and their viability as
business enterprises in doubt.
Ma.ga~ines and newsp~pers employ a business model based on generating sufficient
subscriptions and advertising to cover the costs of delivering their products to readers. DSTV,
Cell C, MTN and Vodacom, record clubs, satellite radio companies, and Internet service
providers also employ a subscription-based business model. The business model of network
TV an~ ~adio broadcasters en~ails pr~viding free programming to audiences but charging
advertising fees based on audience size. McDonald's invented the business model for fast
food-economical quick-service meals at clean, convenient locations. Gillelte's business
rn?del in razor blad.es involves selling a "master product"-the razor-at an attractively low
price and then making money on repeat purchases-the razor blades. Printer manufacturers
like Hewlett-Packard, Canon and Epson pursue much the same business model as Gillette-
selling printers at a lo~ (virtually.break-even) price and making large profit margins on the
rep~at purchases _of printer supplies, especially ink cartridges. Companies like Dell employ
a direct sales busmes~ m_odel that helps .keep prices low by cutting out the costs of reaching
consurn~rs thro.ugh distributors and retail dealers. Illustration Capsule 1.1 discusses the
contrasting business models of Capitec Bank and Nedbank.

r ·""'\ Coot\ II lus.l rt1 tio n Capsule 1. 1 :

Busmess Models
Capitec Bank and Nedbank: Two Contrasting

roven"e """""'''
T:
~
strategies ~f rival companies are often predicated on strikingly different business
th fi 0 del.s. Consider, for example, the business models for Capitec Bank and Nedbank in
Cllentba" \ e na.ncial services industry in South Africa.
Ca~~~ec ~urrently services around 2.1 million customers, but the next benchmark is
(
d I
Process/ \
Structure
25
21 07
~ ~~ ~o n J' the end ~f the 2010 fiscal year, and looking further ahead, 5 million by

t
r-p~~~i~~ ~ /
Human Resources Capital
and th t th. ~st o.f Cap1tec's growth remains in the unbanked or underbanked market
not have b erek "is sh II. h, u.ge po 1entia
8 · I among the 37 per cent of all South Africans who do
aervic~ and an mgd facthlles. · · Capt'tcc •s b usrness
· model for making money from its low-cost
Price Market . . . resources )
D1s~t •-- . pro ucts ts based on the following revenue-cost- profit economics:

G Promotion_) ~ Technology Infrastructure

- ovation
:l'h~y have applied a pionee .
h1ch has enabl d h
.. .
rmg approach to trad1t1onal bankmg by using technology
~ ll
e t em to s·
Werful endorsement of h
l'f
1 b k '
•mp Y an mg, so this international recognition is a
1 e succ..ess of our strategy so far.
'

FIGURE 1.1 Typical business model

10 Chapler 01 What is Strategy? Integration and Strategic Alignment 1.6 Analysing a Company's Resources and Competitive Position 11

~I Affordability
Capitec focus on savings {10 per cent on daily balance), Transactions {fixed fees for ATMs,
Nedbank's business solutions focus on the following areas:
Transactional Solutions
Stop/Debit orders, Return Debit Orders, POS - Withdrawals), while Debit Card Purchases
and balance enquiries are free of charge. They also have the lowest cost for unsecured Transactional products and services include current accounts cash handl' .
r · t t' cl • - mg services
1oreign ransac mns, car products and electronic services. '
loans.
Simplicity Lending Solutions
The principles are paperless, single-account structure, real-time delivery, lowest fee . services include overdrafts • overnight s an d s h ort-term 1oans debtor
Lending solutions and
structure and effective communication in the industry. management so Iuhons, trade and term financing , commerc1a · l property an d structured
'
fimance.
Access and Agreements
Almost 400 branches country wide which are open between oa:oo and 17:00, a 24/7 Investment Solutions
workplace banking with Mastercard and SASWITCH-linked purchases worldwide, In recognizing that . every company has unique require men ts w h en it · comes to the
agreements with various retailers like Pick 'n Pay, Boxer and Score, Shoprite, Checkers management and investment of finances • they have desig ne d various
· .
. options to suit
11 and PEP stores, and Internet banking for account payment or transfers. long· and s h art-term business
. needs like call and term clepos1' ts, cas h management, fleet
management,
· 1 s h art-term
. insurance ' corporate schemes and pnva · te ban k'mg.
Software and Mobile Technology
Capitec has introduced innovations, such as a 30-day loan that can be arranged entirely . dIt is c ear that
d . Cap1tec and Nedbank identified two d ' fr t ·
I ieren segments m the financial
via a mobile phone, that simplify the often complicated banking business. The customer m us.try an tailored . and differentiated their solutions an d b usmess
· mod e 1s to cater
sends a text message with the loan amount needed, the loan is processed, and once it is effectively for their different client base.
approved the funds are available immediately in the customer's account-with no filling Sourot!$: Carl Fi~chor (2007). 'lnnovativo thinking in Retail Bankin • Bl o .
11
documents nnd mformntion posted on www .~mrnorin ows g • uo. conn Prosontnhon. Company
out of interminable forms required. ~· Ac:c:osscd on 18 Mnrc:h 2010. ' .co.?.q, www.cnptlocban k.co.zn, www.nodbnnk .
The Swiss-based financial services group Credit Suisse commended Capitec for its 1

innovative, low-cost banking model, which attracts customers for whom value for money 11

is an important issue and who are looking for a better alternative to the established
options. Capitec marketing and corporate affairs executive Carl Fischer said: "At Capitec
Bank we have based our business model on innovation and doing things differently. fie
1.6 Anal sing a ComP-any_'s Resources and ComP-etitive Position
have applied a pioneering approach to traditional banking by using technology, which
have enabled us to simplify banking, so this international recognition is a powerful
endorsement of the success of our strategy so far."
-----
"Before executives can chart a new strategy they must reach common
Nedbank Business Banking (focus on clients with a turnover of R7.5 million to R400 understanding of the company's current positio~."
million per client), is differentiated by its decentralized and client-centric approach. This Chan Kim and Renee Mauborgne ( Harvard)
is echoed by its slogan "Nedbank Business Banking-partnering for growth for a greater
South Africa". With specialist expertise in servicing key industries, including wine, A~pppr~~ng.at. cornpdanhy's resource strengths and weaknesses and its external
uni res
good overview of anh th I reals commonly k
' nown as SWOT analysis, provides a
diamonds, professionals, and printing and publishing, Nedbank Business Banking offers
the full spectrum of business banking products and related services. Nedbank's business or unhealthy J t w .e er the company's overall situation is fundamentally healthy
model for making money in the relatively high-income segment of the market focus on the crafting a str~teugsy aths 1tmpo~tan1·t, a first-rate SWOT analysis provides the basis for
. the corn an
capturing a capita
's 1zes on the. .com pany s resources, aims squarely at
1
•
key services of lending, deposit-taking, transactional banking, debt-structuring, factoring ,
and vehicle and asset finance.
Well-being. p Y best opportunities and defends against the threats to its
Nedbank's decentralized business model means they have 70 regional offices and
many more client service teams, each with a high degree of autonomy and unique in
that they include credit and administrative specialists and a business manager. Being CORE CONCEPT:
. SWOT analysis is a simple b t
capabilities and d f' . . .
rt I ..
u powe u tool for s121ng up a company's resource
decentralized allows Nedbank to gain a deeper understanding of the local economy . e 1c1encres rts ma rk t ..
Well-being, ' e opportunities and the external threats to its future
industry and business.
12 Chapter 01 What is Strategv7 Integration and Strategic Alignment 1 9 Killers of Strategic Alig nment and Fit 13

1.6.1 Identifying Company Resource Strengths and Competitive Capab~lities 1.8 Principles of Creating a StrategyMAligned Organization
In Chapter 4 we define a resource strength as someth·ng 1 a company is good at domg t or ths
. . .
an attribute that enhances its competitiveness m· the marketplace
. : These resource
will be discussed in great length in Chapter 4 but as an mtroduction, we ist t e 0
s reng
I' h f llowing
T o compete successfully, an organization's strategy must be aligned with that of its
environment and at the same time the organization must have the capabilities that fit
forms of a resource strength: its strategy. This is to say that alignment or "fit" must be achieved within the organization
as well as with the business environment. To accomplish this alignment, leaders have to
• A skill, specialized expertise, or competitively important capability
be open to learning.about how their decisions and behaviours fit the environment, strategy
• Valuable physical assets and organization. This suggests that effective leaders enable their organizations to confront
• Valuable human assets and intellectual capital the tensions that prevent alignment and, through a collaborative process, reshape strategic
• Valuable organizational assets alignment at several levels: between environment and strategy, strategy and organization,
organization and the leadership team, and between key people. Figure 1.4 gives an outline
• Valuable intangible assets
of the process of achieving full alignment and line-of-sight in the organization, meaning
• An achievement or attribute that puts the company in a position of market advantage
that everybody can "see" his or her contribution to the strategic objectives of the business.
• ompetitively valuable alliances or co-operative ventures.
C .. Many organizations deploy the latest approaches to organizational efficiency in hopes
A company's resource strengths may or may not enable it to improve its compet1t1ve of achieving alignment, but too often find that they are unable to reap the full benefits from
position and financial performance (see Chapter 4). such activities. One of the main reasons for this is the lack of an integrated approach that
changes multiple dimensions of the organizational system, particularly key organizational
capabilities and leadership behaviour. Organizatiwis that reflect the continuous change in
the environment by being able to adapt their design and behaviour to changes in strategy,
1.7 The ConceP.t of a ComP.any Value Chain and do this rapidly and effectively, exhibit a second-order organizational capability that
ny's business consists of a collection of activities undertaken in the c~urse Beer and Eisenstat" have called "organizational fitness". To adapt successfully demands
E~~~e~~~fn~ producing, marketing, delivering, and supporting its produ~t s~rvice
or senior management with the courage and skill to lead a systemic organizational learning
that create valu~ for buyers. All of the various activities that a company per orms interna 11Y process that will "rejuvenate" the organization by fundamentally reshaping its design,
culture and political landscape.
combine to form a value chain. . f . .. .
Cha ter 4 describes a company's value chain as two broad categories o acllv1t1es.
namel ~he primary activities that are foremost in creating value for customers, ~nd the CORE CONCEPT: Strategic alignment is a dynamic process whereby an organization's strategy is
requisite support activities that facilitate and enhance the performance of the primary calibrated with its culture, leadership, organizational structure and governance in such a way
activities. · d f JI h · s that everyone can see her or his contribution to the strategic objectives of the organization.
At this earl stage it is important to know that the combine costs o a t e vanou
· · · · y ,
act1v1t1es in a company s va ue I chain define the company's internal cost structure.
.. Further,
the cost of each activity contributes to whether the company's overall. cost pos~t1on
relative to rivals is favourable or unfavourable. The tasks of value-chain ana.ly.s1s ~nd r . 1.9 Killers of Strategic Alignment and Fit
benchmarkin are to develop the data for comparing a com~a~(s costs act1v1ty- y-ac 1v1 1Y
against the c!ts of key rivals and to learn which internal act1v1t1es are a source of cost Beer, Eisenstat and Spector5 described a study at SPF in 1990 where members of a
advantage or cost disadvantage. . . d I' so:called "Task Force" integrate their findings into a set of themes lo be fed back
11 is clear that good strategies alone will not ensure that ?rgan~1z_a~1ons e 1ver 's to senior management. An analysis of these themes in a dozen org<rn izations, and
sustained results but that execution and alignment are crucial to fit the .c.o_mpany subsequently validated in many other organizations, revealed the fo llowing six barriers
10 strategy alignment:
strategies with its customers, internal business processes, ~esource cap~b1lit1es and
eo le and erformance systems. The following part of this module will focus on . d • Unclear strategy and/or conflicting priorities
~lig~ing pri~ciples, alignment challenges and different ways to create a strategy-altgne • An ineffective top management team
organization. • A leadership style that is too top-down or, conversely, too laissez-faire
• Poor coordination across functions, businesses, or geographic regions
·
CORE CONCEPT: Acompany's value chain identifies the primary · · · th at crea te customer
act1v1t1es
• Inadequate leadership skills and development of down-the-line leaders
value and the related support activities.
~~~~~~~~~---
• Poor Vertical communication.
14 Chapter 01 What is Strategy? Integration and Strategic Alignment
1.10 Managing Alignment; Different Views 15

. f
Together these six barriers constitute a set o SYn:1P
toms that prevent managers from
. . 'th changes 'in strategy Without honest communication about all of the barriers, senior teams are unable to
0 f 1· • their organizations w1 ·
solving the ever-present pro em _a ig~ing
bl confront the issues that cause poor alignment and their ineffectiveness as a team, while
. wa that makes them self-sealing.
Figure 1.2 illustrates how th~se barriers i_nte~act I~ a ar~ difficult to raise and subject to organizational design issues are blocked from resolution by functional mental models
Though known to everyone in the_ organ~zati~n, ~ ey That is why Beer and Eisenstat as well as issues of power and politics. Without redesigning the organization and its
open discussion, organizational diagnosis an c ange Pan. 1 management processes the company is unable to plan and allocate resources effectivllfy.
(2000) called them the "Silent Killers"-'' The next logical question concerns the dangers of misalignment. Bob Frost, Director of
Measurement International, quoted by Fonvielle and Carr 7 "believe[sJ that misalignment
can take several forms, namely

Top down or • Unstated disagreements about how the goals should be reached.
Ineffective laissez.fai re senior
top team
• Warring camps exist.
management style
,,__--"T"""
• Members are unconvinced of the need for the proposed action.
• People don't know what the goals of the organization are. "
When alignment is lacking, new programmes run a high risk of external failure and
Unclear strategy
end priorities typically fall into disuse over time. Also, w ithout management's support and consistency,
employees' commitment to quality will usually deteriorate, their individual objectives will
take precedence, and their morale and productivity will diminish over time.

Poor vertical Learning

Quality of
communication 1.10 Mana ing Ali nment: Different Views

Inadequate
W ithout sufficient alignment the goals of the company will not be taken seriously.
Employees may look at the goals as "insufficiently strategic, a threat to job security,
Poor coordination or requiring more work without obvious rew ard". Therefore, the employees need to
across functions down·the·I i ne
leadership skills understand the organizational goals and the means to achieve them.
and businesses 11
and development Fonvielle and Carr discuss six steps to achieve alignment in an organization. These
steps are as follows:

1 Articulate the key strategic drivers of your business and the main areas of focus that
will make your organization successful.
FIGURE 1.2 Barriers to st~ategic alignment . Id d ET k' l2005l "Stre1egic management as organizelional learning:
Source: Based on discussions in M. Beer, S. Voelpel, M. Le~bo an . e ie . 2 Define critical strategic goals that you perceive should be deployed throughout your
Developing Iii and alignment through a disciplined process • Long Range Planning, 38, p. 452. organization.
3 Develop performance measures for each of these key goals.
Unclear strategy and conflicting priorities, an ineffective senio~ team, and a leaderhwho
4 Ensure that everyone understands the measures of both their department and their
is too controlling or too disengaged in management style, can ~II i~teract ~o pr.event t e
company and how they are all Jinked together into the strategy.
. r team from developing a high-quality business and organizational d1rect1on.
sen~:ckin a common view of strategy and a commitment to improv: th.e perf?rmance 5 Link each of these measures to a formal feedback and recognition system, and
communicate the results regularly.
h gl or anization leads to poor downward vertical communication, with the top
~~~= :m~~t u~able to communicate clearly and consistentl y with low er levels about d
6
Formally review the goals' performance often, and develop corrective actions to
the di~ection of change. This in turn prevents the development of common purpose an ensure that they are met.

commitment at lower levels. . f om !,~ey conclude by emphasizing two system considerations that are important in creating
· ortant oor u ward vertical communication prevents the senior te~m ~ . ignme~t.
bei~~~~~;:~ted wlt~ _po~r co~rdm~~~~~ion
These include effective communications and rewards and recognition. With
communications · · . .
two !her barriers identified by the Task Force: to anoth . ' an organization needs to be able to transfer information from one person
and inadequate leadership skills among do~n-the·~inhe 1ea1_ers: Orfaniz~~~:~. ~~~ris'. to lead of co er rn ~rder for alignment to be effective. An organization should tie some part
and effective lower-level leaders are essential for h1g -qua 1t~ imp emen · mpensation to the ~ . .
further · 1h . per ormance measures as a means to dnve..employee behaviour
projects, integrate processes and foster the required cooperation. in e appropriate direction.
16 Chapter 01 What is Strategy? Integration and Strategic Alignment 1. I 1 Managing Alignment to Ensure Line·of·Sight 17

Lorsch and Tierney 9 outline four aspects of the organization which are central to the Enterprises enjoying the greatest benefit from their erf
work of creating alignment: namely, strategy, culture, leadership and the organization are much better at aligning their corporate business u~it or;;ance managen:ient systems
10
(including its people systems, structure and governance). Korogodsky states that indicates that alignment produces good sy~e . d anb. suppor~ strategies and this
h . rgies an a 1so 1g benefits Uncle t d.
strategic alignment cannot be created overnight, but its recipe is no mystery. He identifies .ow_f~o create this strategic alignment is crucial because this w ill be abie t0 rsdan ing
the components of this "recipe" as company-wide decision-making and buy-in on all srgni_ icant benefits for all types of businesses. pro uce
levels, automated processes, organizational positioning of people and teams and, lastly, Figure 1.4 shows a strategic process where a business strate is ali ned fr0
technology to ensure data integration. Michelman 11 is more concerned about maintaining board and shareholder level that create synergies from the corp~ate le~el to di.mv· .
alignment and postulates that the linking of each project to the strategy of the organization departments and staff. 1s1ons,
plus measure and reward systems with an emphasis on long-term thinking will create the
right environment for sustained alignment.
Establishing Li11e·of·Sight
From the above discussions the need to manage effective strategic alignment through a
measured process of different dimensions with adequate company-wide decision-making
with enough alignment checkpoints is clear.

1.11 Managing Alignment to Ensure Line-of-Sight

•
anaging alignment is seen as a key management process particularly in strategy
M implementation. Kaplan and Norton 12 identified organizational alignment as the
biggest gap between the practices of so-called "Hall of Fame" organizations and two other
11
groups: namely, high-benefit and low-benefit users of the Balanced Scorecard (BSC).
Figure 1.3 indicates this and the relationship between managerial excellence and the level
of benefits for these three groups.
Parformanco Contracts

Development plans
s o -i-----~----+----------+-----+----+----+----+---------1- Career management

FIGURE 1.4 Pro f · . .

I~~~~ -~dcreatmg strategic alignment throughout the organization
Saurc11. Hough J
, . vanced Strategy course·. Unpublished course notes, Stellenbosch University.
Hall of fame

The strategic intent and directi f h b . .

and/or vision from th B d on o t e usiness is developed from the mandates
A -- - --+ High-benefit
BSC users or down drilling the s~ra~a~c ~~~/or. shareho~d:~s. !he line-ofasight is created by cascading
corporate strategy ma th g h 1ect1ves a~d m1llat~ves on the corporate scorecard and
with their own aligne~ roug ~ut the various ~usmess units (divisions and departments)
to ensure that these ob·sc~recar sand maps. It is the responsibility of line management
Low-benefit rformance contracts l~r iv;s ~nd key performance indicators (KPls) are embedded in
BSC users
3.o -+---------+---------+----+-~-+----+----+---------4-
y this creative and int dn iv1 ual staff members. Full alignment should be achieved
ysTtehm Cor software) in~rv:~.nde~t prd~cess. ~he ~osition of a Performance Management
1 Executive 2 Strategy 3 Organization 4 Employee 5 Governance
motivat ion practices
e Strategy Ma d ion is m 1cated in Figure 1.4.
mobilization translation alignment
ke P an Strategic Ob· r d ·
practice practices practices practices y corporate priorities and Jee ives enved from the Balanced Scorecard14 clarify
1 V
alue propositions serve as commun· icarion "tooIs,, to the following focus areas:
FIGURE 1.3 Relationship between managerial excellence and level of benefits Board and sh
Source: Kaplan and Nonon (20061 Alignment, Boston, HBS Press. areholder alignment
18 Chapter 01 What is Strategy? Integration end Strategic Alignment
1.13 Stra tegy Process Followed in this Book 19

3 Divisions and departments and business units

4 Business units to staff members.
1.12 Good Strategy+ Good Alignment+ Good Strategy Execution=
Good Management
The employees and management processes must also be aligned with the company
strategy. The following steps are necessary to create the alignment process throughout the
business: C rafting and executing strategy are core management functions. Among all the
things managers do, nothing affects a company's ultimate success or failure more
• Clearly define corporate strategy and business unit strategy . fundamentally than how well its management team charts the company' s direction,
develops competitively effective strategic moves and business approaches, and pursues
• Align the business units with the corporate strategy (Cascading). .
what needs to be done internally to align day-in, day-out strategy execution and operating
• Create a governance process to ensure that full alignm~nt .a~d line-of-sight . excellence. Indeed, good strategy and good strategy execution (including alignmenl) are
is maintained- including the various key initiatives of ind1v1duals (Strategy matrix). the most trustworthy signs of good management. Weak implementation and execution
Figure 1.5 shows the Alignment Matrix to align the individual initiatives with the business undermine the strategy's potential and pave the way for shortfalls in customer satisfaction
unit and the business unit with the strategic objectives of the company. and company performance. Competent execution of a mediocre strategy scarcely merits
enthusiastic applause for management's efforts either. The rationale for using the twin
standards of good strategy making and good strategy execution to determine whether a
Strategic: focus areas Strategy allgnment Corporate balanced scorecard objectives company is well managed is therefore compelling: the better conceived a company's
f inancial Internal Learn ing
Customer strategy and the more competently it is executed and aligned the more likely that the
:;
perspective pers pective process
- g-o
growth
company will be a standout performer in the marketplace. •
0
.. ll;..~ ....~ Jl
0 ~ !!. ~
..
m

.a<"
:I

e"<
!!.
;:·
~
..
C/I Buslness strategy matrix
;;:-
ho !l. ~
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~
;
CJI
0
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~
"
O>
!?.
n"
CT 0
~ 'C
-
~-
~~ o·~~ n..
n , "Cl :::I - · 'a
3 e: 3 ~ CORE CONCEPl: Excellent execution and alignment of an excellent strategy is the best test of
..
fal a::i

~0 ~· i" ~ ~
~ ~
"5l ii'
I
"cc. s~
0
; < Cl"
!l c: iil 3
!!
Cl X' -a
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~

"..3 managerial excellence-and the most reliable recipe for turning companies into standout
!l i5'
.."
<
!!.
c
CD
Bus ness development 0
3
~
::> ~
~
~
~ ..
!!. a.
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performers.
< "'"'
• • Identify high-volume customers
• • • • • •
• • CrQls soll product mix aggressively
• • • 1.13 Strate .'l Process Followed in this Book

• • Coordina1e management visils

• • • • • F igure 1.6 describes the process of developing a focused strategy to achieve the
organization's vision and strategic objectives by implementing and executing all its human
• • Increase contact visils
• • • • •
• • • Develop o mail lists
• • • Phnse 1 Phase 2
Phase 5

• • Par1ner with stakeholders Ira •oildays•

• • • Envlranmental
Monitoring
developmenta,
I Analpis
• lncroastl maintenance of tanks
• • eva luating
performance,
and making
corrective
adjust ments
FIGURE 1.5 Alignment Matrix . .
Source-. Hough, J (2010) "Advanced Slralegy course". Unpublished course notes. Stellenbosch Umvers1ty.

The Alignment Matrix can be used as a cascading and alignment tool. The benefits are
Revise es needed in light of actual
that: 1 ~ performance, chang ing conditions,
new opportunities, end new ideas
• Every business plan/action can be linked to the corporate objectives.
• Every individual can see her/his contribution to the corporate strategy.
• Outdated and misaligned initiatives can be stopped or re-aligned.
· d.irection of
• Every initiative can be measured and managed in terms o f the strategic
1.& The process 0 f
the business as a whole. strategy development and execution
20 Chapter 01 What is Strategy? Integration and Strategic Alignment
resources, business processes, customers and financial abilities with the objectives i~ such a
way that every staff member can see his or her contribution to the su.ccess. of the bu.siness.
Figure 1.7 links the Strategy Process with the phased outcome in a stngle busrness
operation.
Process of strategy alignment to create alignment and line-of-sight
Envlronmtmtll
Analpl1
FIGURE 1.7 Practical link between the Strategy Process and the outcome in a sin~re business operation
Source: Hough, J. (2010) "Adve rced Slralegy course· Unpubl shed course notes, S1e1.enbasch Umvers1ty.
The five phases are interlinked and start with the development of the strategic vision
meaning, to create the direction and the make-~p ?f the b~siness for the next 5- 10 y:ars.
Phase 2 is concerned with the high-level strategrc rmperat1ves to be employed to a.chreve
the vision while phase 3 focus on the strategy or strategic plan to follow. Phase 4 1s part
of the cas~ading process to ensure that the chosen strategy is executed and imple'.71ented
throughout the various business units or divisions or departmen~s of th~ or?~rnzat1on. The
last phase is important to confirm, monitor and evaluate the actions of indrvrduals and to
calibrate the alignment of all the processes. Corrective adjustments ar~ also part an~ parcel
of this phase. As already stated, these phases are integrated and the alignment matrrx
(figure 1.5) can be used to "increase" this integrated process.
Summary
- T he tasks of crafting, aligning and exec..~tin~ c~mpany
strategres are the.heart of
· managing a business enterprise and wrnnrng rn the marketplace. A ~?mpany s str~t gy
is the game plan which management is using to stake out a market position, conduct rts
Summary 21
operations, attract and please customers, compete successfully and achieve organizational
objectives. The central thrust of a companj 's strategy is undertaking moves lo build and
strengthen the company's long-term competitive position and frnancml performance and,
Ideally, gain a competitive advantage over rivals that then becomes <J company's ticket to
abnv<;:average profi tab iii t)'.
Closely rel.lied to the concept of strategy is the concept of a company's business
moael. A buc;inec;s model ic; management's story-line for how and why the company's
product offerings and competitive approaches will ge~erate a revenue st~eam and ha~e an
associated cost structure that produces at1ract1ve earnmgs and return on rnvestment- rn
I effect, a company's business model sets forth the economic logic for making money in a
particular business, given the company's current strategy.
[ A winning strategy fits the circumstances of a company's external situation and its
internal resource strengths and competitive capabilities, builds competitive advantage,
I and boosts company performance. Crafting and executing strategy are core management
functions. Whether a company wins or loses in the marketplace is directly attributable
I to the calibre of a company's strategy and the proficiency with which the strategy is
I executed. Effective alignment checkpoints will ensure that the company's strategies are
calibrated with its customers, internal business processes, resource capabilities and people
and performance systems.
Throughout the following chapters and the updated international and new African and
I South African cases, the focus is on the foremost question in running a business enterprise:
' what must managers do, and do well, to make a company a winner in the marketplace?
I The answer that emerges, and that becomes the message of this book, is that doing a good
job of managing inherently requires good strategic thinking and good management of the
strategy-making, strategy-executing and strategy-alignment processes.
The mission of this book is to provide a solid overview of what every business student
and aspiring manager needs to know about crafting and executing strategy. This means
exploring what good strategic thinking entails; presenting the core concepts and tools
of strategic analysis; describing the ins and outs of crafting and executing strategy; and,
through the cases, helping you build your skills both in diagnosing how well the strategy-
making, strategy-executing and strategy-alignment task is being performed in actual
companies and in prescribing actions for how the companies in question can improve
their approaches to crafting and executing their strategies.
The "golden thread" is the focus on sustainable high performance, meaning the
sustained process of creating and implementing strategic differentiators and leadership
styles a~ross industries in such a way that the business value curves outperform
competitors over time in terms of revenue growth, return on investment, positioning for
the future, duration of out-performance in total returns to shareholders and consistency.
lo short, to become a high-performing organization.
~nd so~I
 2.1 Introduction 23

The Managerial 2.1 Introduction

Process of C rafting and executing strategy are the heart and soul of managing a business enterprise
with the ullimate aim lo create value and to become a sustainable high-performance
business. But exactly what is involved in developing a strategy and executing it proficiently?
What are the various components of the strategy-making, strategy-executing process? And to

Crafting and what extent are company personnel- aside from top executi ves-involved in the process?
In this chapter we present an overview of the managerial process of crafting and executing
company strategies. Special attention will be given to management's direction-setting

Executing
responsibilities-charting a strategic course, setting performance targets, and c hoosing a
strategy capable of producing the desired outcomes. We w ill also examine w hich kinds of
strategic decisions are made at which levels of management, and the roles and responsibilities
of the company's board of directors in the strategy-making, strategy· executing process.

Strategy The managerial process of crafting and executing a company' s strategy consists of five
interrelated and integrated phases:

1 Developing a strategic vision of where the company needs to head and what its
future product/market/customer technology focus should be. This is based on a
thorough external and internal anal ysis (see Chapters 3 and 4).
2 Setting objectives and using them as yardsticks for measuring the compan y' s
performance and progress.
3 Crafting a strategy to achieve the objectives and move the company along the
strategic course that management has charted.
Crafting and Executing Strategy: C~eating s.ustainable 4 Implementing and executing the chosen strategy efficiently and e ffectively.
High Performance in South African Businesses 5 Evaluating performance and initiating corrective adjustments in the compan y's
Part 3:
-------,
Part4: long-term direction, objecti ves, strategy, or execut ion in light of actual experience,
Pert1: Part 2: Crafting e Strategy to Executing and
Scope and Dynamics of concepts end changing conditions, new ideas, and new opportunities.
Create Sustainable Aligning the
Strategy Analytical Tools High Performance Strategy
Figure 2.1 displays this five.phase process. Let' s examine each phase in enough detail to set the
stage for the forthcoming chapters and give you a bird's-eye view of w hat this book is about.
Concepts Managerial
Tha and
Managerial Tailoring Keysto
What ls Tools lor Phase 1
Stratogy7 PtoeoHof Stratogy1o Orvanl r1tion1I Succenfully Phase J Phase 4 Phase 5
Evaluating Executing and
lnlegrotlon Stratogy Various Performance
a Company's Company Aligning the
ind Stra1eglc Devalopmant External end Management Monitoring
Alignment and Situstion• Chas""
ln1ernal Strategy Environmental develop ments,
lmplementl1ion Environment An•lysls evaluating
performance,
and m aking
Chapters Chapters Chapters corrective
Chapter 1 Chepter2 Chapter 7 8, 9, & 10 adjustments
3&4 5&6

Sing le Multi·Business
Business or Diversified
Companies Companies

Z.1 The strategy k.

-ma mg, strategy-executing process
24 Chapter 02 The Managerial Process of Crahing and Executing Strategy 2 2 Developing a Stra tegic Vision (Phase 1) 25

of others, aided internal efforts to mobilize the Ford Motor Company's resources, and
2.2 Develo ing a Strategic Vision (Phase 1) served as a reference point for gauging the merits of the company' s strategic actions.
2.2.1 Considerations and Characteristics of an Effectively Worded Strategic
Vision CORE CONCEPT: A strategic vision describes the route a company intends to take in developing
Very early in the strategy-making process, a company's senior managers .must wrestle ' and strengthening its business. It lays out the company's strategic course in preparing for
the future.
with the issue of what path the company should take and what changes 1~ ~ he company s
product/market/customer/technology focus would improve its market pos1t1on and future
prospects. Deciding to commit the company to one path versus ~nother pushes ~a na~ers W ell-conceived visions are distinctive and specific to a particular organization; they
to draw some carefully reasoned conclusions about how to modify the company s business
avoid generic feel-good statements like " We w ill become a global leader and the first
make-up and what market position it should stake out. . choice of cu stomers in every market we choose to serve"- which could apply to any of
A detailed external and internal environmental analysis is needed to address ~he issues 1
hundreds of organizat ions. In addition, they are not the product of a committee charged
w hich might impact on achieving the vision of the business. These external and .internal
with coming up with an innocuous but w ell-meaning, one-sentence vision that w ins
discussion takes place in Chapters 2 and 3, but we will start the process by looking at a
consensus approva l fro m various stakeholders. N icely w orded vision statements with no
number of direction-shaping factors (see Table 2 .1 ). specifics about the company's prod uct/market/customer/ technology focus fall well short
of w hat it takes for a v ision to measure up. A strategic vision proclaiming management' s
quest " lo be the market leader" or "to be the first choice of customers" or " to be the most
External Considerations Internal Considerations innovative" or "to be recognized as th e best company in the industry" offers scant guidance
• Is the outlook for the company promismg • What are the company's ambitions? What industry about a company's directio n and w hat c hanges and c hallenges lie on the road ahead.
if it simply maintains its product/market/ standing should the company have? For a strategic vision to function as a valuable managerial tool, it must (1) provide
customer/technology focus? Does sticking understanding of what management wants its business to look like and (2) provide managers
with the company's current strategic course
with a reference point in making strategic decisions and preparing the company for the
present attractive growth opportunities?
future. It must say something definitive about how the company's leaders intend to position
• Are changes under way in the market and • Will the company's present business generate
the company beyond where it is today. A good vision alwa ys needs to be a bit beyond a
competitive landscape acting to enhance sufficient growth and profitability in the years
ahead to please shareholders? company's reach, but progress toward the vision is w hat unifies the efforts of company
or weaken the company's prospects?
personnel. Table 2.2 lists some characteristics of an effectively worded strategic vision.
• What. if any, new customer groups and/or • What organizational strengths ought to be
geographic markets should the company leveraged in terms of adding new products or
get in position to serve? services and getting into new businesses?
Gl'llphfc Paints e picture of the kind of company that management is trying to create and the
• Which emerging market opportunities • Is the company stretching its resources too thin by
trying to compete in too many markets or segments, market position(s) the companv is striving to stake out.
should the company pursue? Which ones
should not be pursued? some of which are unprofitable? Directional Is forward·looking; describes the strategic course that management has charted and
• Is the company's technological locus too broad or the kinds of product/market/customer/technology changes that will help the company
• Should the company plan to abandon
too narrow? Are any changes needed? prepare for the future.
any of the markets, market segments, or
customer groups it is currently serv[ng? Focuud
ls specific enough to provide managers with guidance in making decisions and allocating
resources.
- -

TABLE 2.1 Factors to consider in deciding to commit the company to one path ve rsus another
Top management's views and conclusions about the comp~ny'; .direction and future
product/market/customer/technology foc~s con~tit~te a strategic ~1s1on for t~e .company.
A strategic vision delineates managements aspirat1on.s f~r the ~usmess, prov 1d1~g a es
·c v'iew of "where we are going" and a convincing rationale for why this mak
panoram1 . . . . · · a
good business sense for the company. A strategic v1s1on thus ~om.ts an ?rga~1zat1on ':rl
particular direction, charts a strategic path, and moulds orga~1z~t1onal 1dent1ty. A cle nJ
articulated strategic vision communicates management's aspir~t1on.s to stak~holders a
helps steer the energies of company personnel in a common d1re.ct1on. For msta~ce, inatioJl
Henry Ford's vision of a car in every garage had power because 1t captured the 1mag
Fluibl1
ls not a once·and·for-all·time statement- the directional course that management has
charted may have to be adjusted as product/market/customer/technology circumstances
change.
Feasible
Is within the realm of what the company can reasonably expect to achieve in due time.
Desirable
lndicates why the chosen path makes good business sense and is in the long-term
interests of stakeholders (espec ially shareowners, employees, and customers).
Is explainable in 5-10 minutes and, ideally, can be reduced to a simple, memorable slogan
(Lke Henry Ford's famous vision of "a car in every garage").
21 Chapter 02 The Managerial Process of Crafting and Executing Strategy
A sampling of strategic visions currently in use shows a range from strong and clear
to overly general and generic. A surprising number of the visions found on company
websites and in annual reports are vague and unrevealing, saying very little about the
company's future product/market/customer/technology focus. Some are nice-sounding but
say little. Others read like something written by a committee to win the support of different
stakeholders. And some are so short on specifics as to apply to most any company in any
industry. Many read like a public relations statement- high-sounding words that someone
came up with because it is fashionable for companies to have an official vision statement. 2
Table 2.3 provides a list of the most common shortcomings in strategic vision statements.
The one- or two-sentence vision statements most companies make available to the public,
of course, provide only a glimpse of what company executives are really thinking and the
strategic course they have charted-company personnel nearly always have a much better
understanding of where the company is headed and why that is revealed in the official
vision. But the real purpose of a strategic vision is to serve as a management tool for giving
the organization a sense of direction. Like any tool, it can be used properly or improperly,
either clearly conveying a company's strategic course or not.
Vague or incamplela Is short on specifics about where the company 1s headed or what the company
is doing to prepare for the future.
Not forward·looking Does not indicate whether or how management intends to alter the company's
current product/market/customer/technology focus.
Too broad Is so umbrella·like and all·mclusive thatthe company could head in most any
direction, pursue most any opportunity, or enter most any business.
Bland or uninspiring Lacks the power to motivate company personnel or inspire shareholder
confidence about the company's direction or future prospects.
Not distinctive Provides no unique company identity; could apply to companies in any of several
mdustries (or at least several rivals operating in the same industry or market
arena).
Too reliant on Does not say anything specific about the company's strategic
superlatives course beyond the pursuit of such lofty accolades as best, most
successful, recognized leader. global or worldwide leader. or first choice of
customers.
T. TABLE 2.3 Common short~omings ;n company vis;on statements
Ir' Sources· ~ased on mformat101~111 ~ugh Davidson, T~c Comn111tcd f ntcrpr1sc How ro M,1kc V1S1011 and Values Work (Oxford
I. Bunorwort/1 Heinemann. 20021. Chapter 2. and Michel Robert. Str.itegy Pure and Simple 11 INcwYork· McGraw·Hrl!, 1992),
' cl1;p1;;;·2.~1a~' . '.
Illustration Capsule 2.1 provides examples of strategic visions of several prominent
South African and international companies. See if you can tell which ones are mostly
meaningless or nice-sounding and which ones are managerially useful in communicating
"where we are headed and the kind of company we are trying to become".
2..2 Developing a Strategic Vision (Phase I) 27
1llustr«1tion Capsule 2 .1: Examples of Strategic Visions-How Well Do
They Measure Up?
• Vodacom
To democratise the telephony market in Africa and to contribute to creating an
information society by offering access to information across various platforms and
devices. Vodacom 's commitment to this industry is driven by its passion for and
dedication to its stakeholders, customers, employees, and financial performance.
• Coca-Cola Sabco
We will be the best Coca-Cola bottler in the world
• Basil Read
To be a diversified construction group competing with the "Big 4 " in the industry.
•Peugeot
To positively contribute to the Southern African economy in a responsible manner.
• Atlanta Web Printers
To be the first choice in the printed communications business. The first choice is the
best choice, and being the best is what Atlanta Web pledges to work hard at being -
everyday!
• Balanced Scorecard Institute of South Africa
It is our vision lo instill high performance cultures in South African and African
businesses
Sources: Company documents and websites.
2.2.2 Strategic Vision Covers Different Ground From the Typical Mission
Statement
The defining characteristic of a well-conceived strategic vision is what it says about the
company's future strategic course-"the direction we are headed and what our future
product/market/customer/technology focus will be".
In contrast, the mission statements that one finds in company annual reports or
posted on company websites typically provide a brief overview of the company's
present business purpose and raison d'etre. and sometimes its geographic coverage or
standing as a market leader. They may or may not single out lhe company's present
products/services, the buyer needs it is seeking lo satisfy, the customer groups it serves,
or its technological and business capabilities. Rarely, however, do company mission
slalements say anything about where the company is headed, the anticipated changes in
its business, or its aspirations; hence, they lack the essential forward-looking quality of a
strategic vision in specifying a company's direction and future product/market/cuslomer/
technology focus.
28 Chapter 02 The Managerial Process of Crahing and Executing Strategy
Consider, for example, the mission statement of Trader Joe's (a specialty convenience
food chain):
The mission of Trader Joe's is tp give our customers the best food and beverage
values that they can find anywhere and to provide them with the information
required for informed buying decisions. We provide these with a dedication to
the highest quality of customer satisfaction delivered with a sense of warmth,
friendliness, fun, individual pride, and company spirit.
Note that Trader Joe's mission statement does a good job of conveying "who we are, what
we do, and why we are here", but provides no sense of "where we are headed". (Some
companies use the term business purpose instead of mission statement in describing
themselves; in practice, there seems to be no meaningful difference between the terms
mission statement and business purpose-which one is used is a matter of preference.)
There is value in distinguishing between the forward-looking concept of a strategic
vision and the here-and-now theme of the typical mission statement. Thus, to mirror actual
practice, we will use the term mission statement to refer to an enterprise's description of
its present business and its purpose for existence. Ideally, a company mission statement is
sufficiently descriptive to identify the company's products/services and specify the buyer
needs it seeks to satisfy, the customer groups or markets it is endeavouring to serve, and
its approach to pleasing customers. Not many company mission statements fully reveal all
of these facets (and a few companies have worded their mission statements so obscurely
as to mask what they are about), but most company mission statements do a decent job of
indicating "who we are, what we do, and why we are here".
CORE CONCEPT: The distinction between a strategic vision and a mission statement is fairly
clear-cut: a strategic vision portrays a company's future business scope (wwhere we are
goingH), whereas a company's mission typically describes its present business and pur-
pose ("who we are, what we do, and why we are here").
Google's mission statement, while short, still captures the essence of the company: "to
organize the world's information and make it universally accessible and useful".
An example of a not-so-revealing mission statement is that of the present-day Ford
Motor Company: "We are a global family with a proud heritage passionately committed
to providing personal mobility for people around the world. We anticipate consumer need
and deliver outstanding products and services that improve people's lives." A person who
has never heard of Ford would not know from reading the company's mission statement
that it is a global producer of motor vehicles. Similarly, Microsoft's mission statement-
"to help people and businesses throughout the world realize their full potential" - says
nothing about its products or business make-up and could apply to many companies
in many different industries. Coca-Cola, which markets nearly 400 beverage brands in
over 200 countries, also has an overly general mission statement: "to benefit and refresh
everyone it touches". A mission statement that provides scant indication of "who we are
and what we do" has no substantive value.
Occasionally, companies couch their mission statements in terms of making a profit.
This is misguided. Profit is more correctly an objective and a result of what a company
2.2 Developing a Strategic Vision (Phase 1) 29
does. Moreover, earning a profit is the obvious intent of every commercial enterprise. Such
companies as BMW, Anglo American, SASOL, BP, and N~kia a~e each striving to e~rn a
profit for shareholders; but plainly the fundamentals of t~;ir ~usmesses are substant1ally
different when it comes to "who we are and what we do . It 1s managements answer to
1
"Make a profit doing what and for whom?" that reveals a company's true substance and
business purpose. A wel/.c onceived mission statement distinguishes a company's business
make-up from that of other profit-seeking enterprises in language specific enough to give
the company its own identity.
2.2.3 Communicating the Strategic Vision
Effectively communicating the strategic vision dow~ the line to lower-level r:nan~gers
and employees is as important as choosing a strategically sound long-term direction.
Not only do people have a need to believe that senior management knows where
it's trying to take t11e company and understand what changes lie ahead both
externally and internally, but unless and until frontline employees understand why
the strategic course that management has charted is reasonabl~ a~d benefi.cial.' they
are unlikely to rally behind managerial efforts to get the organ1zat1on moving in the
intended direction.
Winning the support of organization members for the vision nearl! alw~y~ means
putting "where we are going and why" in writing, distributi.ng the ~~1tten v1s_1on
( organization-wide, and having executives personally e~plam the v1s1on and 1 t~ ..
rationale to as many people as feasible. Ideally, executives should present _their v1s1on
I for the company in a manner that reaches out and grabs people. An engaging and
convincing strategic vision has enormous motivational value-for the same reason that a
stonemason is more inspired by "building a great cathedral for the ages" than by "laying
stones to create floors and walls". When managers articulate a vivid and compelling
case for where the company is headed, organization members begin to say, "This is
1 interesting and has ll lot of merit. I want to be involved and do my part to helping
make it happen." The more that a vision evokes positive support and excitement, the
greater its impact in terms of arousing a committed o~ganizational ~ffort ~~d getti~g
company personnel to move in a common directi.on. Thus execu~1ve _abtl.1ty to_raint a
convincing and inspiring picture of a company's iourney and destination 1s an important
element of effective strategic leadership.
CORE CONCEPT: An effectively communicated vision is a valuable management tool for enlist·
ing the commitment of company personnel to actions that get the company moving in the
l intended direction.
~~~~~--~~~--~~~~~~~~~~~~~~~~~~~~~~-
Expressing the Essence of the Vision in a Slogan
The task of effectively conveying the vision to company personnel is assisted when
management can capture the vision of where to head in a catchy or easily remembered
slogan. A number of organizations have summed up their vision in a brief phrase:
• Nike: "To bring innovation and inspiration to every athlete in the world".
• PetroSA: "To be the leading African energy company".
30 Chapter 02 The Managerial Process of Crafting and Executing Strategy
11
• SASOL: At Sasol, our vision is to be a respected global enterprise".
• Greenpeace: "To halt environmental abuse and promote environmental
solutions".
Creating a short slogan to illuminate an organization's direction and purpose and
then using it repeatedly as a reminder of "where we are headed and why" helps rally
organization members to hurdle whatever obstacles lie in the company's path and
maintai n their focus.
CORE CONCEPT: Strategic visions become real only when the vision statement is imprinted in th e
minds of organization members and then translated into hard objectives and strategies.
Breaking Down Resistance ta a New Strategic Vision
It is particularly important for executives to provide a compelling rationale for a
dramatically new strategic vision and company direction. When company personnel don' t
understand or accept the need for redirecting organizational efforts, they are prone to resist
change. Hence, reiterating the basis for the new direction, addressing employee concerns
head-on, calming fears, lifting spirits, and providing updates and progress reports as
events unfold all become part of the task of mobilizing support for the vision and winning
commitment to needed actions.
Just stating the case for a new direction once is not enough. Executives must repeat
the reasons for the new direction often and convinci ngly at company gatherings and in
company publications, and they must reinforce their pronouncements with updates about
how the latest information confirms the choice of direction and the validity of the vision.
Unless and until more and more people are persuaded of the merits of management's new
vision and the vision gains wide acceptance, it will be a struggle to move the organization
down the newly chosen path.
Understanding the Benefits al a Clear Vision Statement
In sum, a well -conceived, forcefully communicated strategic vision pays off in several
respects:
1 It crystallizes senior executives' own views about the company' s long-term direction.
2 It reduces the risk of rudderless decision making.
3 Jt is a tool for winning the support of organizatlonal members for internal changes
that will help make the vision a reality.
4 It provides a beacon for lower-level managers in forming departmental m issions,
setting departmental objectives, and crafting functional and departmental strategies
that are in sync with the company's overall strategy.
5 It helps an organization prepare for the future.
When management is able to demonstrate significant progress in achievi ng these five
benefits, the first step in organizational direction setting has been successfully completed.
Z.2 Developing a Strategic Vision (Phase 1t 31
2.2.4 Linking the Vision/Mission with Company Values
Many companies have developed a statement of values to guide the company' s pursuit of
its vision/mission, strategy, and ways of operating. By values {or core values, as they are
often called), we mean the beliefs, traits, and w ays of doing things that management has
determined should guide the pursuit of its vision and strategy, the conduct of company' s
operations, and the behaviour of compan y personnel.
'
CORE CONCEPT: A company's values are the beliefs, traits, and behavioural norms that company
personnel are expected to display in conducting the company's business and pursuing its
strategic vision and strategy.
Values, good and bad, exist in every organization. They relate to such things as fair
treatment, integrity, ethical behaviour, innovation, teamw ork, top-notch quality, superior
)
customer service, social responsibility, and community citizenship. Most companies have built
their statements of values around four to eight traits that company personnel are expected to
display and that are supposed to be mirrored in how rhe company conducts its business.
At Sasol, six core values has helped them live up to their brand promise. These are:
• Customer focus
• Winning with people
• Safety
• Excellence in all we do
• Continuous improvement
• Integrity.
Energized by strong Sasol values, they aspire to create an env ironment w here teams of
dedicated people with diverse talents grow their full potential through skills development,
performance rew ards and participation in a safe and healthy working environment.
At Kodak, the core values are respect for the dignity of the individual, uncompromising
integrity, unquestioned trust, constant credibility, continual improvement and personal
renew al, and open celebration of individual and team achievements.
Toyota preaches respect for and development of its employees, teamwork, getting
quality right the first time, learning, continuous improvement, and embracing change in its
pursuit of low-cost, top-notch manufacturing excellence in motor vehicles.
DuPont stresses four values- safety, ethics, respect for people, and env ironmental
stewardship; the first three have been in place since the company w as founded 200 years
ago by the DuPont family.
Heinz uses the Jc ronym PREMIER to identify seven values that "define to the world and
to ourselves who w e are and what we stand for":
• .eassion ... to be passionate about winning and about our brands, products and
people, thereby delivering superior value to our shareholders.
• Risk Tolerance ... to create a culture w here entrepreneurship and prudent risk taking
are encouraged and rewarded.
 32 Chapl&r 02 The Managerial Process of Crafling and Executing Strategy

2.2 Developing a Strategic Vision (Phase 11 33

• fxcellence ... to be the best in quality and in everything we do.
• individuals
Motivation and
... tolearns.
celebrate success, recognizing and rewarding !he achievements of
illustril t1o
. n Capsu Je -·-
? ? ·. The Connection Between Yahoo 's Mission and
• Innovation ... to innovate in everything, from products lo processes. Core Values
what's right. ... to empower our talented people to take the initiative and to do
• frnpowerrnent
. . . to be the most essential global Internet service for consumers a~d
• Respect ... to act with integrity and respect towards all. O ur mtssrnn ts
businesses. i:ow ~e
h t mission is influenced by a set of core values-t e
pur:.ue t a •th fellow Yahoos, the principles that direct how
Do companies practise what they preach when it comes to their professed values? standar~s that gmde mtera~e1~~:a~\lrnt
drive what we do and how we do it. Many of
Sometimes no, sometimes yes-it runs the gamut. At one extreme are companies with we service
I our customers,
were t . by two guys .m a trailer some time ago; others dreflect
put into practice
window-dressing values; the values statement is merely a collection of nice words ambitions
our va uesas our company grows. All of them are what we strive to achieve every ay.
and phrases that may be given lip service by top executives but have little discernible
impact on either how company personnel behave or how the company operates. Such
~nt~1: fl~~less
Excellence . . . . it We know leadership is hard won and should
companies have values statements because such statements are in vogue and are We are committed to wmnmg with execution and don't take short-cuts on
seen as making the company look good. At the other extreme are companies whose never beWe
quality. taken
seekforthe
granted.
best ta WIe aspd1re
ent an prom ate its development. We are flexible and learn
executives lake the stated values very seriously- the values are widely adopted by from our mistakes.
company personnel, are ingrained in the corporate culture, and are mirrored in how
company personnel conduct themselves and the company's business on a daily basis.
We thrive on creativity and ingenmty. We s~e t e
Top executives at companies on this end of the values-statement gamut genuinely Innovation . k h innovations and ideas that can change
, kly to embrace them. We are not
believe in the importance of grounding company operations on sound values and the world. We anticipate market trends an move qmc
ways of doing business. In their view, holding company personnel accountable afraid to take informed, responsible risk.
for displaying the stated values is a way of infusing !he company with the desired
character, identity,
of DNA. and behavioural norms- the values become the company's Customer Fixation ~
r et that they come to us by choice.
cnuastlor:epr~nas~~~~tyal!oe~:i:~~i:::e;c~s~omers'
equivalent
We srehspect
We our
are a perso . loyalty
r and trust. We listen
At companies where the stated values are real rather than cosmetic, managers connect and respond to our customers and seek to exceed their expecta mns.
values to the pursuit of the strategic vision and mission in one of two ways. In companies

~:~:~·:ne another wHh mpect and communicate openly. Wdos;;; c;~~~:;;i;::,0;

0
with long-standing values that are deeply entrenched in !he corporate culture, senior
managers are careful to craf! a vision, mission, and strategy that match established values,
and they reiterate how the values-based behavioural norms contribute lo the company's
business success. If the company changes lo a different vision or strategy, executives take
while maintaining
anywhere individu.al
within the a.ccou;tability.
orgamzahon. e apprec1a e ~; e~hceo~:~~: ~~e~:~:i~~= perspectives and
care to explain how and why the core values continue to be relevant. Few companies with diverse expertise.
sincere
with values.to established core values ever undertake strategic moves that conflict
commitment
ingrained

In new companies or companies with weak or incomplete sets of values, lop

Community
We share an
consumers in infectious sebn~e m1s.s~I
. ·on to make an impact on society and empower
ways never e1oreofposst e. We are committed to serving both !he Internet
management considers what values, behaviours, and business conduct should community and our own communities.
characterize the company and that will help drive !he vision and strategy forward. Then
values and behaviours that complement and support vision are drafted and circulated
W
Fun believe humour is essential to success. We app laud irreverence and don ' t take
among managers and employees for discussion and possible modification. A final values
statement that incorporates the desired behaviours ;ind tra its and !hat connects to the ou:selves too seriously. We celebrate achievement. We yodel.

:.ht:•.Y.:~ :f~;:::•ltu:: ~:tement, Yahoo made a point of slngUng out 5~!h!~:.::ha~~t

vision/mission is then officially adopted. Some companies combine their vision and 0 1
values into a single statement or document, and circulate ii lo all organization members.
lllusrration C;:ipsule 2.2 describes the connection between Yahoo's mission and its core
values. did not value, including bureaucracy, losing, good en~ugh, arroganc~ nday mor:in~
Of course, a wide gap sometimes opens between a company's stated values and ils ~~!~=:~=~:;,r~~I~~ j1 ~u~:~l~it~%'i!~~~i~~et~:a~~;f~y~;r;;ca::g~~:~nc~ing the clock,
and "shoulda coulda woulda".
actual business practices. Cape-based Fidentia (the company that mismanaged billions
Source: htt p://!locs.y ahoo.com/in fo/vnluo.~ (nccossocl 1Novombor 2009).
34 Chaptar 02 The Me nag eria I Process of Crafting and Exe cu ting Strategy
of stakeholders' money) for example, touted corporate values like respect, integrity,
communication, and excellence, but the top official engaged in dishonest and fraudulent
manoeuvres that were concealed by ."creative" accounting; the lack of integrity and their
deliberate failure to accurately communicate with shareholders and regulators in the
company's financial filings led directly to the company's dramatic demise.
The report4 which accompanied the legal papers in the court application for provincial
liquidation spells out a litany of mismanagement and misappropriation of investors'
money; total disregard for laws protecting investors; and significant contraventions of the
financial licence conditions of Fidentia Asset Management.
2.3 Setting Ob"ectives (Phase 2) --~~~~~~~~~~~~~~~~~~
2.3 Setting Objectives (Phase 2f 35
I
improving both its fi nancial performance and its business position, and to be more
intentional and focused in its actions. Stretch objectives spur exceptional performance
and help compani es guard against c ontentment with modest gains in organizational
performance.
2.3.2 What Kinds of Objectives to Set The Need for a Balanced Scorecard
Two very distinct types of performance yardsticks are required: those relating to financial
performance and those relating to strategic performanc~outcomes that indicate a
company is strengthening its marketing standing, competitive vitality, and future business
prospects. Examples of commonly used financial objectives and strategic objectives
inc lude the following:

2.3.1 Nature of Objectives

Financial Objectives
The managerial purpose of setting objectives is to convert the strategic vision into
• An x per cent increase in annual revenues
specific performance targets- results and outcomes the company's management wants
• Annual increases in after-tax profits of
to achieve. Objectives represent a managerial commitment to achieving particular xper cent
results and outcomes. Well-stated objectives are quantifiable, or measurable, and • Annual increases in earnings per share of
contain a deadline for achievemenl. As Bill Hewlett, cofounder of Hewlett-Packard, xper cent
shrewdly observed, "You cannot manage what you cannot measure .... And what gets • Annual dividend increases
measured gets done."5 • Larger profit margins
Concrete, measurable objectives are managerially valuable because they serve • An x per cent return on capital employed
as yardsticks for tracking a company's performance and progress- a company that (ROCEJ or return on equity (ROEi
consistently meets or beats its performance targets is generally a better overall performer • Increased shareholder value-in the form of
than a company that frequently falls short of achieving its objectives. Indeed, the an upward trending stock price end ennuel
dividend increases
experiences of countless companies and managers teach that precisely spelling out how
• Strong bond end creditratings
much of what kind of performance by when and then pressing forward with actions and
• Sufficient internal cash flows to fund new
incentives calculated to help achieve the targeted outcomes greatly improve a company's
capital investment
actual performance.
• Stahie earnings during periods of recession
The above approach definitely beJts setting vague targets like "maximize profits",
"reduce costs", "become more efficient", or "increase sales", which specify neither how - - - -
Strategic Objectives
• Winning an x per cent marketshere
• Achieving lower overall costs then rivals
• Overtaking key competitors on product
performance or quality or customer service
• Deriving x per cent of revenues from the sale
of new products introduced within the pest five
years
• Acfi;eving technological leadership
• Having better product selection than rive Is
• Strengthening the company's brand-name
appeal
• Heving stronger national or global sales end
distribution capabilities then rivals
• Consistently getting new or improved products
to market ahead of rive ls
--- - -

TABLE 2.4 Fin ancial and st rategic objectives

much nor when. Similarly, exhorting company personnel to try hard or do the best they
can, and then living with whatever results they deliver, is dearly inadequate.

rr;:;;; CONCEPT: Financial objectives relate to the financial performance targets management
CORE CONCEPT: Objectives are an organization's performance targets-the results and out- I uum: has established for the organization to achieve. Strategic objectives relate to target out·
comes management wants to achieve. They function as yardsticks for measuring how well comes that indicate a company is strengthening its market standing, competitive vitality,
the organization is doing. • and future business prospects.

The Imperative of Setting Stretch Objectives
Ideally, managers ought to use the objective-setting exercise as a tool for stretching
an organization to perform at its full potential and deliver the best possible results.
Challenging company personnel to go all out and deliver "stretch" gains in
performance pushes an enterprise to be more inventive, to exhibit more urgency in
Achieving acceptable financial results is a must. Without adequate profitability and
financial strength, a company's pursuit of its strategic vision, as well as its long-term health
and ultimate survival, is jeopardized. Furthermore, sub-par earnings and a weak balance sheet
not only alarm shareholders and creditors but also put the jobs of senior executives at risk.
However, good financial performance, by itself, is not enough. Of equal or greater importance
-..-,..w• v .. ' " " 1v1111111gena1 l'rocess of Crafting end Executing Strategy
is a company's strategic performance-outcomes that indicate whether a company's market
position and competitiveness are deteriorating, holding steady, or improving.
The Case for a Balanced Scorecard: lmpro11ed Strategic Performance Fosters Better
Financial Performance
A company's fi nancial performance measures are really lugging indicators that reflect
the results of past decisions and organizational activities.<' However a company's past
or current financial performance is not a reliable indicator of its future prospects poor
financial performers ofren turn things around and do belier, while good financial
performers can fall on hnrd times. The best and most reliable leading indicators of a
company's future fi nancial performance and business prospects are strategic outcomes
tha r ind i<;!!te whethe r the company's competitiveness and market position are stronge< or
weaker. rFor inst<ince, if a company has set aggressive strategic objectives and is achieving
them-such that its competitive strength and market position are on the rise, then there's
reason to expect that its future financial performance will be better than its current or
past performance. If a company is losing ground to competitors and its market position
is slipping-outcomes that reflect weak strategic performance (and, very likely, failure to
achieve its strategic objectives), then its ability to maintain its present profitability is highly
suspect. Hence, the degree to which a company's managers set, pursue, and achieve
stretch strategic objectives tends to be a reliable leading indicator of whether its future
financial performance will improve or stall.
CORE CONCEPT: A company that pursues and achieves strategic outcomes that boost its com-
petitiveness and strength in the marketplace is in much better position to improve its future
l financial performance.
Consequently, a balanced scorecard for measuring company pe rforma nce-one tha t
tracks the achievement of both financial objectives and strategic objectives- is optimal.7
Just tracking a company' s financial performance overlooks the fac t that what ultimately
enables a company to deliver better financial results from its operatio ns is the ac hieveme nt
of strategic objectives that improve its competitiveness and market strength. Indeed, the
surest path to boosting company profitability quarter after quarter and year after year is to
relentlessly pursue strategic outcomes that strengthen the compan y's market p osition and
produce a growing competitive advantage over rivals.
Roughly 53 per cent of the top global companies a nd many no n-profit and
governmental organizations used the balanced scorecard approach in 2008.u
Organizations that have adopted the balanced scorecard approach to setting objectives
and measuring performance include BMW, AT&T ~anada , Daimle rChrysle r, Siemens,
Saatchi & Saatchi, US Departme nt of the Army, the United Kingdom's Ministry of Defence,
the University of California at San Diego, and the City of Charlolle, North Caro lina.9
Companies in South Africa included Mango, SAA, PetroSA, V&A Wate rfront, Old Mutual,
FNB, Duferco, TCTA, British American Tobacco, She rwood Interna tional, Akanya Business
Development, ere. Illustration Capsule 2.3 shows se lected objectives of three prominent
companies- all employ a combination of strategic and financial objectives.
2 3 Setting Ob1ect1ves (Phase 2) 37
lllustr;ition CJpsule 2.3: Examples of Company Objectives
McDonald's
Place more emphasis on delivering an exceptional customer experience; add
approximately 350 net new McDonald's restaurants; reduce general and administrative
spending as a percent of total revenues; achieve system-wide sales and revenue growth
of 3 per cent to 5 per cent, annual operating income growth of 6 per cent to 7 per cont,
and annual returns on incremental invested capital in the high teens.
Seagate Technology
Solidify the c ompany's No. 1 position in the overall market for hard-disk drives; gel
more Seagate drives into popular consumer electronics products; take share away from
Western Digital in providing disk drives for Microsoft's Xbox; maintain leadership in
core markets and achieve leadership in emerging markets; grow revenues by 10 per cent
per year; maintain gross margins of 24-26 per cent; hold internal operating expenses to
13-13.5 per cent of revenue.
JM Corporation
To achieve long term sales growth of 5- 6 per cent organic plus 2-4 per cent from
acquisitions; annual growth in earnings per share of 10 per cent or better, on average;
a return on stockholders' equity of 20 per cent- 25 per cent; a return on capital employed
of 27 per cent or better; double the number of qualified new 3M product ideas and triple
the value of products that win in the marketplace; and build the best sales and marketing
organization in the world.
Sources: Information postod on company websites.
Both Short-Term and Long-Term Objecti11es Are Needed
As a rule, a company's set of fina ncia l a nd strategic objecti ves ought to include both
near-term a nd longer-term performance targets. Having quarte rly a nd annual objectives
foc uses a tte ntion on de livering immediate perfo rmance improvements. Targets to be
achieved within three to five years prompt considerations of what to do now to put the
company in position to perform bette r later. A company that has an objective of doubling
its sales within five years can' t wait until the third or fourth year to begin growing its
sales and customer base. By spelling out annual (or perhaps quarterly) performance
targets, management indicates the speed at which longer-range targets are to be
approached. Long-term objectives take on particular importance because it is generally
in the best interest of shareholders for companies to be managed for optimal long-term
pe rformance. When trade-offs have to be made between achieving long-run objectives
and achieving short-run objectives, long-run objectives should take precedence (unless
the achievement of one or more short-run performance targe ts have unique importance).
Shareholders are seldom well served by repeated management actions that sacrifice
better long-term performance in order to make quarterly or annual targets.
38 Chapter 02 The Manage nal Process of Crafting and Executing Strategy
Strategic Intent: Relentless Pursuit of an Ambitious Strategic Objective
Very ambitious companies often establish a long-term strategic objective that clearly
signals strategic intent lo be a winner in the marketplace, often against long odds. 10
A company's strategic intent can entail unseating the existing industry leader, becoming
the dominant market share leader, delivering the best customer service of any company
in the industry (or the world), or turning a new technology into products capable of
changing the way people work and llve. Nike's strategic intent during the 1960s was to
overtake Adidas; this intent connected nicely with Nike's core purpose "to experience
the emotion of competition, winning, and crushing competitors". Canon's strategic intent
in copying equipment was to "beat Xerox". For some years, Toyota has been driving to
overtake General Motors as the world's largest motor vehicle producer- and it surpassed
Ford Motor Company in total vehicles sold in 2003, to move into second place. Toyota
has expressed its strategic intent in the form of a global market share objective of 15
per cent by 2011. Starbucks' strategic intent is to make the Starbucks brand the world' s
most recognized and respected brand.
( CORE CONCEPT: A company exhibits strategic intent when it relentlessly pursues an ambitious
strategic objective, concentrating the full force of its resources and competitive actions on
l. achieving that objective.
Ambitious companies that establish exceptionally bold strategic objectives and have an
unshakable commitment to achieving them almost invariably begin with strategic intents
that are out of proportion to their immediate capabilities and market grasp. But they pursue
their strategic target relentlessly, sometimes even obsessively. They rally the organization
around efforts to make the strategic intent a reality. They go all out lo marshal the
resources and capabilities to close in on their strategic target (which is often global market
leadership) as rapidly as they can. They craft potent offensive strategies calculated to throw
rivals off-balance, put them on the defensive, and force them into an ongoing game of
catch-up. They deliberately try to alter the market contest and tilt the rules for competing
in their favour. As a consequence, capably managed, up-and-coming enterprises with
strategic intents exceeding their present reach and resources are a force to be reckoned
with, often proving to be more formidable competitors over time than larger, cash-rich
rivals that have modest strategic objectives and market ambitions.
The Need far Objectives at All Organizational Levels
Objective setting should not stop with top management's establishing of company-wide
performance targets. Company objectives need to be broken down inlo performance
targets for each of the organization's separate businesses, product lines, functional
deparlmenls, and individual work units. Company performance can'! reach full potenlial
unless each organizational unit sets and pursues performance targets that contribute
directly lo the desired company-wide outcomes and results. Objective setting is thus
a top-down process that must extend to the lowest organizational levels. It means that
each organizational unit must lake care lo set performance targets that support- rather
than conflict with or negate-the achievement of company-wide strategic and financial
objectives.
Z.4 Crafting a Strategy (Phase 31 39
The ideal situation is a team effort in which each organizational unit strives to p d
· · f ·b·1· ro uce
resu rts m its area o respons1 1 r~y t~~t contribute to the achievement of the company's
performa~ce targ~ts and strategrc vrsron. Such consistency signals that organizational units
know ~herr strategic role and are on board in helping the company move down the chosen
strategic path and produce the desired results.
Objsctive Setting Needs to Be Top-Down Rather than Bottom-Up
A top-do~n pr_ocess of settin.g company-wide performance targets first and then insisting
that the frnancral and strategic performance targets established for business units divi·s·
· l d , rons,
funct1ona ~pa~tments, and operating units be directly connected to the achievement of
comp~ny ?bJect1ves has t~o po':erfuJ advantages; one, it helps produce cohesion among
~he ob1ect1ves and strategres of different parts of the organization; two, it helps unify
mt~rnal eff~rts to ~ove the comp~ny .along the chosen strategic path. If top management,
desirous of involving many organization members, allows objective setting to start at
the bottom le~els of an organization without the benefit of company-wide performance
targets as a guide, then lower-level organizational units have no basis for connecting their
performance targets to the company's.
CORE CONCE~T: Bottom-up objective setting, with little or no guidance from above, nearly
always signals an absence of strategic leadership on the part of senior executives.
2.4 Crafting a Strateg_y (Phase 3)
The I.ask of crafting a strategy entails answering a series of hows: how lo grow the
b u.smess, how to p~~ase customers, how to outcompete rivals, how to respond to
changrng market cond1t1ons, how to manage each functional piece of the business and
devel~p neede~ c~mpetencies and capabilities, how to achieve strategic, financial and
operat1~nal ob1ect.1ves. It als? means exe~cising astute entrepreneurship in choosing among
lhe various strategic allernatrves-proactrvely searching for opportunities to do new th·
to d ·f h· · b rngs or
. o ex'.s mg t ings tn n.e.w or etter ways. 11 The faster a company's business environment
is_ changing, the more crillcal the need for its managers to be good entrepreneurs in
d1~gnosing t~e direction and force of the changes under way and in responding with timely
adjustments rn str.at~gy. Strateg~ maker~ have to pay attention to early warnings of future
cha~~e a.nd be wr.llrng lo experiment with dare-to-be-different ways to alter their market
pos1t1on In preparing for new market conditions. When obstacles unexpectedly appear
tn a co.mpany's path, it is up to management to adapt rapidly and innovatively. Masterful
~trateg1es com~ partly '.maybe mostly) by doing things differently from competitors where
~ counts- out·mnovatm? then:', being more efficient, being more imaginative, adapting
faster- rather than runnmg with the herd. Good strategy making is therefore inseparable
rom good business entrepreneurship. One cannot exist without the other.
2.4.1 Who Participates in Crafting a Company's Strategy?
: comrany's. senior executives obviously have important strategy-making roles. The chief
xecut1ve officer (CEO) wears the mantles of chief direction setter, chief objective setter,
40 Chapter 02 Tile Managerial Process of Crahing and Executing Strategy
chief strategy maker, and chief strategy implementer for the total enterprise. Ultimate
responsibility for leading the strategy-making, strategy-executing process and full alignment
rests with the CEO. In some enterprises the CEO functions as strategic visionary and chief
architect of strategy, personally deciding what the key elements of the company's strategy
will be, although others may well assist with data gathering and analysis, and the CEO
may seek the advice of other senior managers and key employees in fashioning an overall
strategy and deciding on important strategic moves. A CEO-centred approach to strategy
development is characteristic of small owner-managed companies and someti':"1es large
corporations that have been founded by the present CEO or that have CEOs wit~ strong
strategic leadership skills. Adrian Gore at Discovery, Johan van Zyl at S~nlam, Bill Venter
of Altron, Edwin Hertzog at MediClinic, Jeffrey lmrnelt at General Electric, and Howard
Schultz at Starbucks are prominent global examples of corporate CEOs who have wielded
a heavy hand in shaping their company's strategy.
In most companies, however, strategy is the product of more than just the CEO's
handiwork. Typically, other senior executives- business unit heads, the chief financial
officer, and vice presidents for production, marketing, human resources, and other
functional departments- have influential strategy-making roles and help fashion the chief
strategy components. Normally, a company's chief financial officer (CFO: is i~ charge. of
devising and implementing an appropriate financial strategy; the product10? v1c~ president
takes the lead in developing the company's production strategy; the marketing vice
president orchestrates sales and marketing strategy; a brand manager is in charge of the
strategy for a particular brand in the company's product line-up; and so on.
Nonetheless, even here it is a mistake to view strategy making as a top management
function, the exclusive province of owner-entrepreneurs, CEOs, and other senior
executives. The more a company's operations cut across different products, indust~ies, and
geographical areas, the more headquarters executives have little op.lion but to dele~ate
considerable strategy-making authority to down-the-line managers in charge of particular
subsidiaries, divisions, product lines, geographic sales offices, distribution centres, and
plants. On-the-scene managers with authority over specific operating units are in the
best position to evaluate the local situation in which the strategic choices must be made
and can be expected to have detailed familiarity with local market and competitive
conditions, customer requirements and expectations, and all the other aspects surrounding
the strategic issues and choices in their arena of authority. This gives them an edge over
headquarters executives in keeping the local aspects of the company's strategy responsive
to local marker and competitive conditions.
Take the Japanese company Toshiba, a US$50 billion corporation with
300 subsidiaries, thousands of products, and operations extending across the world. While
top-level Toshiba executives may well be personally ia.volved in shaping Toshiba's overall
strategy and fashioning important strategic moves, it doesn't follow that a few senior
executives at Toshiba headquarters have either the expertise or a sufficiently detailed
understanding of all the relevant factors to wisely craft all the strategic initiatives taken
for 300 subsidiaries and thousands of products. They simply cannot know enough about
the situation in every Toshiba organizational unit to decide upon every strategy detail
and direct every strategic move made in Toshiba's worldwide organization. Rather, it
takes involvement on the part of Toshiba's whole management team- top executives,
subsidiary heads, division heads, and key managers in such geographic units as sales
2.4 Crahing a Strategv IP'1ase JI 41
offices, distribution centres, and plants- to craft the thousands of strategic initiatives that
end up comprising. thew.hole of Toshiba's strategy. The same can be said for a company
like General Electric, which employs 300 000 people in businesses ranging from jet
engines to plastics, power generation equipment to appliances, medical equipment to TV
broadcasting, and locomotives to financial services (among many others) and that sells to
customers in over 100 countries.
While managers farther down in the managerial hierarchy obviously have a narrower,
more specific strategy-making role than managers closer to the top, the important
understanding here is that in most of today's companies every company manager
typically has a strategy·making role- ranging from minor to major- for the area he or
she heads. Hence, any notion that an organization's strategists are at the top of the
manag:m:nt h.ierarchy a~d that mid-level and frontline personnel merely carry out the
strategic d1rectrves of senror managers needs to be cast aside. In companies with wide-
ranging operations, it is far more accurate to view strategy making as a collaborative or
team effort involving managers (and sometimes key employees) down through the whole
organizational hierarchy.
CORE CONCEPT: In most companies, crafting and executing strategy is a team effort in which
every manager has a role for the area he or she heads. It is flawed thinking to view crafting
and executing strategy as something only high-level managers do.
l~volv~ng teams of people to dissect complex situations and come up with strategic
solutro.ns_rs an often-used component of the strategy-making process because many
strateg1c.1ssues are complex or cut across multiple areas of expertise and operating units,
thus catlmg for the contributions of many disciplinary experts and the collaboration of
managers from different parts of the organization. A valuable strength of collaborative
~trategy-making is that the team of people charged with crafting the strategy can easily
m:l~de the very p~ople "'.ho will also be charged with implementing and executing it.
Giving people an influential stake in crafting the strategy they must later help implement
and execute not only builds motivation and commitment but also means those people can
be held accountable for pulling the strategy into place and making it work- the excuse of
"It wasn't my idea to do this" won't fly.
2.4.2 The Strategy-Making Role of Corporate lntrapreneurs
In some companies, top management makes a regular practice of encouraging individuals and
learns to develop and champion proposals for new product lines and new business ventures.
The idea is to unleash the talents and energies of promising "corporate intrapreneurs", letting
~h~'.11 ~ry out untested business ideas and giving them the room to pursue new strategic
1n1t1at1ves. Executives judge which proposals merit support, give the chosen intrapreneurs the
o~ganizational and budgetary support they need, and let them proceed freely. Thus, important
pieces of company strategy can originate with those intrapreneurial individuals and teams
who succe.ed in championi.ng a pro~sal through the approval stage and then end up being
charged with l~e lead role 1n laun.ching new products, overseeing the company's entry into
new geographic markets, or heading up new business ventures.
 .... ~ .. ~ 11 .. , " " nuc11ss or !;rafting and Executing Strategy 2.4 Crafting a Strategy !Phase JI 43

Discovery (famous for its innovation in the South African healthcare industry) is In diversified, multibusiness companies where the strategies of several different
an avid and highly successful practitioner of the corporate intrapreneur approach to businesses have to be managed, the strategy-making task involves four distinct types or
strategy making. Discovery expects employees to initiate improvements and to display levels of strategy, each of which involves different facets of the company's overall strategy:
innovativeness. Each employee's intrapreneurial contributions are prime considerations 1 Corporate strategy consists of the kinds of initiatives the company uses to establish
in determining raises and promotions. Discovery's commitment to intrapreneurship has business positions in different industries, the approaches corporate executives
produced a stream of health-service innovations and new strategic initiatives that have pursue to boost the combined performance of the set of businesses the company
kept the company vibrant and growing. has diversified into, and the means of capturing cross-business synergies and turning
them into competitive advantage. Senior corporate executives normally have lead
2.4.3 A Company's Strategy-Making Hierarchy responsibility for devising corporate strategy and for choosing from among whatever
It thus follows that a company's overall strategy is a collection of strategic initiatives and recommended actions bubble up from the organization below. Key business-
actions devised by managers and key employees up and down the whole organizational unit heads may also be influential, especially in strategic decisions affecting the
hierarchy. The larger and more diverse the operations of an enterprise, the more points businesses they head. Major strategic decisions are usually reviewed and approved
of strategic initiative it has and the more managers and employees at more levels of by the company's board of directors. We will look deeper into the strategy-making
management that have a relevant strategy-making role. Figure 2.2 shows who is generally process at diversified companies when we get to Chapter 5.
responsible for devising what pieces of a company's overall strategy. 2 Business strategy concerns the actions and the approaches crafted to produce
successful performance in one specific line of business. The key focus is crafting
responses to changing market circumstances and initiating actions to strengthen market
position, build competitive advantage, and develop strong competitive capabilities.
Orchestrating the development of business-level strategy is the responsibility of the
Orchesrraled by lhe CEO and
olhar senior executives.
manager in charge of the business. The business head has at least two other strategy-
related roles: 1) seeing that lower-level strategies are well conceived, consistent, and
In lhe case of a singlo business
company, these two levels of the adequately matched to the overall business strategy; and 2) getting major business-
strategy-malting hierachy merge
inro one level- business level strategic moves approved by corporate-level officers (and sometimes the board
strategl"-that is orchestrated by
rhe company's CEO and other of directors) and keeping them informed of emerging strategic issues. In diversified
lop execu1ives.
Orchaslrated by the general managers
of eoch of lhe company's difforont
companies, business-unit heads may have the additional obligation of making sure
lines of business, often with advice
and input from the heads of
business-level objectives and strategy conform to corporate-level objectives and
functional area ac1ivilies wilhin eecti
business and other key people.
strategy themes.
3 Functional-area strategies concern the actions, approaches, and practices to be
Two Way lnlluenca employed in managing particular functions or business processes or key activities
within a business. A company's marketing strategy, for example, represents the
managerial game plan for running the sales and marketing part of the business.
Crafted by tho heads of major functional
acllviries within a paniculor A company's product development strategy represents the managerial game plan for
business-often in collaboration wi1h
othor key people. keeping the company's product line-up fresh and in tune with what buyers are looking
for. Functional strategies add specifics to the hows of business-level strategy.
In addition, they aim at establishing or strengthening a business unit's competencies
Two Way Influence and capabilities in performing strategy-critical activities so as to enhance the business's
market position and standing with customers. The primary role of a functional strategy
Crafted by brand managers; lhe is to support the company's overall business strategy and competitive approach.
operaling managers of plonts,
distribution cen tres, ond geographic lead responsibility for functional strategies within a business is normally delegated
units; and the managers of
srrarogically 1mportan1 activities l ike to the heads of the respective functions, with the general manager of the business
advertising and website oporotions- often
key omployoes oro involves. having final approval and perhaps even exerting a strong influence over the content
of particular pieces of the strategies. To some extent, functional managers have to
collaborate and coordinate their strategy-making efforts to avoid uncoordinated or
FIGURE 2.2 A company's strategy-making hierarchy conflicting strategies. For the overall business strategy to have maximum impact,
44 Chapter 02 The Managerial Process of Crafting and Executing Strategy
a business's marketing strategy, production strategy, finance strategy, customer
service strategy, product development strategy, and human resources strategy should
be compatible and mutually rejnforcing rather than each serving its own narrower
purposes. If inconsistent functional-area strategies are sent up the line for final approval,
the business head is responsible for spotting the conflicts and getting them resolved.
4 Operating strategies concern the relatively narrow strategic initiatives and
approaches for managing key operating units (plants, distribution centres,
geographic units) and specific operating activities with strategic significance
(advertising campaigns, the management of specific brands, supply chain -related
activities, and website sales and operations). A plant manager needs a strategy
for accomplishing the plant's objectives, carrying out the plant' s part of the
company's overall manufacturing game plan, and dealing with any strategy-related
problems that exist at the plant. A company's advertising manager needs a strategy
for getting maximum audience exposure and sales impact from the ad budget.
Operating strategies, while of limited scope, add further detail and completeness
to functional strategies and to the overal I business strategy. Lead responsibility for
operating strategies is usually delegated to frontline managers, subject to review and
approval by higher-ranking managers.
Even though operating strategy is at the bottom of the strategy-making hierarchy, its
importance should not be downplayed. A major plant that fails in its strategy to achieve
production volume, unit cost, and quality targets can undercut the achievement of
company sales and profit objectives and wreak havoc with strategic efforts to build
a quality image with customers. Frontline managers are thus an important part of an
organization's strategy-making team, because many operating units have strategy-
critical performance targets and need to have strategic action plans in place to achieve
them. One cannot reliably judge the strategic importance of a given action simply by
the strategy level or location within the managerial hierarchy where it is initiated.
In single-business enterprises, the corporate and business levels of strategy making
merge into one level- business strategy- because the strategy for the whole company
involves only one distinct line of business. Thus, a single-business enterprise has three
levels of strategy: business strategy for the company as a whole; functional-area strategies
for each main area within the business; and operating strategies undertaken by lower-
echelon managers to flesh out strategically significant aspects for the company' s business
and functional-area strategies. Proprietorships, partnerships, and owner-managed
enterprises may have only one or two strategy-making levels, since their strategy-making,
-
strategy-executing process can be handled by just a few key people.
2.4.4 Uniting the Strategy-Making Effort
Ideally, the pieces of a company's strategy up and down the strategy hierarchy should be
cohesive and mutually reinforcing, fitting together like a jigsaw puzzle. To achieve such
unity, the strategizing process requires leadership from the lop. It is the responsibility of
top executives to provide strategy-making direction and dearly articulate key strategic
themes that paint the white lines for lower-level strategy-making efforts. Mid-level and
frontline managers cannot craft unified strategic moves without first understanding the
company's long·term direction and knowing the ma;or components of the overall and
2.4 Cra fting a Strategy (Phase 3t 45
business strategies that their strategy-making efforts are supposed to support and enhance.
Thus, as a general rule, strategy making must start at the top of the organization and then
proceed downward through the hierarchy from the corporate level to the business level
and then from the business level to the associated functional and operating levels.
Strategy cohesion or alignment requires that business-level strategies should complement
and be compatible with the overall corporate strategy. Likewise, functional and operating
strategies have to complement and support the overall business-level strategy of w hich they
are a part. When the strategizing process is mostly top-dow n, w ith lower- level slrategy-
making efforts taking their cues from the higher-level strategy elements they are supposed
to complement and support, there is less potential for strategy conflict between different
levels. An absence of strong strategic leadership from the top sets the stage for some degree
of strategic disunity. The strategic disarray that occurs in an organization w hen there is weak
leadership and too few strategy guidelines coming from top executives is akin to what would
happen lo a rugby team's offensive performance if the fl y-half decided not lo pass the ball
along the back line but instead let each player do whatever he thought would w ork best at
his respective position. In business, as in sports, all the strategy makers in a company are
on the same team and the many different pieces of the overall strategy crafted at various
organizational levels need to be in sync. Anything less than a unified collection o f strategies
weakens the overall strategy and is likely to impair company performance.
CORE CONCEPT: A company's strategy is at full power only when its many pieces are united and
aligned.
There are two things that top-level executives can do to drive consistent strategic
action down through the organi zational hierarchy. One is to communicate effectively
the company's vision, objectives, and major strategy components to down-the-line
managers and key personnel. The greater the numbers of company personnel who know ,
understand, and buy into the company's long-term direction and overall strategy, the
smaller the risk that organization units will go off in conflicting strategi c directions w hen
strategy making is pushed down to frontline levels and many people are given a strategy-
making role. The second is to exercise due diligence in rev iew ing lower-level strategies for
consistency and support of higher-level strategies. Any strategy conflicts must be addressed
and resolved, either by modifying the lower-level strategies with conflicting elements or by
adapting the higher-level strategy to accommodate w hat may be more appealing strategy
ideas and initiatives bubbling from below. Thus, the process of sy nchronizing the strategy
initiatives up and down the organizational hierarchy does not necessarily mean that lower-
level strategies must be changed whenever conflicts and inconsistencies are spotted. When
more attractive strategies ideas originate at lower organizational levels, it makes sense to
adapt higher-level strategies to acc ommodate them.
2.4.5 A Strategic Vision+ Objectives+ Strategy= A Strategic Plan
Developing a strategic vision and mission, setting objecti ves, and crafting a strategy are basic
direction-setting tasks. They map out where a company is headed, the targeted strategic and
financial outcomes, and the competitive moves and internal action approaches to be used in
achieving the desired business results. Together, they constitute a strategic plan for coping
46 Cha pier 02 The Managerial Process of Crafting and Executing Strategy
with industry and competitive conditions, the expected actions of the industry's key players,
and the challenges and issues that stand as obstacles to the company's success.
CORE CONCEPT: A strategic plan lays out the company's future direction, performance targets,
and strategy.
In companies that do regular strategy reviews and develop explicit strategic plans,
the strategic plan usually ends up as a written document that is circulated to most
managers and perhaps selected employees. Near-term performance targets are the part
of the strategic plan most often spelled out explicitly and communicated to managers
and employees. A number of companies summarize key elements of their strategic
plans in the company's annual report to shareholders, in postings on their website, or
in statements provided to the business media. Other companies, perhaps for reasons of
competitive sensitivity, make only vague, general statements about their strategic plans.
In small, privately owned companies it is rare for strategic plans to exist in written form.
Small companies' strategic plans tend lo reside in the thinking and directives of owners/
executives, with aspects of the plan being revealed in meetings and conversations with
company personnel, and the understandings and commitments among managers and key
employees about where to head, what to accomplish, and how to proceed.
2.5 Implementing and Executing the Strategy (Phase 4)
M anaging the implementation and execution of strategy is an operations-oriented,
make-things-happen activity aimed at performing core business activities in a
strategy-supportive manner. It is easily the most demanding and time-consuming part of
the strategy management process.I Converting strategic plans into actions and results tests
a manager's ability to direct organizational change, motivate people, build and strengthen
company competencies and competitive " apabilities, create and nurture a strategy-
supportive work climate, and meet or beat performance targets. Initiatives to put the
strategy in place and execute it proficiently have to be launched and managed on many
organizational fronts.
Management's action agenda for implementing and executing the chosen strategy
emerges from assessing what the company will have to do differently or better, given its
particular operating practices and organizational circumstances, to execute the strategy
competently and achieve the targeted financial and.,,c;trategic performance. Each company
manager has to think through the answer to: ''What has to be done in my area lo execute
my piece of the strategic plan, and what actions should I take to get the process under
way?" How much internal change is needed depends on how much of the strategy is new,
how far internal practices and competencies deviate from what the strategy requires, and
how well the present work climate/culture supports good strategy execution. Depending
on the amount of internal change involved, full implementation and profici ent execution of
company strategy (or important new pieces thereof) can take several months to several years.
In most situations, managing the strategy execution process includes the following
principal aspects:
2.6 Evaluating Performance and Initiating Corrective Adiustments {Phase 5) 47
• Staffing the organization with the needed skills and expertise, consciously building
and strengthening strategy-supportive competencies and competitive capabilities,
and organizing the work effort.
• Allocating ample resources to those activities critical to strategic success.
• Ensuring that policies and procedures facilitate rather than impede effective execution.
• Using best practices to perform core business activities and pushing for continuous
improvement. Organizational units have to periodicall y reassess how things are
being done and diligently pursue useful changes and improvements.
• Installing information and operating systems that enable company personnel the
better to carry out their strategic roles day in and day out.
• Motivating people to pursue the target objectives energetically and, if need be,
modifying their duties and job behaviour to better fit the requirements of successful
strategy execution.
• Tying rewards and incentives directly to the achievement of performance objectives
and good strategy execution.
• Creating a company culture and work climate conducive to successful strategy
execution.
• Exerting the internal leadership needed to drive implementation forward and
keep improving on how the strategy is being executed. When stumbling blocks or
weaknesses are encountered, management has to see that they are addressed and
rectified in timely and effective fashion.
Good strategy execution requires diligent pursuit of operating excellence. It is a job
for a company's whole management team. Success hinges on the skills and cooperation
of operating managers who can push needed changes in their organization units and
consistently deliver good results. Strategy implementation can be considered successful
i f things go smoothly enough that the company meets or beats its strategic and financial
performance targets and shows good progress in achieving management' s strategic vision.
2.6 Evaluating Performance and Initiating Corrective Adjustments
(Phase 5)
he fifth phase ~f the strategy management process-monitoring new external develop-
T ments, evaluating the company's progress, and making corrective adjustments-is the
trigger point for deciding whether lo continue or change the company's v ision, objectives,
strategy, or strategy execution methods. So Jong as the compan y's direction and strategy
se:m well marched to industry and competitive conditions, and performance targets are
berng ~et, company executives may well decide to stay the course. Simply fine-tuning the
strategic plan and continuing with efforts to improve strategy execution are sufficient.
CORE CONCEPT: A company's vision, objectives, strategy, and approach to strategy execution
are never final; managing strategy is an ongoing process, not an every-now-and-then task
or project.
48 Chaptur 02 The Managerial Process of Craft ng and Executing Strategy
However, whenever a company encounters disruptive changes in its environment,
questions need to be raised about the appropriateness of its direction and strategy. lf
a company experiences a downturn in its market position or persistent shortfalls in
performance, then company managers are obligated to ferret out the_ causes- do ~hey
relate to poor strategy, poor strategy execution, or both?- and take t1n:i~ly corre~hve
action. A company's direction, objectives, and strategy have to be rev1s1ted a~yt1me . .
external or internal conditions warrant. lt is to be expected that a company will modify its
strategic vision, direction, objectives, and strategy over time. . greater promise than alternatives. If executive management is bringing w ell-supported
Likewise, it is not unusual for a company to find that one or more aspects of its strategy.
implementation and execution are not going as well as intende?. Proficient strategy e~ecut1on
is always the product of much organizational learning. It is achieved unevenly-c.oming
quickly in some areas and proving nettlesome in others. It is both normal a~d desirable to
periodically assess strategy execution to determin~ which ~sp~c~ are workin~ well and
which need improving. Successful strategy execution entails vigilantly searching for ways to
improve and then making corrective adjustments whenever and wherever it is useful to do so.
2.7 Corporate Governance: The Role of the Board of Directors
lthough senior managers have lead responsibility for crafting and executing a
A company's strategy, it is the duty of the board of directors to exercise strong ov~rsight
and see that the five tasks of strategic management are done in a manner that benefits
shareholders (in the case of investor-owned enterprises) or stakeholders (in the case of
not-for-profit organizations). We will focus on corporate governance, ethics. a~? the
King Ill principles in Chapter 10, but it is important to point out the respons1b1l1ty of the
board of directors in terms of developing the corporate strategy. Figure 2 .3 gives a clear
picture of the link between corporate governance and strategy.
EXTERNAL Accountability
- Reporting to stakeholders
- Ensuring statues regulatory
compliance
- Reviewing auditreports
INTERNAL Supurvision
- Reviewing key executive
performance
..
- Reviewing business results
- Monitoring budgetary control
and corrective action
SHORT TERM
FIGURE 2.3 Link between corporate governance and strategy
Source- Tricker, R.I (1994) International Corporate Governance, !st Edition. S ngapore· Simon & Schuster Pty Ltd, Sunday Times,
22 January 2005
2. 7 Co rporate Governance: The Role of the Boord of Directors 49
In watching over management's strategy-making, strategy-executing actions and
making sure that executive actions are not onl y proper but also aligned w ith the interests
of stakeholders, a company's board of directors has four important obligations to fulfil:
1 Strategic thinking by being c ritical and oversee the company's direction, strategy, and
business approaches. Board members must ask probing questions and draw on their
business acumen to make independent judgments about whether strategy proposals
have been adequately analysed and whether proposed strategic actions appear to have
and reasoned strategy proposals to the board, there' s little reason for board members
to aggressively challenge or pick apart everything put before them. Asking incisive
questions is usually sufficient to test whether the case for management' s proposals
is compelling. However, when the company' s strategy is failing or is plagued with
faulty execution, and certainly when there is a prec ipitous collapse in profitability,
board members have a duty to express their concerns about the validity of the strategy
and/or operating methods, initiate debate about the company' s strategic path, hold
one-on-one discussions with key executives and other board members, and perhaps
directly intervene as a group to alter the company's executi ve leadership and,
ultimately, its strategy and business approaches.
2 Supervision by evaluating the calibre of senior executives' strategy-making and
strategy-executing skills. The board is alw ays responsible for determining whether
the current CEO is doing a good job of strategic leadership (as a basis for awarding
salary increases and bonuses and deciding on retention or removal). Boards must
also exercise due diligence in evaluating the strategic leadership skills of other senior
executives in line to succeed the CEO. When the incumbent CEO steps dow n or
leaves for a position elsewhere, the board must elect a successor, either going w ith
an insider or deciding that a better-qualified outsider is needed to perhaps radically
change the company's strategic course.
3 Corporate policy developing by instituting a compensation plan for top executives
that rewards them for actions and results that serve stakeholder interests, and most
Strategic thinking especially those of shareholders. A basic principle of corporate governance is that the
- Reviewing end initiating owners of a corporation delegate operating authority and managerial control to top
strategic analysis management in return for compensation . In their role as an agent of shareholders,
- Formulating strategy top executives have a clear and unequivocal duty to make decisions and operate the
- Setting corporate direction company in accord with shareholder interests (but this does not mean disregarding
Corporate policy the interests of other stakeholders, particularly those of employees, w ith whom they
- Approving budgets'
- Determining compensation
also have an agency relationship). Most boards of directors have a compensation
committee, composed entirely of outside directors, to develop a salary and incentive
policy for senior executives compensation plan that makes it in the interests of executives lo operate the business
- Creating corporate culture in a manner that benefits the owners; the compensation committee's recommendations
are presented to the full board for approval. In addition to creating compensation
LONGTERM plans intended to align executive actions w ith ow ner interests, the board of directors
must put a halt to self-serving executive perks and privileges that simply line the
financial pockets of executives. Numerous media reports have recounted instances
in which boards of directors have gone along with opportunistic executive efforts to
secure excessive, if not downright obscene, compensation of one kind or another
50 Chapter 02 The Managerial Process of Crafting and Executing Strategy

Summary 51

(multimillion-dollar, interest-free loans, ~e d tock incentive awards, and so on).

rsonal use of corporate aircraft, lucrative
d t. ent packages outsize s Summary
severance an re irem ' , r· . I accounting and financial
4 Accountability ~y overs~emg e
. th company s 1manc1a
ers articularly the company's CEO and CFO,
reporting practices. While top manag ,hp
. ·1
are priman y responsi , .
ny's financial statements report the
1· h d h t
fairl and accurately, it is well estab is e t ~
'ble for seeing that t e compa T he managerial process of crafting and executing a company's strategy consists of five
interrelated and integrated phases:
results of the company s operations y t t shareholders by exercising oversight
1 Developing a strategic vision of where the company needs to head and what its future
board members have a fiduciary. duty lo pr? ecth t enerally accepted accounting
of the company's financial practices, ensuring_ ath~ company's financial statements, product/market/customer/technology focus should be. This managerial step provides
principles (GAAP) are properly us~d in ~r~pant~~ls are in place to prevent fraud
long-term direction, infuses the organization with a sense of purposeful action, and
communicates management's aspirations to stakeholders.
and d~termining whet~er prope;I f~~:~~:ao~~~ectors monitor the financial rep~rting 2 Setting objectives to spell out for the company how much of what kind of
and misuse of funds. Virtually ~ . ys composed entirely of outside
. t' n audit committee, a 1wa . performance is expected, and by when. The objectives need to require a significant
activities by apporn rng a d' .ti have lead responsibility for overseerng
Th bers of the au 1t commi ee d I amount of organizational stretch. A balanced scorecard approach for measuring
directors. em.em . . d consulting with both internal an externa
the company's frnanc1al officers an 1 t' nd adequate financial controls. company performance entails setting both financial objectives and strategic objectives.
auditors to ensure accurate financia r~por rng ~zed because of the actions of 3 Crafting a strategy to achieve the objectives and move the company along the
The number of prominent compa~1~~ben:h~ growing propensity of disgruntled
strategic course that management has charted. Cra fting strategy is concerned
scurrilous or out-of-control CEOs an . s, Ii ence and the escalating costs principally with forming responses to changes under way in the external environment,
stockholders to file lawsui.ts alleging director negth~ res~onsibility that a board of devising competitive moves and market approaches aimed at producing sustainable
competitive advantage, building competiti vely valuable competencies and
of liability insurance for directors all underscore k'1ng strategy-executing process
· mpany's strategy-ma ' capabilities, and uniting the strategic actions initiated in various parts of the company.
directors has for overseerng a co per and responsible. Moreover,
and ensuring that management actions ~r~ p~~ and pension funds), regulatory The more a company's operations cut across different products, industries, and
geographical areas, the more strategy making becomes a team effort involving
holders of large blocks of shares (mutua. untl rge that board members, especially
authorities, and the fina~cial pdre~~rcon~1~tet~err ~versight of company strategy and
managers and company personnel at many organizational levels.
outside directors, be active an . I ige.n rn The total strategy that emerges in such companies is really a collection of strategic
maintain a tight rein on executive actions. actions and business approaches initiated partly by senior company executives, partly
by the heads of major business divisions, partly by functional-area managers, and
Every corporation should have a strong, .rn de pendent board of directors that: partly by frontline operating managers. The larger and more diverse the operations of
an enterprise, the more points of strategic initiative it has and the more managers and
1 is well informed about the company's performan.ce
employees at more levels of manageme nt that ha ve a relevant strategy-making role.
2 guides and judges the CEO and ot~er top execuu~es mana ement actions A single business enterprise has three levels of strategy- business strategy for
3 has the courage to curb inappropnate or unduly risky g the company as a whole, functional-area strategies for each main area within the
4 certifies to shareholders that the CEO is doing what the board expects business, and operating strategies underta ken by lower-eche lon managers to flesh
out strategically significant aspects for the company' s bus iness and functional-area
5 provides insight and advice to management d s f key decisions and actions. strategies. In diversified, multibusiness companies, the stra tegy-making task invol ves
6 is intensely involved in debating the pros an con o . .
four distinct types or levels of strategy: corporate strategy for the company as a who le;
Boards of directors that lack the b~ck o
b ne to challenge a strong-willed or imperious CEO, business strategy (one for each business into which the company has diversified);
EO ' meFlds without probing inquiry and
I st anythrng the C reCOllJ h . d t functional-area strategies within each business; and operating strategies. Typ ically, the
or that rubber-stamp a mo . k
debate (perhaps because the board is. stac e d with the CEO's cronies) abdicate t e1r u Y strategy-making task is more top-down than bottom-up, wi th higher-level strategies
serving as the guide for developing lower-level strategies.
to represent and protect shareholder interests. nee is undermined when boards of
The whole fabric of effective corpor~le ~ovelr~a t
4 Implementing and executing the chosen strategy efficiently and effectively. Managing
ntrol over the company's strategic
directors shirk their respons1 I I ~ o
'bTt I marntarn u t1ma e co the implementation and execution of strategy is an operations-oriented, make-things-
th business approaches management is
direction, the major elements of I~ strat~gy, e:ecutive compensation, and the financial
happen activity aimed at shaping the performance of co re business activities in a
strategy-supportive manner. Management's handling of the strategy implementation
using to implement and execute I ehstlra edgy, 'b'1l'1ty for crafting and executing strategy
Th en thoug ea respons1 . h process can be considered successful if thi ngs go so smoothly that the company mee ts
reporting process. us, ev h ery important oversight role rn I e
falls lo top executives, boards dir:~l~r:ira~;:y~a~ignment process.
or beats its strategic and financial performance targets and shows good p rogress in
strategy-making, strategy-execu rng
o:. ac hieving management's strategic vision.
---- -~--------------------------
52 Chapter 02 The Managerial Process of Crafting and Executing Stretagy

5 Evaluating p erformance and initiating corrective adjustments in vision, long-term

direction, objectives, strategy, or execution in light of actual experience, changing
conditions, new ideas, and new opportunities. This phase of the strategy management
PART 02
Concept and
process is the starting point for deciding whether to continue or change the
company's vision, objectives, strategy, and/or strategy execution methods.
A company's strategic vision, objectives, and strategy constitute a strategic plan for
coping with industry and competitive conditions, outcompeting rivals, and addressing
the challenges and issues that stand as obstacles to the company's success.
Boards of directors have a duty to shareholders to play a vigilant role in overseeing
management's handling of a company's strategy-making, strategy-executing process.
Analytical Tools
A company's board is obligated to: critically appraise and ultimately approve strategic
action plans; evaluate the strategic leadership skills of the CEO and others in line to
succeed the incumbent CEO; institute a compensation plan for top executives that

I rewards them for actions and results that serve stakeholder interests, most especially
those of shareholders; and ensure that the company issues accurate financial reports
[ ~:~ has adequate finan cial controls. Chapter 10 deals in more detail about the strategic,
\......:::.rational and ethical responsibilities of companies.

References
See endnotes.

• f
 Analysing a
Company's
External
Environment

Crafting and Executing Strategy: Creating Sustainable

High Performance in South African Businesses
•
P•rt 1: Part 2: P•rt 3: Part 4:
Scope and Dynamics of Concepts aro1 Crafting a Strategy to E11ecutlng end
Strategy Analytical Tools Create Sustainable Aligning the
High Performance Strategy

The Concapl1
Wllat11 Manegerial and Managerial
Tools for Tallorlng Kays to
Slralegy? Proceuof Str1tegyto
lnlegra1ion Slrategy Evaluallng 0111anlza1lonal SUCCltSlfully
a Company'• Varlou1 Executing and
and Slr•leglc Dewlopment Performance
Alignment Extamaland Company Management Aligning Ille
and Situations
Implementation Internal Chol8n
Environment Strategy

Chapter 1 Chapter2 Cha pten Chapters Chapters

31114 Siie& Ch1pter7
8,9, llc 10

Slngle Multi·Busine11
Business o r Diversified
Companies Companies

55
56 Chapter 03 Analvs ng a Company's External Environment 3.2 The Strategically Relevant Components of a Company's External Environment 57

3.1 Introduction 3.2 The Strategically Relevant Components of a Company's External

outh African managers are not prepared either to steer their companies in a different
S direction or to alter the company strategy until they have developed a deep
understanding of the pertinent factors surrounding the company's situation. As indicated
in the opening paragraph of Chapter 1, one of the central questions that managers must
address in evaluating their company's business prospects is "What's the company's
present situation?" Two facets of a company's situation are especially pertinent: (1) the
industry and competitive environment in which the company operates and the forces
acting to reshape this environment, and (2) the company's own market position and
competitiveness- its resources and capabilities, its strengths and weaknesses vis-a -vis
rivals, and its windows of opportunity.
Insightful diagnosis of a company' s external and internal environment is a prerequisite
for managers to succeed in crafting and aligning a strategy that is an excellent fit with the
company's siluation, is capable of build ing competitive advantage, and holds out good
prospects for boosting sustainable company performance. Thus, depicted in Fig. 3. 1, the
task of crafting a strategy should always begin with an appraisal of the company's external
and internal situation (as a basis for developing strategic vision of where the company
needs to head), should then move toward an evaluation of the most promising alternative
strategies and business models, and culminate in choosing a specific strategy.
Environment
A ll companies operate in a "macroenv ironment" shaped by influences emanating
from the economy at large; population demographics; societal values and lifestyles;
governmental legislation and regulation; technological factors; and, closer to home, the
industry and competitive arena in which the compan y operates (see Fig. 3.2). Strictly
speaking, a company's macroenvironment includes all relevant factors and influences
outside the company's boundaries; by "relevant", we mean important enough to have a
bearing on the decisions the company ultimately makes about its direction, objectives,
strategy, and business model. Strategically relevant influences coming from the outer ring
of the macroenvironment can sometimes have a strong impact on a company' s business
situation and play a very significant part in the company's direction and strategy. The
strategic opportunities for cigareUe producers to grow their business are greatly reduced
by anti-smoking ordinances and the growing cultural stigma attached to smoking. Motor
vehicle companies must adapt their strategies (especially as concerns the fuel kilometres
fl/'lacroenvironment

Thinking
strategically
about a
...
company's
external Select the
environment Form a
Identify best
strategic
promising strategy
vision of
strategic and
where the
options business
company
for the model
needs to
company for the
Thinking head
company
strategically
about a
company's
internal
environment
,

FIGURE 3.1 From thinking strategically about the company's situation to choosing a strategy

This chapter presents the concepts and analytical tools for zeroing in on those aspec ts
of a single-business company's external environment that should be considered in making
strategic choices. AUention centres on the competitive arena in which a company operates,
the drivers of market change, and what rival companies are doing. In Chapter 4 we explore
the methods of evaluating a company's internal circumstances and competitiveness. FIGURE 3.2 The components of a company's macroenvironment
58 Chapter 03 Analysing a Company's External Environment
of their vehicles) to customer concerns about petrol prices. The demographics of an
ageing P?P~lation and longer life expectancies and increased self-medication are having
a dramatic im_pact on the business prospects and strategies of healthcare and prescription
drug co~panies. Companies in almost all industries have to craft strategies that are
responsive to environmental regulations, growing use of the Internet and broadband
t~chnology, and energy prices. Companies in the food-processing, restaurant, sports, and
f~tness industries have to pay special attention to changes in lifestyles, eating habits, leisure-
trme preferences, and attitudes toward nutrition and exercise in fashioning their strategies.
. Happ~nings in the outer ring of the macroenvironment may occur rapidly or slowly,
wit~ or without advance warning. The impact of outer-ring factors on a company's
chorce of strategy can range from big to small. However, even if the factors in the outer
ring of the macroenvironment change slowly or have such a comparatively low impact
on a company's situation that only the edges of a company's direction and strategy are
affected, there are enough strategically relevant outer-ring trends and events to justify a
watchful eye. As company managers scan the external environment, they must be alert
for potentially important outer-ring developments, assess their impact and influence, and
adapt the company's direction and strategy as needed.
However, the factors and forces in a company's macroenvironment having the biggest
strategy-shaping impact typically pertain to the company's immediate industry and
competitive environment-competitive pressures, the actions of rival companys, buyer
?ehaviour, supplier-related considerations, and so on. Consequently, it is on a company's
mdustry and competitive environment that we concentrate our attention in this chapter.
3.3 Thinking Strategically About a Company's Industry and
Competitive Environment
To gain a deep understanding of a company's industry and competitive environment,
. ma.nag~rs ~o not need to gather all the information they can find and spend lots of
trme digesting 1t. Rather, the task is much more focused. Thinking strategically about
a company's industry and competitive environment entails using some well-defined
concepts and analytical tools to get clear answers to seven questions:
1 What are the industry's dominant economic features?
2 What kinds of competitive forces are industry members facing and how strong is
each force?
3 What forces are driving industry change and what impacts will they have on
competitive intensity and industry profitability?
, more importantto a company's long-term competitive success?
4 What. market positions do industry rivals occupy- who is strongly positioned and
who rs not?
5 What strategic moves are rivals likely to make next?
6 Whut are the key factors for future competitive success?
7 Does the outlook for the industry present the company with sufficiently attractive
prospects for profitubility?
Analysis-bused answers lo thes~ questions provide manugers with the understanding
needed to craft a strategy that fits the company's externul situation. The remainder of
3.4 What are the Industry's Dominant Economic Features? 59
this chapter is devoted to describing the methods of obtaining solid answers to the
seven questions and explaining how the nature of a compan y' s industry and competitive
environment weighs upon the strategic choices of company managers.
3.4 What are the lndust~ Dominant Economic Features?
ecause industries dif~e.r so sig~ificantly, th~ task .of ~naly~i~g a cor:iipany's,
B industry and compet1t1ve environment begins wrth 1dent1fyrng an rndustry s
dominant economic features and forming a picture of w hat the industry landscape is
like. An industry's dominant economic features are defined by such factors as market
size and growth rate, the number and sizes of buyers and sellers, the geographic
boundaries of the market (which can extend from local to worldwide), the degree
to which sellers' products are differentiated, the pace of product innovation, market
supply/demand conditions, the pace of technological change, the extent of vertical
integration, and the extent to which costs are affected by scale economies (i.e.,
situations in which large-volume operations result in lower unit costs) and learning/
experience curve effects (i.e. situations in which costs decline as a company gains
knowledge and experience). Table 3.1 provides a convenient summary of w hat
economic features to look at and the corresponding questions to consider in profiling
an industry's landscape.
Economic Feature Questions to Answer
Market size and growth rate • How big is the industry and how fast is it growing?
• What does the industry's position in the life cycle
(early development rapid growth end takeoff, early maturity
and slowing growth, saturation and stagnation, declinel reveal
about the industry's growth prospects?
Number of rivals • Is the industry fragmented into many smaMcompanies or
concentrated and dominated by a few large compa nies?
• Is the industry going through a period of consolidation to a
smaller number of competitors?
Scope of competitive rivalry • ls the geographic area over which most companies compete
local, regional, national, multinationa I, or global?
• Is having a presence in the foreign country markets becoming
Number of buyers • Is market demand fragmented among many buyers?
• Do some buyers have bargaining power because they purchase
in large volume?
Degree of product differentiation • Are the products of rivals becoming more differentiated or less
differentiated?
• Are increasingly look-alike products of rivals causing heightened
price competition?
TAB LE 3.1 Wha t to cJnsider in rdentifying an industry 's dominant economic features
60 Chaplar OJ Analysing a Company's External Environment
Economic Feature Questions to Answer
Produ ct innovation • Is th!! industry characterized by rapid product innovation and
short produ ct life cycles?
• How important is R&D and product innovation?
• Are there opportunities to overtake key rivals by being
first-to-market with next-generetion products?
Supply/demand conditions • Is a surplus of capacity pushing prices and profit margins down?
• Is the industry overcrowded with too many competitors?
• Are short supplies creating a seller's market?
Pace of technological change • What role does advancing tee hnology play in this industry?
• Are ongoing upgrades of facilities/equipment essential because
of rapidly advancing production process technologies?
• Do most industry members have or need strong technological
capabilities?
Vertical integration • Do most competitors operate in only one stage ofthe industry
(perts and components production, manufacturing and
assembly, distribution, retailing) or do some competitors operate
in multiple stages?
• Is there any cost or competitive advantage or disadvantage
associated with being fully or partially integrated?
Economies of sea le • Is the industry characterized by economies of scale in
purchasing, manufacturing, advertising, shipping, or other
activities?
• Do companies with large-scale operations have en important
cost advantage over small-scale compenys?
Learning/experience curve
• Are certain industry activities characterized by strong learning/
experience effects curve effects ("learning by doing") such that
unit costs decline as a company's experience in performing the
activity builds?
• Do any companies have significant cost advantages because of
their learning/experience in performing particular activities?
Getting a handle on an industry's distinguishing economic features not only sets
lhe slage for the analysis to come but also promotes underslanding of the kinds of
stralegic moves that industry members are likely to employ. For example, in industries
characterized by one product advance afler anolher, cqripanies must invest in research
and developmenl (R&D) and develop strong producl innovation capabililies- a slrategy of
continuous product innovalion becomes a condition of survival in such industries as video
games, mobile phones, and pharmaceuticals. An industry thal has recently passed lhrough
the rapid-growth stage and is looking at single-digit percentage increases in buyer demand
is likely lo be experiencing a competilive shake-out and much stronger stralegic emphasis
on cost reduction and improved customer service.
In industries like semiconductors, strong learning/ experience curve effects in
manufacturing cause unit costs to decline about 20 per cent each time cumulative
J .5 What Kinds of Competitive Farces ere Industry Members Feeing? 61
production volume doubles. With a 20 per cent experience curve effecl, if lhe first
million chips cost Rl 00 each, the unit cost would be R80 (80 per cent of Rl 00) by
a production volume of 2 million, the unit cost would be R64 (80 per cent of R80)
by a production volume of 4 million, and so on . 1 The bigger the learning/experience
curve effect, the bigger the cost advantage of the company with the larges! cumula tive
production volume.
Thus, when an industry is characterized by important learning/experience curve effects
(or by economies of scale), industry members are strongly motivated to adopt volume-
increasing strategies lo capture the resulting cost. saving economies and maintain lheir
competitiveness. Unless small-scale compan ys succeed in pursuing strategic options that
allow them to grow sales sufficiently to remain cost-competitive with larger-volume rivals,
they are unlikely to survive. The bigger the learning/experience curve effects and/or scale
economies in an industry, the more imperative it becomes for compeling sellers to pursue
strategies to win additional sales and market share-the compan y with lhe biggest sales
volume gains sustainable competitive advantage as the low~cost producer.
3.5 What Kinds of Competitive Forces are Industry Members
Facing?
T he character, mix, and subllelies of the competitive forces operating in a company's
industry are never the same from one industry to another. Far and away the most powerful
and widely used tool for syslematically diagnosing the principal competitive pressures
in a markel and assessing the strength and importance of each is the five-forces model of
competition. 2 This model, depicted in Fig. 3.3, holds that the state of compelition in an
induslry is a composile of compelitive pressures operating in five areas of the overall market:
1 Competitive pressures associated with lhe market manoeuvring and jockeying for •
buyer patronage that goes on among rival sellers in lhe industry.
2 Competitive pressures associated with the threat of new entrants inlo the market.
3 Competitive pressures coming from the atlempls of companies in other industries to
win buyers over lo their own substitute products.
4 Competitive pressures stemming from supplier bargaining power and supplier- seller
collaboration.
5 Competitive pressures slemming from buyer bargaining power and seller- buyer
collaboration.
The way one uses the five-forces model lo delermine the nature and strength of competitive
pressures in a given industry is to build lhe picture of competition in three steps:
• Step 1: Identify the specific competitive pressures associated with each of the five
forces.
• Step 2: Evaluale how strong the pressures comprising each of the five forces are
(fierce, strong, moderate to normal, or w eak).
• Step 3: Determine whether the collective strength of the fi ve competitive forces
is conducive to earning atlractive profits.
62 Chapter 03 Analysing a Company's External Environment 3.5 What Kinds of Competitive Forces are Industry Members Facing? 63

This pattern of action and reaction, move and counter-move, adjust and readjust produces
a continually evolving competitive landscape in which the market battle ebbs and flows,
Firms in other
industries
sometimes takes unpredictable twists and turns, and produces winners and losers. But
offering the winners- the current market leaders- have no guarantees of continued leadership;
substitute
products
their market success is no more durable than the power of their strategies to fend off the
strategies of ambitious challengers. In every industry, the ongoing jockeying of rivals leads
to one or another companies gaining or losing momentum in the marketplace according to
whether their latest strategic manoeuvres succeed or fail.
Competitive pressures coming from
the attempts of companies outside the
industry to win buyers over to their product r ~

CORE CONCEPT: Competitive jockeying among industry rivals is ever changing, as rivals initiate
Rivalry
among
fresh offensive and defensive moves and emphasize first one mix of competitive weapons
Competitive Competitive and then another in efforts to improve their market positions.
competing
Suppliers pressures pressures
sellers
of raw stemming stemming
Competitive pressures
materials, from from
created by jockeying
parts, supplier
for better market
buyer
Buyers Figure 3.4 shows a sampling of competitive "weapons" that companys can deploy in
components, bargaining bargaining
position, increased battling rivals and indicates the factors that influence the intensity of their rivalry. A brief
or other power power
sales and market
resource and supplier- and buyer-
share, end
inputs seller
competitive -{t seller
collaboration
advantage c::J collaboration
Rivalry is generally stronger when:
• Competing sellers are active In making fresh
moves to Improve their market standing and
Competitive pressures coming from business performance
the throat of entry of new rivals • Buyer demand Is growing slowly
r • Buyer demand falls off and selle111 find
Typical ·weapons" for themselves with excess c•paclty andfor
battling rivals and Inventory
attracting buyers: • The number of rivals Increases and rivals are
• Lower prices of roughly equal size and competitive
• More or different capability
Potential
new entrants
features r+- • The products of rival sellers are commodities
• Better product r or else weakly differentiated
perfor1m1nce Rlvalry • Buyer costs to switch brands are low
• Higher quality among • One or more rivals are dissatisfied with their
• Stronger brand competing current position and market share and make
Image and appHI sellers aggressive moves to attract more customers
• Wider selection of How strong are the • Rivals have diverse strategies and objectives
FIGURE 3.3 The five-forces model of competition: a key analytical tool models and styles competitive and are located in different countries
Sourclf'. Adapted from Michael E Porter, "How Competitive Forces Shape Strategy", Harvard Business Review 57, no. 2 (Marcil-April 1979), • Bigger/better /L- pressures stemming
from the efforts of
• Outsiders have recently acquired weak
dealer network competitors and are trying to turn them into
pp. 137-45. rivals to gain better
• Low interest-rate
financing 1m1rket postions, .... major contenders
• One or two rivals have powerful strategies
• Higher levels of higher sales and and other rlvals are scrambllng to stay In the
3.5.1 Competitive Pressures Associated with Rival Sellers
The strongest of the five competitive forces is nearly always the market manoeuvring and
advertising
• Stronger J><oduct
Innovation
market shares, and
competitive
advantages?
J '-
gama
./

jockeying for buyer patronage that goes on among rival sellers of a product or service . capabilities Rivalry Is generally weaker when;
• Better customer • Industry members move only infrequently or
In effect, a market is a competitive battlefield where there is no end to the jockeying aarvice capabillthts
in a non-aggressive manner to draw sales and
• Stronger
for buyer patronage. Rival sellers are prone to employ wfiatever weapons they have in capabilitias to
market share away from rivals
• Buyer demand is growing rapidly
their business arsenal to improve their marke t positions, strengthen their market position provide buyers

with buyers, and earn good profits. The challenge is lo craft a competitive strategy that, at
'-
with custom·made
productl
./
• • The products of nval sallers are strongly
differentiated and customer loyalty is high
• Buyer costs to switch brands are high
the very least, allows a company to hold its own against rivals and that, ideally, produces • There are fewer than fiva aelle111 or alsa so
many rivals that anv one company's actions
a competitive edge over rivals. But competitive contests are ongoing and dynamic. When have little direct Impact on rivals' buslnass
one company makes a strategic move that produces good results, its rivals typically
respond with offensive or defensive counter-moves, shifting their strategic emphasis from
one combination of product attributes, marketing tactics, and capabilities to another. FIGURE 3.4 "Weapons" for competing and factors affecting the strength of rivalry
64 Chapter 03 Analysing a Company's External Environment
discussion of some of the factors that influence the tempo of rivalry among industry
competitors is in order: 1
1 Rivalry intensifies when competing sellers are active in launching fresh actions to
boost their market standing and business performance. One indicator of active rivalry
is lively price competition, a condition that puts pressure on industry members to
drive costs out of the business and threatens the survival of high-cost companies.
Another indicator of active rivalry is rapid introduction of next-generation products-
when one or more rivals frequently introduce new or improved products, competitors
that lack good product innovation capabilities feel considerable competitive heat
to get their own new and improved products into the marketplace quickly. Other
indicators of active rivalry among industry members include:
• Whether industry members are racing to differentiate their products from rivals
by offering better performance features or higher quality or improved customer
service or a wider product selection.
• How frequently rivals resort to such marketing tactics as special sales promotions,
heavy advertising, rebates, or low-interest-rate financing to drum up additional sales.
• How actively industry members are pursuing efforts to build stronger dealer
networks or establish positions in foreign markets or otherwise expand their
distribution capabilities and market presence.
• How hard companies are striving to gain a market edge over rivals by developing
valuable expertise and capabilities that rivals are hard pressed to match.
Normally, competitive jockeying among rival sellers is active and fairly intense
because competing companies are highly motivated to launch whatever fresh actions
and creative market manoeuvres they can think of to try to strengthen their market
positions and business performance.
2 Rivalry intensifies as the number of competitors increases and as competitors become
more equal in size and capability. Rivalry is not as vigorous in microprocessors for
PCs, (where Advanced Micro Devices (AMO) is one of the few challengers to Intel)
as it is in fast-food restaurants, where numerous sellers are actively jockeying for
buyer patronage. Up to a point, the greater the number of competitors, the greater
the probability of fresh, creative strategic initiatives. In addition, when rivals are
nearly equal in size and capability, they can usually compete on a fairly even
footing, making it harder for one or two companies to win commanding market
shares and confront weaker market challenges from rivals.
3 Rivalry is usually stronger in slow-growing markets a(Jd weaker in fast-growing
markets. Rapidly expanding buyer demand produces enough new business for all
industry members to grow. Indeed, in a fast-growing market, a company may find
itself stretched just to keep abreast of incoming orders, let alone devote resources to
stealing customers away from rivals. In markets where growth is sluggish or where
buyer demand drops off unexpectedly, however, expansion-minded companies and
companies with excess capacity often are quick to cut prices and initiate other
sales-increasing tactics, thereby igniting a baltle for market share that can result in a
shake-out of weak, inefficient companies.
3 5 What Kinds of Competitive Forces ere Industry Members Fac ing ? 65
4 Rivalry is usually weaker in industries comprising of so man y rivals that the
impact of any one company'5 actions is spread thinly across all industry
members; likewise, it is often weak when there are fewer than five competitors.
A progressively larger number of competitors can actually begin to w eaken
head-to-head rivalry once an industry becomes populated w ith so many ri vals
that the impact of successful moves by any one company is spread thinly across
many industry members. To the extent that a company's strategic moves ripple
out to have little discernible impact on the businesses of its many ri vals, then
industry members soon learn that it is not imperative to respond every time one
or another rival does something to enhance its market position-an outcome
that weakens the intensity of head-to-head battles for market share. Rivalry also
lends to be weak if an industry consists of j ust tw o or three or four sellers. In a
market with few rivals, each competitor soon learns that aggressive moves to
grow its sales and market share can have an immediate and adverse impact on
rivals' businesses, almost certainly provoking vigorous retaliation and risking an
alt-out battle for market share that is likely to lower the profits of all concerned.
Companies that have a few strong rivals thus come to understand the merits of
restrained efforts to wrest sales and market share from competitors as opposed to
undertaking hard-hitting offensives that escalate into a profit-eroding arms race or
price war. However, some caution must be exercised in concluding that rivalry
is weak just because there are only a few competitors. Thus, although occasional
warfare can break out (the fierceness of the curren t battle betw een Red Hat and
Microsoft and the decades-long war betw een Coca-Cola <ind Pepsi are prime
examples), competition among the few normally produces a live-and-let-live
approach to competing because rivals see the merits of restrained efforts to wrest
sales and market share from competitors as opposed to undertaking hard-hitting
offensives that escalate into a profit-eroding arms race or price war.
5 Rivalry increases when buyer demand falls o ff and sellers find themselves w ith excess
capacity and/ or inventory. Excess supply conditions create a "buyer' s market",
putting added competitive pressure on industry ri vals to scramble for profitable sales
levels (often by price discounting).
6 Rivalry increases as it becomes less costly for buyers to sw itch brands. The less
expensive it is for buyers lo switch their purchases from the setter of one brand
to the seller of another brand, the easier it is for setters to steal customers aw ay
from rivals, but the higher the costs buyers incur to sw itch brands, the less prone
they are to brand switching. Even if con sumers view one or more rival brands as
more attractive, they may not be inclined to sw itch because of the added time
and inconvenience or the psychological costs of abandoning a familiar brand.
Distributors and retailers may not switch to the brands of rival manufacturers
because they are hesitant to sever long-standing supplier relationships, incur
any technical support costs or retraining expenses in making the switchover, go
to the trouble of testing the quality and reliability of the rival brand, or devote
resources to marketing the new brand (especially if the brand is less w elt-know n).
Apple Computer, for example, has been unable to convince PC users to switch
from Windows-based PCs because of the time burdens and inconvenience
&& Chapler OJ Analysing a Company's External Environment
associated with learning Apple's operating system, and because so many
Windows-based applications will not run on a Macintosh due to operating system
incompatibility. Consequently, unless. buyers are dis.sat~s.fied with the brand t.hey
are presently purchasing, high switching costs can s1gnif1cantly weaken the ri valry
among competing sellers.
7 Rivalry increases as the products of rival sellers become more standa~dized ~nd
diminishes as the products of industry rivals become more strongly d1fferent1ated.
When the offerings of rivals are identical or weakl~ diff:rentiat~d, buyers h~ve less
reason to be brand-loyal- a condition that makes 1t easier for rivals to convince
buyers to switch to their offering. Since the brands of different sellers have .
comparable attributes, buyers can shop the market for the best. deal and sw~tch
brands at will. In contrast, strongly differentiated product offerings amo~g rivals
breed high brand loyalty on the part of buyers- because many buyers view the
attributes of certain brands as better suited to their needs. Strong brand attachments
make it tougher for sellers to draw customers away from rivals. Unless n:ieaningf~l
numbers of buyers are open to considering new or different product attributes being
offered by rivals, the high degrees of brand loyalty that a_ccompany strong product
differentiation work against fierce rivalry among competing sellers: The de[Jree of
product differentiation also affects switching costs. Whe~ the off~nngs of ri vals are
identical or weakly differentiated, it is usually easy and inexpensive for buyers to
switch their purchases from one seller to another. S1rongly differentiated products
raise the probability that buyers will find it costly to switch brands.
8 Rivalry is more intense when industry conditions tempt competitors to use price
cuts or other competitive weapons to boost unit volume . When a product 1s .
perishable, seasonal, or costly to hold in inventory, competitive pressures build _
quickly any time one or more companies decides to cut prices and du~p supplies
on the market. Similarly, whenever fixed costs account for a !arge fraction of t.otal
cost so that unit costs tend to be lowest at or near full capacity, then companies
com'e under significant pressure to cut prices or otherwise try to .bo?st sales
whenever they are operating below full capacity. Unused cap~c1ty 1mpo~es a
significant cost-increasing penalty because there are fewer un'.ts over wh1c_h t~
spread fixed costs. The pressure of high fixed costs. can push riv~I co~pan1es into
price concessions, special discounts, rebates, low-interest-rate financing, and other
volume-boosting tactics.
9 Rivalry increases when one or more competitors become dissatisfied with thei~
market position and launch moves to bolster their standing at the expense of ~1vals.
Companies that are losing ground or in financial ti'Ou?le often ~ursu~ aggressive
(or perhaps desperate) turnaround strategies ~hat can 1~volve pnce discounts,
more advertising, acquisition of or merger with other rivals, or new product
introductions- such strategies can turn competitive pressures up a notch.
1o Rivalry becomes more volatile and unpredictable as the diversi~y of competitors
increases in lerms of vision, strategic intents, objeclives, strategies, resources, and
countries of origin. A diverse group of sellers often contJins one or more maveric~s
willing to try novel or high-risk or rule-breaking market approaches, thus generating
3.5 What Kinds of Competitive Forces are Industry Members Facing ? 67
a livelier and less predictable competitive environment. Globally competitive
markets often contain rivals with different view s about where the industry is headed
and a willingness to employ perhaps radically different competitive approaches.
Attempts by cross-border rivals to gain stronger footholds in each other's domestic
markets usually boost the intensity of rivalry, especially when the aggressors have
lower costs or products with more attractive features.
11 Rivalry increases when strong companies outside the industry acquire weak
companies in the industry and launch aggressive, well-funded moves to transform
their newly acquired competitors into major market contenders. A concerted effort lo
turn a weak rival into a market leader nearly always entails launching well-financed
strategic initiatives to dramatically improve the competitor' s product offering, excite
buyer interest, and win a much bigger market share-actions that, if successful, put
added pressure on rivals to counter with fresh strategic moves of their own.
12 A powerful, success{ul competitive strategy employed b y one company greatly
intensifies the competitive pressures on its rivals to develop effective strategic
responses or be relegated to also-ran status.
Rivalry can be characterized as cut-throat or brutal when competitors engage in
protracted price wars or habitually employ other aggressive tactics that are mutually
destructive to profitability. Rivalry can be considered fierce to strong w hen the battle for
market share is so vigorous that the profit margins of most industry members are squeezed
to bare-bones levels. Rivalry can be characterized as moderate or normal when the
manoeuvring among industry members, while lively and healthy, still allow s most industry
members to earn acceptable profits. Rivalry is w eak when most companies in the industry
are relatively well satisfied with their sales grow th and market shares, rarely undertake
offensives to steal customers away from one another, and have comparati vely attractive
earnings and returns on investment.
3.5.2 Competitive Pressures Associated with the Threat of New Entrants
Several factors determine whether the threat of new companies entering the marketplace
poses significant competitive pressure (see Fig. 3.5). One factor relates to the size of the
pool of likely entry candidates and the resources at their command. As a rule, the bigger
the pool of entry candidates, the stronger the threat of potential entry. This is especially
true when some of the likely entry candidates have ample resources and the potential
to become formidable contenders for market leadership. Frequently, the strongest
competitive pressures associated with potential entry come not from outsiders, but from
current industry participants looking for growth opportunities. Existing industry members
are often strong candidates for entering market segments or geographic areas where they
currently do not have a market presence. Companies already w ell established in certain
product categories or geographic areas often possess the resources, competencies, and
competitive capabilities to hurdle the barriers of entering a different market segment or
new geographic area .
A second factor concerns whether the likely entry candidates face high or low entry
barriers. High barriers reduce the competitive threat of potential entry, while low barriers
make entry more likely, especially if the industry is growing and offers attractive profit
68 Chapter 03 Analysing a Company's External Environment 3.5 What Kinds of Competitive Forces are Industry Members Facing? i9

have low unit costs that are hard to replicate by newcomers. Industry incumbents
can have cost advantages that stem from learning/experience curve effects, the
Entry threats are stronger
when: possession of key patents or proprietary technology, partnerships with the best and
• The pool of entry cheapest suppliers of raw materials and components, favourable locations, and low
candidates is large fixed costs (because they have older facilities that have been mostly depreciated).
and some of the
candidates have • Strong brand preferences and high degrees of customer loyalty- the stronger the
Rivalry resources that would attachment of buyers to established brands, the harder it is for a new comer to break
Entry threats are weaker among make them formidable
market contenders
into the marketplace. In such cases, a new entrant must have the financial resources
when: competing
• The pool of entry se llers • Entry barriers are low to spend enough on advertising and sales promotion to overcome customer loyalties
candidates is small or can be readily and build its own clientele. Establishing brand recognition and building customer
• Entry barriers are high hurdled by the likely loyalty can be a slow and costly process. In addition, if it is difficult or costly for
• Existing competitors entry candidates
• When existing a customer to switch to a new brand, a new entrant must persuade buyers that
are struggling to earn
healthy profits How strong are the
industry members are its brand is worth the switching costs. To overcome switching-cost barriers, new
• The industry's outlook looking to expand entrants may have to offer buyers a discounted price or an extra margin of quality
competitive pressures
is risky or uncertain their market reach by
associated with the entry or service. All this can mean lower expected profi t margins for new entrants, which
• Buyer demand is entering product
threat from new rivals?
growing slowly or is segments or increases the risk to startup companies dependent on sizable early profits to support
stagnant geographic areas their new investments.
• Industry members will where they currently
strongly contest the do not have a • High capital requirements- the larger the total capital investment needed to enter
efforts of new entrants presence the market successfully, the more limited the pool of potential entrants. The most
to gain a market • Newcomers can
Potential obvious capital requirements for new entrants relate to manufacturing facilities and
foothold expect to earn
new equipment, introductory advertising and sales promotion campaigns, working capital
attractive profits
entrants • Buyer demand is to finance inventories and customer credit, and sufficient cash to cover start-up costs.
grow ing rapidly
• Industry mem bers are • The difficulties of building a network o f distributors or retailers and securing
unable or unwilling to adequate space on retailers' shelves- a potential entrant can face numerous
st rongly contest the distribution channel challenges. Wholesale distributors may be reluctant to take on a
entry of newcomers
product that lacks buyer recognition. Retailers have to be recruited and convinced to
give a new brand ample display space and an adequate trial period. When existing
sellers have strong, well-functioning distributor or retailer networks, a newcomer
FIGURE J.5 Factors affecting the threat of entry has an uphill struggle in squeezing its w ay in. Potential entrants sometimes have to
"buy" their way into wholesale or retail channels by cutting their prices to provide
dealers and distributors with higher mark-ups and profit margins or by giving them
opportunities. The most widely encountered barriers that entry candidates must hurdle big advertising and promotional allowances. As a consequence, a potential entrant' s
include: 4
own profits may be squeezed unless and until its product gains enough consumer
• The presence of significant economies of scale in production or other areas of acceptance that distributors and retailers are an xious to carry it.
operation- when incumbent companies enjoy cost advantages associated with • Restrictive regufalory po/ides-government agencies can limit or even bar
large-scale operation, outsiders must either enter oJt a large scale (a costly and entry by requiring licences and permits. Regulated industries like cable TV,
perhaps risky move) or accept a cost disadvantage and consequently lower telecommunications, electric and water agencies, radio and television broadcasting,
profitability. Trying to overcome the disadvantages of small size by entering on a liquor retailing, and railroads entail government-controlled entry. In international
large scale at the outset can result in long-term overcapacity problems for the new markets, host governments commonly limit foreign entry and must approve all foreign
entrant (until sales volume builds up), and it can so threaten the market shares investment applications. Stringent government-mandated safety regulations and
of existing companies that they launch strong defensive manoeuvres (price cuts, environmental pollution standards are entry barriers because they raise entry costs.
increased advertising and sales promotion, and similar blocking actions) to maintain
• Tariffs and international trade reslrictions-national governments commonly use
their positions and make things hard on a newcomer.
tariffs and trade restrictions (anti-dumping rules, local content requirements, quotas,
• Cost and resource disadvantages not related to scale of operation- aside from etc.) to raise entry barriers for foreign companies and protect domestic producers
enjoying economies of scale, there are other reasons why existing companies may from outside competition.
70 Chapter 03 Analysing a Company's External Environment
• The ability and inclination of industry incumbents to launch vigorous initiatives
to block a newcomer's successful entry- even if a potential entrant has or can
acquire the needed competencies and resources to attempt entry, it must still
worry about the reaction of existing companies. ~ Sometimes, there is little
that incumbents can do to throw obstacles in an entrant's path- for instance,
existing restaurants have little in their arsenal to discourage a new restaurant
from opening or to dissuade people from trying the new restaurant. However,
there are times when incumbents do all they can to make it diffic ult for a new
entrant, using price cuts, increased advertising, product improvements, and
whatever else they can think of to prevent the entrant from building a clientele.
Cable TV companies vigorously fight the entry of satellite TV companies; Sony
has mounted strong defences to thwart Microsoft's entry in videogames with
its Xbox; existing hotels try to combat the opening of new hotels with loyalty
programmes, renovations of their own, the addition of new services, and so
on. An entrant like Mango Airlines (SAA's low-cost airline) can have second
thoughts when financially strong incumbent companies send clear signals that
they will give newcomers a hard time and when there is an overlap with its own
parent company (see Illustratio n Capsule 3.1 ).
11 lustration Capsul e 3 .1: Can Mango Give Low-Cost Rivals the Pip in
Turbulent Times and Prevent Overlapping?
T he launch of SA's new low-cost carrier, Mango, has sent ripples across the domestic
airline market, forcing its competitors to reduce their air fores in a bid to match its
prices. Launched in 2006, the wholly owned SAA subsidiary claims lo be "a truly low-
cost carrier" based on successful low-cost carriers such as Europe's Ryanair or America's
Southwest Airlines. "When SAA began to consider the option of introducing a new airline
into the South African market, it was immediately clear that what was needed was a truly
low-cost option, not simply another no-frills airline," says Mango chairman Professor
Jakes Gerwe!. "This airline is all about inexpensive, safe and speedy travel."
In a deliberate attempt to undercut the fares offered by its more established competitors,
Kulula.com and 1 time, Mango has slarlcd selling itc; tickets between Johannesburg and
the coastal cities of Cape Town and Durban for Rl69 a trip- including airport charges.
Mango CEO Nico Bczuidcnhout says the ticket price has elicited "an unprecedented wave
of enthusiasm" from consumers, clogging up booking syjlems. "The high call volumes,
web impressions and soaring ticket sales prove that the market is hungry for an airline
such as Mango," says Bezuidcnhout. Kulula's joint CEO, Gidon Novick, says his airline's
fares are still the lowest in the country. He says. although competition is welcome, there
is no need for government to enter the airline business as government already owns
SAA and SA Express. But everything is not rosy for Mango. There is concern regarding
tlw overlapping of services offered by the three state-owned airlines-SAA, Mango and
SA Express. Although, they have tho same owner. the Department of Public Enterprise
3.5 What Kmds of Competitive Forces are Industry Members Feeing? 71
r ~
sec them as three different airlines with three different strategies serving three different
markets. But in reality the lines are far from defined. That much was clear when SA
Express outlined its future plans this week, which were surprisingly similar to those of
SAA. While in theory SAA serves the larger, primary cities and SAExpress the smaller,
secondary cities, both airlines now seem to be gunning for the same markets.
The two airlines are already tripping over each other, with SAA earlier this year
launching 13 flights a week to Gaborone, a destination already served by SA Express.
One has lo wonder whether either airline is able to make any money with that amount of
capacity on the route.
Then there is the Democratic Republic of Congo. Back in December, when former
SAA CEO Khaya Ngqula first mentioned plans to expand to Congo, SA Express CEO
Siza Mzimela and her team were exploring similar plans. For now, the more nimble
and efficient SA Express has outfoxed its ham-handed sibling and from November will
increase its four weekly flights between Johannesburg and Lubumbashi to daily flights,
with an onward connection to Kinshasa. The strategies of both airlines in west Africa also
overlap, with both planning regional hubs there.
While it is not clear who is copying whom, for now SA Express has proved itself to be
more deft al implementing its strategies, remaining profitable despite the many challenges
facing the industry. However, if Public Enterprises Minister Barbara Hogan does not redefine
the boundaries-or reconsider the wisdom of owning three airlines-both SA Express and
SAA could be hurt, particularly in the African market, where many governments are
already wary of the dominance of SA's airlines.
Source: Business Day. Posted on the Web 3 November 2006 ond 31 July 2009.
Three additional aspects need to be mentioned specifically in the South African
context, namely: the role of competition policy, the pressure to privatize previously state-
owned businesses and the onslaught on traditional protection afforded by patent rights as
the case involving generic medicine for Aids reflects. These may remove barriers to entry
that previously existed.
Whether an industry's entry barriers ought to be considered high or low depends on the
resources and competencies possessed by the pool of potential entrants. Companies with
large financial resources, proven competitive capabilities, and a respected brand name
may be able to hurdle an industry's entry barriers rather easily. Small start-up enterprises
may find the same entry barriers insurmountable. Thus, how hard it will be for potential
entrants to compete on a level playing field is always relative to the financial resources
and competitive capabilities of likely entrants.
In evaluating whether the threat of additional entry is strong or weak, company
managers must look at (1) how formidable the entry barriers are for each type of potential
entrant- start-up enterprises, specific candidate companies in other industries, and current
industry participants looking to expand their market reach-and (2) how attractive the
growth and profit prospects are for new entrants. Rapidly growing market demand and
high potential profits act as magnets, motivating potential entrants lo commit the resources
72 Chapter 03 Analysing a Company's External Environment
needed to hurdle entry barriers.'' When profits are sufficiently attractive, entry barriers
are unlikely to be an effective entry deterrent. At most, they limit the pool of candidate
entrants to enterprises with the requisite competencies and resources and with the
creativity to fashion a strategy for competing with incumbent companies.
Hence, the best test of whether potential entry is a strong or weak competitive force
in the marketplace is to ask if the industry's growth and profit prospects are strongly
attractive to potential entry candidates. When the answer is no, potential entry is a weak
competitive force. When the answer is yes and there are entry candidates with sufficient
expertise and resources, then potential entry adds significantly to competitive pressures
in the marketplace. The stronger the threat of entry, the more that incumbent companies
are driven to seek ways to fortify their positions against newcomers, pursuing strategic
moves not only to protect their market shares but also to make entry more costly or
difficult.
One additional point: the threat of entry changes as the industry's prospects grow
brighter or dimmer and as entry barriers rise or fall. For example, in the pharmaceutical
industry the expiration of a key patent on a widely prescribed drug virtually guarantees
that one or more drug makers will enter with generic offerings of their own. Growing use
of the Internet for shopping is making it much easier for Web-based retailers to enter into
competition against such well-known retail chains as Pick 'n Pay, and Exclusive Books. In
international markets entry barriers for foreign-based companies fall as tariffs are lowered,
as host governments open up their domestic markets to outsiders, as domestic wholesalers
and dealers seek out lower-cost foreign-made goods, and as domestic buyers become
more willing to purchase foreign brands.
3.5.3 Competitive Pressures from the Sellers of Substitute Products
Companies in one industry come under competitive pressure from the actions of
companies in a closely adjoining industry whenever buyers view the products of the
two industries as good substitutes. For instance, the producers of sugar experience
competitive pressures from the sales and marketing efforts of the makers of artificial
sweeteners. Similarly, the producers of spectacles and contact lenses are currently
facing mounting competitive pressures from growing consumer interest in corrective
laser surgery. Newspapers are feeling the competitive f~rce of the general public
turning to cable news channels for late-breaking news and using Internet sources to
get information ;ibout sports results, stock quotes, and job opportunities. The makers of
videotapes and VCRs have watched demand evaporate as more and more consumers
have been attracted to substitute use of DVDs and DVD recorders/players. Traditional
providers of telephone service like Telkom are feeling enormous competitive pressure
from cell phone providers, as more and more consumers find cell phones preferable to
landline phones.
3.5 What Kinds of Competitive Forces are Industry Members Facing? 73
Just how strong the competitive pressures are from the sellers of substitute products
depends on three factors:
1 Whether substitutes are readily available and attractively priced. The presence
of readily available and attractively priced substitutes creates competitive
pressure by placing a ceiling on the prices industry members can charge
without giving customers an incentive to switch to substitutes and risking
sales erosion. 7 At the same time this price ceiling puts a lid on the profits that
industry members can earn unless they find way s to cut costs. When substitutes
are cheaper than an industry's product, industry members come under heavy
competitive pressure to reduce their prices and find ways to absorb the price cuts
with cost reductions.
2 Whether buyers view the substitutes as being comparable or better in terms of
quality, performance, and other relevant attributes. The availability of substitutes
inevitably invites customers to compare performance, features, ease of use, and other
attributes as well as price. For example, ski-boat manufacturers are experiencing
strong competition from personal water-ski craft because water sports enthusiasts
see personal water skis as fun to ride and less expensive. The users of paper cartons
constantly weigh the performance trade-offs w ith plastic containers and metal cans.
Competition from successful substitutes unleashes competitive pressures on industry
participants to incorporate new performance features and attributes that makes their
product offerings more competitive.
3 Whether the costs that buyers incur in switching to the substitutes are high or
low. High switching costs deter switching to substitutes, while low switching
costs make it easier for the sellers of attractive substitutes to lure buyers to their
offering. 11 Typical switching costs include the time and inconvenience that may
be involved, the costs of additional equipment, the time and cost in testing the
quality and reliability of the substitute, the psychological costs of severing old
supplier relationships and establishing new ones, payments for technical help in
making the changeover, and employee-retraining costs. High switching costs can
materially weaken the competitive pressures that industry members experience
from substitutes unless the sellers of substitutes are successful in offsetting the
high switching costs with enticing price discounts or additional performance
enhancements.
Figure 3.6 summarizes the conditions that determine whether the competitive pressures
from substitute products are strong, moderate, or weak.
As a rule, the lower the price of substitutes, the higher their quality and performance,
and the lower the user's switching costs, the more intense the competitive pressures
posed by substitute products. Other market indicators of the competitive strength of
substitute products include (1) whether the sales of substitutes are grow ing faster than
the sales of the industry being analysed (a sign that the sellers of substitutes may be
drawing customers away from the industry in question), (2) whether the producers of
substitutes are moving to add new capacity, and (3) whether the profits of the producers
of substitutes are on the rise.
74 Chapter 03 Analysing a Company's External Environment 3 5 What Kinds of Competitive Forces are Industry Members Facing? 75

the icons for Microsoft software prominently on the screens of new computers that come
with factory·loaded software. Intel pushes greater use of Intel microprocessors in PCs
Firms in other by granting PC makers significant advertising allow ances on PC models equipped w ith
industries
"Intel Inside" stickers; it also tends to give PC makers that use the biggest percentages
offering Competitive pressu res
substitute from substitutes are of Intel chips in their PC models top priority in filling orders for new ly introduced Intel
products stronger when: chips. Being on Intel 's list of preferred customers helps a PC maker obtain an allocation
Competitive pressures
• Good substitutes are of the first production runs of Intel' s latest and greatest chips, thus enabling it to get new
from substitutes are
readily available or
weaker when: PC models equipped with these chips lo market ahead of ri vals w ho are heavier users
• Good substitutes are new ones are
emerging of chips made by Intel's rivals. The ability of Microsoft and Intel to pressure PC makers
not readily available How strong are competitive
• Substitutes are for preferential treatment of one kind or another in turn affects competition among ri val
or don't exist pressures coming from the
attractively priced
• Substitutes are attempts of companies PC makers.
• Substitutes have
higher priced relative outside the industry to win Several other instances of supplier bargaining pow er are w orth citing. Small·scale
comparable or better
to the performance buyers over to their products?
they deliver
performance features retailers must often contend with the power of manufacturers w hose products enjoy
r • End users have low prestigious and well·respected brand names; the know ledge that a retailer needs to
• End users have high
costs in switching to
" costs in switching to
Rivalry substitutes stock the manufacturer's product because consumers expect to find the product on the
substitutes among • End users grow more shelves of retail stores where they shop gives the manufacturer some degree of pricing
competing comfortable w ith power and means that he can also push hard for favourable shelf displays. Motor vehicle
I
sellers using substitutes
manufacturers typically exert considerable power over the terms and conditions with
.)
which they supply new vehicles to their independent car dealerships. The operators of
franchised units of such chains as McDonald's, Spar, 7Eleven, and Master Maths must
Signs that competition from substitutes is strong:
• Sales of substitutes are growing faster than sales of the industry frequently agree not only to source some of their supplies from the franchisor at prices and
being analysed (an indication that the sellers of substitutes are terms favourable to that franchisor but also to operate their facilities in a manner largely
drawing customers away from the industry in question) dictated by the franchisor.
• Producers of substitutes are moving to add new capacity
• Profits of the producers of substitutes are on the r ise Strong supplier bargaining power is a competiti ve factor in industries where unions
have been able to organize the workforces of some industry members but not others; those
industry members that must negotiate wages, fringe benefits, and working conditions w ith
FIGURE 3.6 Factors affecting competition from substitute products powerful unions (which control the supply of labour) often find themselves w ith higher
labour costs than their competitors with non·union labour forces. The bigger the gap
between union and non·union labour costs in an industry, the more unionized industry
3.5.4 Competitive Pressures Stemming from Supplier Bargaining Power and members must scramble to find ways to relieve the competitive pressure associated with
Supplier-Seller Collaboration their disadvantage on labour costs.
The factors that determine whether any of the suppliers to an industry are in a position
Whether supplier- seller relationships represent a weak or strong competitive force
to exert substantial bargaining power or leverage are fairly clear·cut: 9
depends on (1) whether the major suppliers can exercise sufficient bargaining power to
influence the terms and conditions of supply in their favour, and (2) the nature and extent • Whether the item being supplied is a commodity that is readily available from man y
of supplier- seller collaboration in the industry. suppliers at the going market price. Suppl iers have little or no bargaining power or
leverage whenever industry members have the ability to source their requirements
How Supplier Bargaining Power Can Create Competitiveil'ressures at competitive prices from any of several alternative and eager suppliers, perhaps
Whenever the major suppliers lo an industry have considerable leverage in determining dividing their purchases among two or more suppliers to promote lively competition
the terms and conditions of the item they are supplying, they are in a position to exert for orders. The suppliers of commodity items have market pow er only w hen supplies
competitive pressure on one or more rival sellers. For instance, Microsoft and Intel, become quite tight and industry members are so eager to secure what they need that
both of which supply personal computer (PC) makers with products that most PC users they agree to terms more favourable to suppliers.
consider essential, are known for using their dominant market status not only to charge • Whether a few large suppliers are the primary sources o f a particular item. The
PC makers premium prices but also to leverage PC makers in other ways. Microsoft leading suppliers may well have pricing leverage unless they are plagued with excess
pressures PC makers to load only Microsoft products on the PCs they ship and to position capacity and are scrambling to secure additional orders for their products. Major
76 Chapler 03 Analysing a Company's External Environment
suppliers with good reputations and strong demand for the ilems they supply are
harder to wring concessions from than struggling suppliers striving to broaden their
customer base or more fully utilize their production capacity.
• Whether it is difficult or costly for industry members to switch their purchases from
one supplier lo another or to switch to attractive substitute inputs. High switching
costs signal strong bargaining power on the part o( suppliers, whereas low switching
costs and ready availability of good substitute inputs signal weak bargaining power.
Soft-drink bottlers, for example, can counter the bargaining power of aluminum can
suppliers by shifting or threatening to shift to greater use of plastic containers and
introducing more attractive plastic container designs.
• Whether certain needed inputs are in short supply. Suppliers of items in short supply
have some degree of pricing power, whereas a surge in the availability of particular
items greatly weakens supplier pricing power and bargaining leverage.
• Whether certain suppliers provide a differentiated input that enhances the
performance or quality of the industry's product. The more valuable a particular
input is in terms of enhancing the performance or quality of the products of industry
members or of improving the efficiency of their production processes, the more
bargaining leverage ils suppliers are likely to possess.
• Whether certain suppliers provide equipment or services that deliver valuable cost-
saving efficiencies to industry members in operating their production processes.
Suppliers who provide cost-saving equipment or other valuable or necessary
production-related services are likely to possess bargaining leverage. Industry
members that do not source from such suppliers may find themselves at a cost
disadvantage and thus under competitive pressure to do so (on terms that are
favourable to the suppliers).
• Whether suppliers provide an item that accounts for a siz<1ble fra<lion of the costs
of the industry's product. The bigger the cost of a particular part or component, the
more opportunity there is for the paltern of competition in the marketplace to be
affected by the actions of suppliers lo raise or lower their prices.
• Whether industry members are major customers of suppliers. As a rule, suppliers have
less bargaining leverage when their sales to members of this one industry constitute a
big percentage of their total s<iles. In such cases, the well-being of suppliers is closely
tied to the well -being of their major customers. Suppliers then have a big incentive
to protect and enhance their customers' competitiveness via reasonable prices,
exceptional quality, and ongoing adv<inces in the technology of the items supplied.
• Whether 1t makes good economic ~ense for indusJ;y members to integrate backward
and self manufacture items the y have been buying from suppliers. The make-
or-buy issue generally boils down lo whether suppliers who specialize in the
production of a particular part or component and make them in volume for many
different customers have the expertise and scale economies to supply as good or
better component at a lower cost than industry members could achieve via self-
manufacture. Frequently it is difficult for industry members to self-manufacture parts
and components more economically than suppliers who specialize in making such
3.5 What Kmds of Compelllive Forces are Industry Members Facing? n
items. For instance, most producers of outdoor power equipment (lawn mowers,
rotary tillers, leaf blowers, etc.) find it cheaper to source the small engines they
need from outside manufacturers who specialize in small-engine manufacture rather
than make their own engines, because the quantity of engines they need is too
small to justify the investment in manufacturing facilities, mastering the production
process, and capturing scale economies. Specialists in small-engine manufacture, by
supplying many kinds of engines to the whole power equipment industry, can obtain
a big enough sales volume to fully realize scale economies, become proficient in all
the manufacturing techniques, and keep costs low. As a rule, suppliers are safe from
the threat of self-manufacture by their customers until the volume of parts a customer
needs becomes large enough for the customer to justify backward integration into
self-manufacture of the component. Suppliers also gain bargaining power when they
have the resources and profit incentive to integrate forward into the business of the
customers they are supplying and thus become a strong rival.
Figure 3.7 summarizes the conditions that tend to make supplier bargaining power
strong or weak.
How strong
are the
Suppliers of competitive
Rivalry
raw materials, pressures
among
parts, components, stemming from
competitive
or other resource supplier bargaining
sellers
inputs power and
seller- supplier
collaboration 7
I
/
Supplier bargaining power is stronger when:
• Industry members incur high cosls in switching their purchases to alternative suppliers
• Needed inputs are in short supply (which gives suppliers more leverage in setting prices)
• A supplier has a differenliated inpul th11t enhances lhe quality or performance of sellers' products or is
a valuable or critical part of sellers' production processes
• There are only a few suppliers of a particular input
• Some suppliers threaten to integrate forward into the business of Industry members and perhaps
become a powerful rival
Supplier bargaining power is weaker when:
• The item being supplied is a commodity that is readily available from many suppliers at the going
market price
• Soller switching costs to alternative suppliers are low
• Good substitute inputs exist or new ones emerge
• There is a surge in the availability of supplies (lhus greatly weakening supplier pricing power)
• Industry members account for a big fraction of suppliers' total sales and continued high volume
purchases are important to the well-being of suppliers
• Industry members ere a th real to integrate backward into the business of suppliers and to self·
manufaclure their own requirements
• Seller collaboration or partnering wilh selected suppliers provides attractive win-win opportunities
,
FIGURE 3.7 Factors affecting the bargaining power of suppliers

78 Chapter 03 Analysing a Company's External Environment
Haw Seller-Supplier Partnerships Can Create Competitive Pressures
In more and more industries, sellers are forging strategic partnerships with select suppliers
in efforts to (1) reduce inventory and logistics costs (e.g. through just-in-time deliveries),
(2) speed the availability of next-generation components, (3) enhance the quality of
the parts and components being supplied and reduce defect rates, and (4) squeeze
out important cost savings for both themselves and their suppliers. Numerous Internet
technology applications are now available that permit real-time data sharing, eliminate
paperwork, and produce cost savings all along the supply chain. The many benefits of
effective seller- supplier collaboration can translate into competitive advantage for industry
members that do the best job of managing supply chain relationships.
US-based Dell Computer has used strategic partnering with key suppliers as a major
element in its strategy to be the world's lowest-cost supplier of branded PCs, servers,
and workstations. Because Dell has managed its supply chain relationships in ways that
contribute to a low-cost, high-quality competitive edge in components supply, it has put
enormous pressure on its PC rivals to try to imitate its supply-chain management practices.
Effective partnerships with suppliers on the part of one or more industry members can thus
become a major source of competitive pressure for rival companies.
The more opportunities that exist for win- win efforts between a company and its
suppliers, the less their relationship is characterized by who has the upper hand in
bargaining with the other. Collaborative partnerships between a company and a supplier
tend to last so long as the relationship is producing valuable benefits for both parties. Only if
a supply partner is falling behind alternative suppliers is a company likely to switch suppliers
and incur the costs and trouble of building close working ties with a different supplier.
3.5.5 Competitive Pressures Stemming from Buyer Bargaining Power and
Seller-Buyer Collaboration
Whether seller-buyer relationships represent a weak or strong competitive force depends
on (1) whether some or many buyers have sufficient bargaining leverage to obtain price
concessions and other favourable terms and conditions of sale, and (2) the extent and
competitive importance of seller-buyer strategic partnerships in the industry.
Haw Buyer Bargaining Power Can Create Competitive Pressures
As with suppliers, the leverage that certain types of buyers enjoy in negotiating favourable
terms can range from weak to strong. Individual consumers, for example, rarely have
much bargaining power in negotiating price concessions or other favourable terms with
sellers; the primary exceptions involve situations in which,.price haggling is customary,
such as the purchase of new and used motor vehicles, homes, and certain big-ticket items
like luxury watches, jewellery, and pleasure boats. For most consumer goods and services,
individual buyers have no bargaining leverage- their option is to pay the seller's posted
price or take their business elsewhere.
In contrast, large retail chains like Pick 'n Pay, Checkers and Spar convenience
stores typically have considerable negotiating leverage in purchasing products from
manufacturers because of manufacturers' need for broad retail exposure and the most
appealing shelf locations. Retailers may stock two or three competing brands of a product
- ---------- .....
3.5 What Kinds of Competitive Forces are Industry Members Facing? 79
but rarely all competing brands, so competition among rival manufacturers for visibility
on the shelves of popular multi-store retailers gives such retailers significant bargaining
strength. Major supermarket chains like Safeway (US), and Royal Ahold (Netherlands),
which provide access to millions of grocery shoppers, have sufficient bargaining power
to demand promotional allowances and lump-sum payments (called "slotting fees")
from food products manufacturers in return for stocking certain brands or putting them
in the best shelf locations. Motor vehicle manufacturers have strong bargaining power
in negotiating to buy original equipment tyres from Goodyear, Michelin, Bridgestone/
Firestone, Continental, and Pirelli not only because they buy in large quantities but also
because tyre makers believe they gain an advantage in supplying replacement tyres to
vehicle owners if their tyre brand is original equipment on the vehicle. "Prestige" buyers
have a degree of clout in negotiating with sellers because a seller's reputation is enhanced
by having prestige buyers on its customer list.
Even if buyers do not purchase in large quantities or offer a seller important market
exposure or prestige, they gain a degree of bargaining leverage in the following
circumstances: 10
• If buyers' costs of switching to competing brands or substitutes are relatively low.
Buyers who can readily switch brands or source from several sellers have more
negotiating leverage than buyers who have high switching costs. When the products
of rival sellers are virtually identical, it is relatively easy for buyers to switch from
seller to seller at little or no cost and anxious sellers may be willing to make
concessions to win or retain a buyer's business.
• If the number of buyers is small or if a customer is particularly important to a seller. The
smaller the number of buyers, the less easy it is for sellers to find alternative buyers
when a customer is lost to a competitor. The prospect of losing a customer not easily
replaced often makes a seller more willing to grant concessions of one kind or another.
r
• If buyer demand is weak and sellers are scrambling to secure additional sales of their
products. Weak or declining demand creates a "buyer's market"; conversely, strong
or rapidly growing demand creates a "seller's market" and shifts bargaining power to
sellers.
• If buyers are well-informed about sellers' products, prices, and costs. The more
information buyers have, the better bargaining position they are in. The mushrooming
availability of product information on the Internet is giving added bargaining power
to individuals. Buyers can easily use the Internet to compare prices and features of
holiday packages, shop for the best interest rates on mortgages and loans, and find
the best prices on items such as digital cameras. Bargain-hunting individuals can
shop around for the best deal on the Internet and use that information to negotiate
a better deal from local retailers; this method is becoming commonplace in buying
new and used motor vehicles. Furthermore, the Internet has created opportunities
for manufacturers, wholesalers, retailers, and sometimes individuals lo join online
buying groups to pool their purchasing power and approach vendors for better terms
than could be obtained individually. A multinational manufacturer's geographically
scattered purchasing groups can use Internet technology to pool their orders with
parts and components suppliers and bargain for volume discounts. Purchasing agents
80 Chapter 03 Analysing a Company's External Environment
at some companies are banding together at third-party websites to pool corporate
purchases lo get better deals or special treatment.
• If buyers pose a credible threat of integrating backward into the business o f sellers.
Companies like SABMiller and Heinz have integrated backward into facilitating
transport and metal-can manufacturing in order to gain bargaining power in
obtaining the balance of their can requirements from otherwise powerful metal-can
manufacturers. Retailers gain bargaining power by stocking and promoting their own
private-label brands alongside manufacturers' name brands.
• If buyers have discretion in whether and when they purchase the product. Many
consumers, if they are unhappy with the present deals offered on major appliances
or hot tubs or home entertainment centres, may be in a position to delay purchase
until prices and finan cing terms improve. If business customers are not happy w ith
the prices or security features of bill-payment software systems, they can either delay
purchase until next-generation products become available or attempt to develop
their own software in-house. If university students believe that the prices of new
textbooks are too high, they can purchase used copies.
Figure 3.8 highlights the factors causing buyer bargaining power to be strong or w eak.
How strong
are the
Rivalry competitive
among pressures from
competing Buyers
buyer bargaining
sellers power and
seller- buyer
collaboration?
Buyer bargaining power is stronger when:
• Buyer switching costs to competing brands or substitute products are low
• Buyers are large and can demand concessions when purchasing large quantit"H
• Large-volume purchases by buyers are important to sellers
• Buyer demand is week or declining
• There ere only e few buyers- so that each one's business is important to sellers
• Identity of buyer adds prestige to the seller's list of customers
• Quantity and quality of information available to buyers improves
• Buyers have the ability to postpone purchases until later if they do not like the present deals being
offered by the sellers
• Some b_u yers are a threat to integrate backward into the business of sellers and become en important
competitor
Buyer bargaining power is weaker when:
- Buyers purchase the item infrequently or in small quantities
• Buyer switching costs to competing brands are high
• There is a surge in buyer demand that creates a "seller's market"
• A seller's brand reputation is important to a buyer
• A particular seller's product delivers quality or performance that is very Important to buyer end that Is
not matched in other brands
• Buyer collaboration or partnering with selected sellers provides attractive win- win opportunities
FIGURE 3.1 Factors affecting the bargaining power of buyers
3.5 Wha t Ki nds of Com petitive Forces ere Industry Members Faci ng? 81
A final point to keep in mind is that not all buyers of an industry's product have equal
degrees of bargaining power with sellers, and some may be less sensitive than o thers to
price, quality, or service differences. For example, independent tyre retailers have less
bargaining power in purchasing tyres than Honda, Ford, and Toyota {which buy in much
larger quantities), and they are also less sensitive to quality. Motor vehicle manufacturers
are very particular about tyre quality and tyre performance because of the effects on
vehicle performance, and they drive a hard barga in w ith tyre manufacturers on both price
and quality.
How Seller-Buyer Partnerships Can Create Competitive Pressures
Partnerships betw een sellers and buyers are an increasingly important element of the
competiti ve picture in business-to-business relationships (as opposed to business-to-
consumer relationships). Many sellers that provi de items to business customers have found
it in their mutual interest to collaborate closely on suc h matters as just-in-time del iveries,
order processing, electronic invoice payments, and data sharing. W al-Mart (the global US
retailer) provides the manufacturers with w hich it does business {li ke Procter & Gamble)
with daily sales at each of its stores so that the manufacturers can maintain suffici ent
inventories at Wal-Mart' s distribution centres to keep the shelves at each Wal-Mart store
amply stocked. Another US company (Dell Computer) has entered into partnerships wi th
its largest PC customers to create online systems for over 50 000 corporate customers,
providing their employees w ith information on approved product con figurations, global
pricing, paperless purchase orders, real-time order tracki ng, invoicing, purchasing history,
and other efficiency tools. Dell loads a customer' s software at the fa ctory and installs asset
tags so that customer set-up time is minimal; it also helps custo mers upgrade their PC
systems to next-generation hardware and software. Dell's partnerships w ith its corporate
customers have put significant competitive pressure on other PC makers.
3.5.6 Is the Collective Strength of the Five Competitive Forces Conducive to
Good Profitability?
Scrutinizing each of the five competiti ve forces one by one provi des a powerful diagnosis of
w hat competitio n is like in a given market. Once the strategist has gained an understanding
of the specific competitive pressures comprising each force and determined w hether
these pressures constitute a strong, moderate, or weak competitive force, the next step
is to evaluate the collective strength of the fi ve forces and determine w hether the state
of competition is conducive to good profitability. Is the collective impact of the five
competitive forces stronger than "normal" ? Are some of the competitive forces sufficiently
strong to undermine industry profitability? Can companies in this industry reasonably
expect to earn decent profits in light of the prevailing competitive forces?
Is the Industry Competitively Attractive or Unattractive?
As a rule, the stronger the collective impact of the five competitive forces, the lower the
combined profitability of industry participants. The most extreme case of a competitively
unattractive industry is w hen all five forces are producing stron g competitive pressures:
rivalry among sellers is vigorous, low entry barriers allow new rivals to gain a market
foothold, competition from substitutes is intense, and both suppliers and customers are
82 Chapter 03 Analysing a Company's External Environment
able to exercise considerable bargaining leverage. Fierce to strong competitive pressures
coming from all five directions nearly always drive industry profitability to unacceptably
low levels, frequently producing losses for n:iany industry members and forcing some out
of business. Nevertheless, an industry can be competitively unattractive even when not
all five competitive forces are strong. Intense competitive pressures from just two or three
of the five forces may suffice to destroy the conditions for good profitability and prompt
some companies to exit the business. The manufacture of disk drives, for example, is
brutally competitive: IBM recently announced the sale of its disk drive business to Hitachi,
taking a loss of over $2 billion on its exit from the business. Especially intense competitive
conditions seem to be the norm in tyre manufacturing and apparel, two industries where
profit margins have historically been thin.
CORE CONCEPT: The stronger the forces of competition, the harder it becomes for industry
members to earn attractive profits.
In contrast, when the collective impact of the five competitive forces is moderate
to weak, an industry is competitively attractive in the sense that industry members
can reasonably expect to earn good profits and a nice return on investment. The ideal
competitive environment for earning superior profits is one in which both suppliers
and customers are in weak bargaining positions, there are no good substitutes,
high barriers block further entry, and rivalry among present sellers generates only
moderate competitive pressures. Weak competition is the best of all possible worlds
for also-ran companies because even they can usually eke out a decent profit- if
a company can't make a decent profit when competition is weak, then its business
outlook is indeed grim.
In most industries, the collective strength of the five competitive forces is somewhere
near the middle of the two extremes of very intense and very weak, typically ranging from
slightly stronger than normal to slightly weaker than normal and typically allowing well-
managed companies with sound strategies to earn attractive profits.
Matching Company Strategy to Competitive Conditions
Working through the five-forces model step by step not only aids strategy makers in
assessing whether the intensity of competition allows good profitability but also promotes
sound strategic thinking about how better to match company strategy to the specific
competitive character of the marketplace. Effectively matching a company's strategy to
prevailing competitive conditions has two aspects: ,
1 Pursuing avenues that shield the firm from as many of the different competitive
pressures as possible.
2 Initiating actions calculated to produce sustainable competitive advantage, thereby
shifting competition in the company's favour, putting added competitive pressure on
rivals, and perhaps even defining the business model for the industry.
Making headway on these two fronts, however, first requires identifying competitive
pressures, gauging the relative strength of each of the five competitive forces, and gaining
3.6 What Factors are Driving Industry Change and What Impacts Will They Have? 83
a deep enough understanding of the state of competition in the industry to know which
strategy buttons to push.
CORE CONCEPT: The more a company's strategy provides some insulation from competitive pres-
sures and shifts the competitive battle in the company's favour, the more effective it grows.
3.6 What Factors are Driving Industry Change and What Impacts
Will They Have?
n industry's present conditions do not n~cessaril y _reveal ~uch ab?ut the _strategically
A relevant ways in which the industry environment 1s changing. All industries are
characterized by trends and new developments that gradu?l~y o~ speedily p~oduce changes
important enough to require a strategic response from participating co_mpanies. A popular
hypothesis states that industries go through a life cycle of take-off, rap1~ growl~, early .
maturity and slowing growth, market saturation, and stagnation or decline. This hypothesis
helps explain industry change-but it is far from co_mplete. 11 There ?re
more causes of
industry change than an industry's normal progression through the hfe cycle-these need
to be identified and their impacts understood.
3.6.1 The Concept of Driving Forces
While it is important to track where an industry is in the life cycle, there is more analytical
value in identifying the other factors that may be even stronger drivers of industry_
and competitive change. The point to be made here is that indust~ ?nd compell~1~e
conditions change because forces are enticing or pressuring certain industry participants
(competitors, customers, suppliers) to alter their actions in important ways. 12 Th~ most
powerful of the change agents are called driving forces ~ecause th~~ have th~ _biggest
influences in reshaping the industry landscape and altering compellt~ve conditions. ~ome
driving forces originate in the outer ring of the company' s macroenv1ronm~~t (see ~1g. 3.2 ),
but most originate in the company's more immediate industry and competitive environment.
Driving-forces analysis has three steps: (1) identifying what th~ driving forces a_re;
(2) assessing whether the drivers of change are, on the whole, acting to make the industry
more or less attractive; and (3) determining what strategy changes are needed lo prepare
for the impacts of the driving forces. All three steps merit further discussion.
84 Ch11p1er 03 Analysing a Company's Ex1ern11I Environmen1

3.6 What Factors are Dr·iv·ing lnduslry Change and What lmpacls Will They Have?
85
3.6.2 Identifying an Industry's Driving Forces
incentive to loC<Jte plants for labou~~a~~~cr~ss the world. Wages in South Africa,
Many developments can affect an industry powerfully enough to qualify as driving forces. . t . e roducts in low-wage countries and
Some drivers of change are unique and specific to a particular industry situation, but most use these plants to supply ma~ket d d . ~ example are about one-fourth those
China, India, Singapore, Mexico, an raz~heo;orces of ~lobalization are sometimes
drivers of industry and competitive change fall into one of the following categories: 13 8 1

• Emerging new Internet capabilities and applications. Since the late 1990s, the Internet in the United States, Germany, a~d J:p~~~ highly advantageous, if not necessary, to
has woven its way into everyday business operations and the social fabric of life such a strong drive! that companies mand more country markets. Globalization is
all across the world. Mushrooming Internet use, growing acceptance of Internet spread their operating reach intoh more . h industries as credit cards, cell phones,
shopping, the emergence of high-speed Internet service and Voice over Internet very much a driver of industry c ange rn sue hides steel petroleum, personal
Protocol (VoIP) technology, and an ever-growing series of Internet applications and digital cameras, golf and ski bel~uip~e~~t~ogt:n~etextbdok publishing.
ters video games, pu ic ac o '
capabilities have been major drivers of change in industry after industry. Companies
• Changes in an industry s lon~-term g h
compu ' ' rowth rate Shifts in industry growth up or
are increasingly using online technology (1) to collaborate closely with suppliers and e affecting the balance between
streamline their supply chains, and (2) lo revamp internal operations and squeeze down are a driving force for indu~ry c ang exit and the character and strength
d
out cost savings. Manufacturers can use their websites to access customers directly industry supply and buyer d~m~n 'e;rry and trigs'ers a race among established
rather than distribute exclusively through traditional wholesale and retail channels. of competition. An upsurge m uyer ~~a~ew sales opportunities; ambitious
Businesses of all types can use Web stores to extend their geographic reach and companies and newcomers to capture e the upturn in demand as a golden
vie for sales in areas where they formerly did not have a presence. The ability companies with trailing market shares _m ar s~eoaden their customer base and move
of companies to reach consumers via the Internet increases the number of rivals opportunity to launch off~nsive strateg1~~ ~ ~slowdown in the rate at which
a company faces and often escalates rivalry by pitting pure on line sellers against up several notches in the industry stand l· ounting rivalry and increased efforts by
combination brick-and-dick sellers against pure brick-and-mortar sellers. The Internet demand is gro~ing nea!ly~lw~y~ ~~r~~at:~of growth by taking sales and market
gives buyers unprecedented ability to research the product offerings of competitors
and shop the market for the best value. The mounting ability of consumers lo
some companies to marntam I eir r dd nl turn flat or begin to shrink after
share aw~~ from rivals. Jf i.n?ustry sa e~~u eti~io~ is certain to intensify as industry
download music from the Internet via either file sharing or on line music retailers has years of nsmg at double-d1g1t levbells, ~ . p a d as mergers and acquisitions result
profoundly reshaped the music industry and the business of traditional brick-and- members
d scramble for the availa lel usmebss nf competitively stronger participants.
mortar music retailers. Widespread use of e-mail has forever eroded the business f"dation to a sma er num er o d
in in ustry conso 1 titivel weak and growth-oriente
of providing fax services and the first-class mail delivery revenues of government Stagnating sales usua~ly pr~mpt both c~mp~ tho:e industry members who elect to
postal services worldwide. Videoconferencing via !he Internet can erode the dem<ind companies to sell their business opera~1ons ~ t continues to shrink, the remaining
for business !ravel. Online course offerings at universities have the potential to stick it out; as demand for the indus~ro::~~e~~ient plants and retrench to a smaller
revolutionize higher education. The Internet of the future will feature faster speeds, industry members may be f?rhced tol . uch changed competitive landscape.
d r b se-all of wh1c resu ts in am -
dazzling applications, and over a billion connected gadgets performing an array of
produ~~:~an alter th; state of competition by opening .
functions, thus driving further industry and competitive changes. But Internet-related pro uc ion a dhow the use it. Shifts in buyer demographics
• Changes in who buys the
and new ways of usrn? the pr~d
impacts vary from industry lo industry. The challenges here are to assess precisely
duct throu h a different mix of dealers and retail
the way to market an industry s ~:~aden or na~row their product lines; bringing
how emerging Internet developments are altering a particular industry's landscape
and lo factor these impacts into the stralegy-making equation.
outlets;
ff prompting producers to h . to play· and forcing adjustments in
• Increasing globalization. Competition begins lo shift from what is primarily a regional I d promotion approac eS In I d •)
di erent sa es.an . d' technical assistance, maintenance, an repair .
or national focus lo an international or global focus when industry members begin customer serv1~e offerings ~ere0 /~ownloading music from the Internet, stor.ing
seeking out customers in foreign markets or when production activities begin to The mushrooming popul~nty b . custom discs has forced recording
migrate to countries where costs are lowest. Glo~lization of competition really music files on PC hard_ dnv:s'. a;.dtri~~~i1~~ strategies and raised questions about the
starts lo take hold when one or more ambitious companies precipitates a race for companies to re-exam1~e t e1~ is . at the same time, it has stimulated sales of
worldwide market leadership by launching initiatives to expand into more and more future of traditional retail music store~'. f ectancies and growing percentages of
country murkets. Globalizulion can also be precipit<Jted by the growth of consumer disc burners and blank ?iscs. Long~r. I e c~x:n es in such industries as healthcare,
demand in more and more countries and by the actions of government officials in relatively well-to-do ret1re~s ar~l?r.'vm~nd va~ation travel. The growing percentage
many countries to reduce trade barriers or open up once-closed markets lo foreign prescription drugs, recreationa ivmg, ·s opening opportunities for banks to
competitors, as is occurring in muny parts of Europe, Lalin America, and Asia. of households with PCs and Internet acce.ss ' d for retailers to move more of their
Significant differences in labour costs among countries give manufacturers a strong expand their electroni.c bill-payment services an
customer services onlrne.
86 Chapter 03 Analysing a Company's External Environment
• Product innovation. Competition in an industry is always affected by rivals racing
to be first to introduce one new product or product enhancement after another. An
ongoing stream of product innovations tends to alter the pattern of competition in
an industry by attracting more first-time buyers, rejuvenating industry growth, and/
or creating wider or narrower product differentiation among rival sellers. Successful
new product introductions strengthen the market positions of the innovating
companies, usually at the expense of companies that stick with their old products or
are slow to follow with their own versions of the new product. Product innovation
has been a key driving force in such industries as digital cameras, golf clubs, video
games, toys, and prescription drugs.
• Technological change and manufacturing process innovation. Advances in technology
can dramatically alter an industry's landscape, making it possible to produce new and
better products at lower cost and opening up whole new industry frontiers. For instance,
Voice over Internet Protocol (VoIP) technology has spawned low-cost, Internet-based
phone networks that are stealing large numbers of customers away from traditional
telephone companies worldwide (whose higher-cost technology depends on hardwired
connections via overhead and underground telephone lines). Flat-screen technology for
PC monitors is killing the demand for conventional cathode-ray tube (CRT) monitors.
Liquid crystal display (LCD), plasma screen technology, and high-definition and 3-D
technology are precipitating a revolution in the television industry and driving use of
cathode-ray technology (CRT) into the background. MP3 technology is transforming
how people listen to music. Digital technology is driving huge changes in the camera
and film industries. Satellite radio technology is allowing satellite radio companies
with their largely commercial -free programming to draw millions of listeners away
from traditional radio stations whose revenue streams from commercials are dependent
on audience size. Technological developments can also produce competitively
significant changes in capital requirements, minimum efficient plant sizes, distribution
channels and logistics, and learning/experience curve effects. In the steel industry
ongoing advances in electric arc minimill technology (which involve recycling scrap
steel to make new products) have allowed steel makers with state-of-the-art minimills
lo gradually expand into the production of more and more steel products, steadily
taking sales and market share from higher-cost integrated producers (which make steel
from scratch using iron ore, coke, and traditional blast furnace technology). Nucor
Corporation, the leader of the minimill technology revolution in the United Stales,
began operations in 1970 and has ridden the wave of technological advances in
minimill technology lo become the biggest US steel producer (as of 2004) and to rank
among the lowest-cost producers in the world. In a spjll.:e of 30 years, advances in
minimill technology have changed the face of the steel industry worldwide.
• Marketing innovation. When companies are successful in introducing new ways
to market their products, they can spark a burst of buyer interest, widen industry
demand, increase product differentiation, and lower unit costs- any or all of which
can alter the competitive positions of rival companies and force strategy revisions.
Online marketing is shaking up competition in electronics (where there are dozens
of on line electronics retailers, often with deep-discount prices) and office supplies
3.6 What Factors are Driving Industry Change and What Impacts Will They Have? 87
(where small businesses are using their websites to market office supplies to big
corporates, other small businesses, schools and universities, and government
agencies). Increasing numbers of music artists are marketing their recordings at
their own websites rather than entering into contracts with recording studios that
distribute through online and brick-and-mortar music retailers.
• Entry or exit of major companies. The entry of one or more foreign companies into a
geographic market once dominated by domestic companies nearly always shakes up
competitive conditions. Likewise, when an established domestic firm from another
industry attempts entry either by acquisition or by launching its own start-up venture,
it usually applies its skills and resources in some innovative fashion that pushes
competition in new directions. Entry by a major firm thus often produces a new
ball game, not only with new key players but also with new rules for competing.
Similarly, exit of a major firm changes the competitive structure by reducing the
number of market leaders (perhaps increasing the dominance of the leaders who
remain) and causing a rush to capture the exiting firm's customers.
• Oiffus ion of technical know-how across more companies and more countries. As
knowledge about how to perform a particular activity or execute a particular
manufacturing technology spreads, the competitive advantage held by companies
originally possessing this know-how erodes. Knowledge diffusion can occur through
scientific journals, trade publications, on-site plant tours, word of mouth among
suppliers and customers, employee migration, and Internet sources. It can also
occur when those possessing technological knowledge license others to use that
knowledge for a royalty fee or team up with a company interested in turning the
technology into a new business venture. Quite often, technological know-how
can be acquired by simply buying a company that has the wanted skills, patents,
or manufacturing capabilities. In recent years, rapid technology transfer across
national boundaries has been a prime factor in causing industries to become more
globally competitive. As companies worldwide gain access to valuable technical
know-how, they upgrade their manufacturing capabilities in a long-term effort to
compete head-on with established companies. Cross-border technology transfer
has made the once domestic industries of automobiles, tyres, consumer electronics,
telecommunications, computers, and others increasingly global.
• Changes in cost and efficiency. Widening or shrinking differences in the costs among
key competitors tend to dramatically alter the state of competition. The low cost of
fax and e-mail transmission has put mounting competitive pressure on the relatively
inefficient and high-cost operations of the postal services in South Africa and all over
the world-sending a one·page fax is cheaper and far quicker than sending a first-class
letter; sending e-mail is faster and cheaper still. In the steel industry, the lower costs of
companies using electric-arc furnaces to recycle scrap steel into new steel products has
forced traditional manufacturers that produce steel from iron ore using blast furnace
technology to overhaul their plants and to withdraw totally from making those steel
products where they could no longer be cost competitive. Shrinking cost differences
in producing multi-featured mobile phones is turning the mobile phone market into a
commodity business and causing more buyers to base their purchase decisions on price.
88 Chapter 03 Analysing a Company's External Environment
• Growing buyer preferences for differentiated products instead of a commodity
product (or for a more standardized product instead of strongly differentiated
products). When buyer tastes and preferences start to diverge, sellers can win a
loyal following with product offerings that stand apart from those of rival sellers. Jn
recent years, beer drinkers have grown less loyal to a single brand and have begun to
drink a variety of domestic and foreign beers; as a consequence, beer manufacturers
have introduced a host of new brands and malt beverages with different tastes and
flavours. Buyer preferences for motor vehicles are becoming increasingly diverse,
with few models generating sales of more than 250 000 units annually. When a
shift from standardized to differentiated products occurs, the driver of change is the
contest among rivals to cleverly out-differentiate one another.
• However, buyers sometimes decide that a standardized, budget-priced product
suits their requirements as well as or better than a premium-priced product with
lots of snappy features and personalized services. Online brokers, for example,
have used the lure of cheap commissions to attract many investors willing to place
their own buy-sell orders via the Internet; growing acceptance of online trading
has put significant competitive pressures on full-service brokers whose business
model has always revolved around convincing clients of the value of asking for
personalized advice from professional brokers and paying their high commission fees
to make trades. Pronounced shifts toward greater product standardization usually
spawn lively price competition and force rival sellers to drive down their costs to
maintain profitability. The lesson here is that competition is driven partly by whether
the market forces in motion are acting to increase or decrease product differentiation.
• Reductions in uncertainty and business risk. An emerging industry is typically
characterized by much uncertainty over potential market size, how much time and
money will be needed to surmount technological problems, and what distribution
channels and buyer segments to emphasize. Emerging industries tend to attract only
risk-taking entrepreneurial companies. Over time, however, if the business model
of industry pioneers proves profitable and market demand for the product appears
durable, more conservative companies are usually enticed to enter the market.
Often, these later entrants are large, financially strong companies looking to invest
in attractive growth industries. lower business risks and less industry uncertainty
also affect competition in international markets. In the early stages of a company's
entry into foreign markets, conservatism prevails and companies limit their downside
exposure by using less risky strategies like exporting, licensing, joint marketing
agreements, or joint ventures with local companies to accomplish entry. Then, as
experience accumulates and perceived risk levels deQine, companies move more
boldly and more independently, making acquisitions, constructing their own plants,
putting in their own sales and marketing capabilities to build strong competitive
positions in each country market, and beginning to link the strategies in each country
to create a more globalized strategy.
• Regulatory influences and government policy changes . Government regulatory
actions can often force significant changes in industry practices and strategic
approaches. Deregulation has proved to be a potent pro-competitive force in the
3.6 What Factors are Driving Industry Change and What Impacts Will They Have? 89
airline, banking, natural gas, telecommunications, and electric utility industries.
Government efforts to reform medical care and health insurance have become
potent driving forces in the healthcare industry. In international markets host
governments can drive competitive changes by opening their domestic markets to
foreign participation or dosing them to protect domestic companies. Note that this
driving force is spawned by forces in a company's macroenvironment.
• Changing societal concerns, attitudes, and lifestyles. Emerging social issues and
changing attitudes and lifestyles can be powerful instigators of industry change.
Growing anti-smoking sentiment has emerged as a major driver of change in the
tobacco industry; concerns about terrorism are having a big impact on the travel
industry. Consumer concerns about salt, sugar, chemical additives, saturated fat,
cholesterol, carbohydrates, and nutritional value have forced food producers to
revamp food-processing techniques, redirect R&D efforts into the use of healthier
ingredients, and compete in developing nutritious, good-tasting products. Safety
concerns have driven product design changes in the car, toy, and outdoor power
equipment industries, to mention a few. Increased interest in physical fitness has
spawned new industries in exercise equipment, biking, outdoor apparel, sports gyms
and recreation centres, vitamin and nutrition supplements, and medically supervised
diet programmes. Social concerns about air and water pollution have forced industries
to incorporate expenditures for controlling pollution into their cost structures. Shifting
societal concerns, attitudes, and lifestyles alter the pattern of competition, usually
favouring those players that respond quickly and creatively with products targeted to
the new trends and conditions. As with the preceding driving force, this driving force
springs from factors at work in a company's macroenvironment.
Table 3.2 lists these 14 most common driving forces.
1 Emerging new Internet capabilities and applications
2 Increasing globalization
3 Changes in an industry's long-term growth rate
4 Changes in who buys the product and how thev use it
5 Product innovation
& Technological change and manufacturing process innovation
7 Marketing innovation
B Entry or exit of major companies
9 Diffusion of technical know-how across more companies end more countries
10 Changes in cost and efficiencv
11 Growing buyer preferences for differentiated products instead of a commoditv product for for a mOfe
standardized product instead of strongly differentiated prod uctsl
12 Reductions m uncenainty and business risk
13 Regulatory influences and government policy changes like Black Economic Empowerment and Employment
Equity
14 Changing societal concerns, attitudes, and lifestyles
TABLE 3.2 The most common driving forces
90 Chapter 03 Analysing a Company's External Environment
That there are so many different potential driving forces explains why it is too
simplistic to view industry change only in terms of moving through the different stages
in an industry's life cycle and why a full understanding of all types of change drivers is a
fundamental part of industry analysis. However, while many forces of change may be at
work in a given industry, no more than three or four are likely to be true driving forces
powerful enough to qualify as the major determinants of why and how the industry is
changing. Thus, company strategists must resist the temptation to label every change
they see as a driving force; the analytical task is to evaluate the forces of industry and
competitive change carefully enough to separate major factors from minor ones.
South African issues that are particular strategic from a government policy-intervention
point are broad-based Black Economic Empowerment (BEE) and Employment Equity
!EE) or affirmative action. The BEE legislation defines this intervention as the economic
empowerment of all black people including women, workers, youth, people with
disabilities, and people living in rural areas, through diverse but integrated socio-economic
strategies. Illustration Capsule 3.2 explains how SABMiller dealt with this issue.
Illustration Capsule 3.2: SABmiller's BEE Deal Shuns the Fashionable
Recipients
ABMILLER's black economic empowerment deal announced yesterday follows the
S pattern of recent broad-based deals, but deviates in some crucial respects.
The deal follows the broad parameters by being focused on the retail portion of the
company's downstream supply chain and employees, with a smaller "worthy causes"
portion added on, thereby shunning high-profile politicians and former politicians who
were once the fashionable recipients of BEE largesse. MD of SABMiller SA, Norman
Adami, makes a point of underlining this issue, stressing the "truly broad-based and
tangible benefits" that will flow from the deal.
The deal implicitly rejects the notion that BEE is partly meant to create a class of
patriotic business leaders. In fact, the leaders or trustees of the different entities created
by the R6 billion deal were not even named at the function yesterday. The deal is different
as it is internally funded and so not reliant on bank funding, which would be a sensitive
issue in this credit-challenged environment.
SABMiller Group CEO Graham Mackay underlines this, saying it "places no reliance
on external bank funding, and requires only a relatively small, and hence affordable, cash
investment from retail participants". In effect, the deal is ~ndor-financed, but surely this
would result in a big hit on the company's income statement? SABMiller argues this is
not the case.
The deal will have no effect on earnings next year, although 2011 earnings will be
affected. The "economic cost" will be 220 million in total. The actual cost will be between
1 per cent and 3 per cent of earnings, taken mainly in 2011.
How is this miracle of financial engineering-a US $750 million (R5.8 billion) deal
which costs only US $220 million (Rl.7 billion)-achieved? Through time, luck and
3 6 What Factors are Driving Industry Change and What Impacts Will Thay Have? 91
dividends. About 30 per cent of the value of the deal will ultimately derive from a solid
flow of dividends, a peculiar advantage of large, mature and cash-generating companies.
The company has been specific that it is a share-price-sensitive deal, hence much of the
upside, it is hoped, will derive from an increase in the share price. In this sense, it is well
timed, initiated while markets are depressed. The other unusual aspect of the deal is the
role management hopes it will play in developing and solidifying the supply chain.
Not only will liquor retailers participate, but also "applicants or legal entities who can
provide evidence that a liquor licence application has been lodged". In other words, if she-
been owners get their act together, they participate too. There is a slight question mark over
whether structuring your BEE deal in this way constitutes anti-competitive behaviour. By
including retailers in their deal, SABMiller does not exclude others from doing the same.
But does the warm and fuzzy feeling retailers will get from being invested in the
company effectively reduce the likelihood they will stock competitors' products? Hard to
say, but it's a borderline issue.
Overall, the local company will get about 60 000 new shareholders, 95 per cent of
whom will be blacks or black majority-owned enterprises, helping to spread and solidify
relationships with the company. The local company is a "level five " contributor to broad-
based empowerment.
So urc1!: Busim1ss Day, 2 July 2009.
Most forward-looking companies in South Africa are committed to introducing EE
into the workplace in such a way as to create an environment in which individuals of
ability and application can develop rewarding careers at all levels, regardless of their
background, race, or gender. Illustration Capsule 3.3 is a practical example of how the
global mining company De Beers is busy implementing their EE policy in South Africa.
Illustration Capsu le 3.3: Harnessing-and-Developing-Talent
T here is a close link between driving improved business performance and attracting,
recruiting, developing and retaining talented people.
Talent management also contributes lo empowerment by providing employees with
skills that benefit them directly, that benefit the family of companies and that build the
skills base of our host countries. It enables us to better serve and reflect the markets and
producer countries within which we operate. We also promote a culture that respects
and harnesses the richness of different ideas, cultures and viewpoints as a key ingredient
in the long-term success of our business.
Talent Management
Our Talent Management Policy supports the recruitment, development, succession
and retention of talent across the family of companies. It requires that we develop and
implement a common talent management approach.
92 Chapter 03 Analysing e Company's External Environment
This common approach includes shared information and standardized processes to
enable talent succession and deployment across the family of companies. It also enables
us to systematically map individual skills against business requirements and understand
our current talent bench strength. This allows us to determine and address capability
gaps and promote career management and development. The Talent Management Policy
mandates the appointment of the best-qualified internal or external candidates in line with
job requirements and national legislation relating to employment equity. It also ensures
employee performance is gauged against a defined set of key performance indicators,
through regular dialogue and feedback.
The percentage of employees receiving regular performance and career development
reviews is monitored across most grades. This includes Patterson grades CL to EU.
We also monitor the training provided to all employees by category of employment.
A talent management scorecard is in place and is used to track and ensure high potential
employees have appropriate access to development opportunities. The scorecard also
enables effective succession planning and coverage. We also monitor the internal fill mte,
vacancies, regretted losses and diversity indicators. The latter are legal requirement as
part of the South African broad-based Black Economic Empowerment (BEE) legislation.
Talent management is formally assessed and reported on across the family of
companies through our annual Organisation and Capability Reviews. This enables us
to ensure appropriate people with the appropriate skills are focused on activities that
deliver value for the organization now and into the future.
Professional Development
All of our operations have internal courses to assist employees in their personal
development, enable them to be more productive and improve their contribution to
business goals. These include mentoring and coaching systems, e-learning, part-time an ti
full-time training courses. We believe in the underlying philosophy of life-long learning.
Equity in Development Opportunities
This strong focus on skills development is also supported by legislation such as the South
African Employment Equity Act 1998 and broad-based BEE Act 2003. De Beers Consolidated
Mines has a well-established bursary scheme that more than delivers on these expectations.
Additional learning interventions are available to fast track Historically Disadvantaged
South Africans (HDSAs) and designated groups. This includes the Women in Mining
Programme, which is facilitated by the DME through the Da Vinci Institute of Technology.
This commitment is most evident in the establishment of the Lesedi Centre for Human
Capital Development in Kimberley, South Africa. Lesed!,.focuses on developi ng technical
and non-technical skills for DBCM, its partners and the broader Northern Cape community.
Employees who are affected by any down-scaling, retrenchment or redu ndancy also
have access to employment agencies sourced by the company in order to find alternative
employment. Lower-skilled employees often have the option of one year of paid training.
Significant programmes arc in place at Kimberley and other operations nea ring " end of
production" to provide training to employees in anticipation of mine closure.
Source: Busim1ss Day, hll p;//www.clnh_!illrW.T.!l.ll !MillIDb1n / S11~tn j nnh j l jp,d (accussud .2 August 20UD).
3.6 What Factors are Drivmg Industry Ch ange and What Impacts Will They Have? 93
Another driving force of change is regulatory influences. As far as the healthcare
industry in South Africa is concerned, the state is in the position that private enterprise
creams off the top and the state has to provide for a growing number that cannot afford
basic care. At present the state is putting in tremendous e ffort to increase the number of
private individuals able to get treatment in state faci lities. There is already a restriction
on the issue of licences for new private medical care facilities in most provinces. The
regulatory restrictions ma y in future be extended.
3.6.3 Assessing the Impact of the Driving Forces
Simply identifying the dri ving forces is not sufficient, howe ver. The second, and more
important, step in driving-forces analysis is to determine whether the prevailing driving
forces are, on the whole, acting to make the industry environment more or less attractive.
Answers to three questions are needed here:
1 Are the driving forces collectively acting to cause demand fo r the industry' s product
to increase or decrease?
2 Are the driving forces acting to make competition more or less intense?
3 Will the combined impacts of the driving fo rces lead to higher or lower industry
profitability?
Getting a grasp of the collective impact of the driving forces usually requires looking
at the likely effects of each force separately, since the driving forces may not a ll be
pushing change in the same direction. For example, two driving forces may be acting to
spur demand for the industry' s product while one driving fo rce may be working to curtail
demand. Whether the net effect on industry demand is up or down hinges on which dri ving
forces are the more powerful. The analyst's objective here is to get a good grip on what
external factors are shaping industry change and what difference these factors will ma ke.
CORE CONCEPT: An important part of driving-forces analysis is to determine whether the col-
lective impact of the driving forces will be to increase or decrease market demand, make
competition more or less intense, and lead to higher or lower industry profitability.
3.6.4 Developing a Strategy That Takes the Impacts of the Driving Forces into
Account
The third step of driving-forces analysis-w here the real pay-off for strategy making
comes- is for managers to draw some concl usions about what stralegy adjustments w ill
be needed to deal with the impacts of the driving forces. The real va lue of doing driving-
forces analysis is to gain better understand ing of what strategy adjustme nts w il l be needed
to cope with the drivers of industry change and the impacts they are likely to have on
market demand, competitive intensity, and industry profitability. In short, the strategy-
making challenge thal flows from driving-forces analysis is what to do to prepare for the
industry and competitive changes being wrought by the driving forces. Indeed, without
understanding the forces driving industry change and the impacts these forces w ill have
on the character of the industry environme nt and on the company's business over the
94 Chapter 03 Analysing a Company's External Environment 3.7 Whet Market Positions Do Rivals Occupy- Who is Strongly Positioned and Who is Not? 95

next one to three years, managers are ill-prepared to craft a strategy tightly matched to
CORE CONCEPT: A strategic group is a cluster of industry rivals that have similar competitive
emerging conditions. Similarly, if managers are uncertain about the implications of one
approaches and market positions.
or more driving forces, or if their views are incomplete or off target, it will be difficult for
them to craft a strategy that is responsive to the driving forces and their consequences for
the industry. So, driving-forces analysis is not something to take lightly; it has practical
The procedure for constructing a strategic group map is straightforward:
value and is basic to the task of thinking strategically about where the industry is headed
and how to prepare for the changes ahead. • Identify the competitive characteristics that differentiate companies in the industry.
Typical variables are price/quality range (high, medium, low); geographic coverage
r (local, regional, national, global); degree of vertical integration (none, partial, full);
CORE CONCEPT: The real benefit of driving-forces analysis is to help managers understand product-line breadth (wide, narrow); use of dislribution channels (one, some, all);
what strategy changes are needed to prepare for the impacts of the driving forces and and degree of service offered (no-frills, limited, full).
when done properly, pushes company managers to think about what's around the corner • Plot the compa nies on a two-variable map using pairs of these differentiating
and what the company needs to be doing to get ready for it. characteristics.
\.

• Assign companies that fall in about the same strategy space to the same strategic group.
• Draw circles around each strategic group, making the circles proportional to the
3.7 What Market Positions Do Rivals Occupy-Who is Strongly size of the group's share of total industry sales revenues.
Positioned and Who is Not? This produces a two-dimensional diagram like the one for the US retailing industry in
Figure 3.9.
ince competing companies commonly sell in different price/quality ranges, emphasize
S different distribution channels, incorporate product features that appeal to different
types of buyers, have different geographic coverage, and so on, it stands to reason that
some companies enjoy stronger or more attractive market positions than other companies.
Understanding which companies are strongly positioned and which weakly is an integral 0 Gucci, Chane
Fendi
part of analysing an industry's competitive structure. The best technique for revealing the
market positions of industry competitors is strategic group mapping. 14 This analytical tool High
is useful for comparing the market positions of each firm separately or for grouping them
into like positions when an industry has so many competitors that it is not practical to
examine each one in depth.

CORE CONCEPT: Strategic group mapping is a technique for displaying the different market or
competitive positions that rival companies occupy in the industry.
\. ------- - -
3.7.1 Using Strategic Group Maps to Assess the Market Positions of
Kev Competitors
A strategic group consists of those industry members with similar competitive approaches
and positions in lhe market. 1> Companies in the same stt'!itegic group can resemble one low
another in any of several ways: they may have comparable product-line breadth, sell in
the same price/qualily range, emphasize the same distribution channels, use essentially the
same product attributes to appeal to similar types of buyers, depend on identical
technological approaches, or offer buyers similar services and technical assistance."' Many localities
Few localities
An induslry conlains only one slrategic group when all sellers pursue essentially
identical strategies and have comparable market positions. At the other extreme, an Geographic coverage
industry may contain as many strategic groups as there are competitors when each
rival pursues a distinctively different competitive approach and occupies a substantially FIGURE 3.9 Comparative market positions of selected retail chains: a strategic group map application
differenl market position. No11r. Crcles are drawn roughly proponional to the sizes of the chains, based on revenues.
96 Ch11pter 03 Ana ys1ng a Company's External Environment
Several guidelines need to be observed in mapping the positions of strategic groups in the
industry's overall strategy space. 17 First, the two variables selected as axes for the map should
not be highly correlated; if they are, the circles on the map will fall along a diagonal and
strategy makers will learn nothing more about the relative positions of competitors than they
would by considering just one of the variables. For instance, if companies with broad product
lines use multiple distribution channels, while companies with narrow lines use a single
distribution channel, then looking at broad versus narrow product lines reveals just as much
about who is positioned where as looking at single versus multiple distribution channels: that
is, one of the variables is redundant. Second, the variables chosen as axes for the map should
expose big differences in how rivals position themselves to compete in the marketplace. This,
of course, means analysts must identify the characteristics that differentiate rival companies
and use these differences as variables for the axes and as the basis for deciding which
firm belongs in which strategic group. Third, the variables used as axes do not have to be
either quantitative or continuous; rather, they can be discrete variables or defined in terms
of distinct classes and combinations. Fourth, drawing the sizes of the circles on the map
proportional to the combined sales of the companies in each strategic group allows the map
to reflect the relative sizes of each strategic group. Fifth, if more than two good competitive
variables can be used as axes for the map, several maps can be drawn to give different
exposures to the competitive positioning relationships present in the industry's structure.
Because there is not necessarily one best map for portraying how competing compa nies
are positioned in the market, it is advisable to experiment with different pairs of competitive
variables. If we take number of aircraft and average number of flights daily for the airline
industry in South Africa, it produces a two-dimensional diagram like the one in Figure 3.10.
> 30
23
Number
of aircraft 15
,:,
21 27 29 30 64
> ...
>100
Average number of flights daily
Strategic Group Map displaying the average number of daily flights flown per airline
versus the number of aircraft for each.
•Take note: The Mango depiction is not true reflection of its market share as this
cannot be assessed yet. Arrows indicate expected moves.
FIGURE 3.10 Comparative market positions of se 'ected airline rivals in South Africa: a strategic group map
application
Source Staisch. l 12007) "A strategic analysis of the latest entr1n1 mto the South African low· cost airline industry-Mango·. USB Working
Paper Senes 110, prepared under guidance of Prof Hein Oosthuizen
3.7 What Market Positions Do Rivals Occupy-Who is Strongtv Positioned and Who is Not? 97
3.7.2 What Can Be Learned from Strategic Group Maps?
Strategic group maps are revealing in several respects. The most important has to do
with which rivals are similarly positioned and are thus close rivals, and which are
distant rivals. Generally speaki ng, the closer strategic groups are to each other on the
map, the stronger the cross·group competitive rivalry tends to be. Although companies
in the same strategic group are the closest rivals, the next closest rivals are in the
immediately adjacent groups. 16 Often, companies in strategic groups that are far apart
on the map hardly compete at all. For instance, Wal-Mart's clientele, merchandise
selection, and pricing points are far too different to justify calling them close (global)
competitors of Neiman Marcus or Saks Fifth Avenue in retailing. For the same reason,
Timex is not a meaningful competitive rival of Rolex, and Kia is not a close competitor
of BMW or Mercedes-Benz.
CORE CONCEPT: Strategic group maps reveal which companies are close competitors and which
are distant competitors. Not all positions on a strategic group map are equally attractive.
The second thing to be gleaned from strategic group mapping is that not all positions on
the map are equally attractive. Two factors account for why some positions can be more
attractive than others:
1 Prevailing compc>titive pressures and industry driving forces favour some strategic
groups and hurt others. 19 Discerning which strategic groups are advantaged and
disadvantaged requires scrutinizing the map in the light of what has also been
learned from the prior analysis of competitive forces and driving forces. Quite
often the strength of competition varies from group to group-there is little reason
to believe that all companies in an industry feel the same degrees of competitive
pressure, since their strategies and market positions may well differ in important
respects. For instance, the competitive battle among Pick 'n Pay, Woolworths,
and even Spar is more intense (with consequently smaller profit margins) than the
rivalry among foschini, Stuttafords, Edgars and other fashion retailers. Similarly,
industry driving forces may be acting to grow the demand for the products of
companies in some strategic groups and shrink the demand for the products of
companies in other strategic groups- as is the case in the radio broadcasting
industry where satellite radio companies like XM and Sirius stand to gain market
ground at the expense of commercial-based radio broadcasters: the consequence
of the impact of such driving forces as technological advances in satellite
broadcasting, growing buyer preferences for more diverse radio programming, and
product innovation in satellite radio devices. Companies in strategic groups that are
being adversely impac ted by intense competitive pressures or driving forces may
try to shift to a more favourably situated group; but shifting to a different position
on the map can prove difficult when entry barriers for the target strategic group
are high. Moreover, attempts to enter a new strategic group nearly always increase
competitive pressures in the target strategic group. If certain companies are known
to be trying to change their competitive positions on the map, attaching arrows to
the circles showing the targeted direction helps clarify the picture of competitive
manoeuvring among rivals.
91 Chapter 03 Analysing e Company's External Environment
2 The profit potential of different strategic groups varies relative lo the strengths and
weaknesses in each group's market position. The profit prospects of companies in
different strategic groups can vary from good to ho-hum to poor because of differing
growth rates for the principal buyer segments served by each group, differing degrees
of competitive rivalry within strategic groups, differing degrees of exposure to
competition from substitute products outside the industry, and differing degrees of
supplier or customer bargaining power from group to group.
Thus, part of strategic group map analysis always entails drawing conclusions about
where on the map is the "best" place to be and why. Which companies/strategic groups
are destined to prosper because of their positions? Which companies/strategic groups seem
destined to struggle because of their positions? What accounts for why some parts of the
map are better than others?
3.8 What Strategic Moves are Rivals Likely to Make Next?
nless a company pays attention to what competitors are doing and knows their
U strengths and weaknesses, it ends up flying blind into competitive battle. As in sports,
scouting the opposition is essential. Competitive intelligence about rivals' strategies, their
latest actions and announcements, their resource strengths and weaknesses, the efforts
being made to improve their situation, and the thinking and leadership styles of their
executives is valuable for predicting or anticipating the strategic moves competitors are
likely to make next in the marketplace. Having good information to predict the strategic
direction and likely moves of key competitors allows a company to prepare defensive
counter-moves, to craft its own strategic moves with some confidence about what market
manoeuvres to expect from rivals, and to exploit any openings that arise from competitors'
missteps or strategy flaws.
CORE CONCEPT: Good scouting reports on rivals provide a valuable assist in anticipating :
wat
J
moves rivals are likely to make next and outmanoeuvring them in the marketplace.
~~ ~~
3.8.1 Identifying Competitors· Strategies and Resource Strengths and
Weaknesses
Keeping dose tabs on a competitor's strategy entails monitoring what the rival is doing in
the marketplace, what its management is saying in com;any press releases, information
posted on the company's website (especially press releases and the presentations
management has recently made to securities analysts). ("Defining Strategy" in Chapter 1
indicates what to look for in identifying a company's strategy.) Company personnel
may be able to pick up useful information from a rival's exhibits at trade shows and
from conversations with a rival's customers, suppliers, and former employees.20 Many
companies have a competitive intelligence unit that sifts through the available information
to construct up-to-date strategic profiles of rivals- their current strategies, resource
strengths and competitive capabilities, competitive shortcomings, press releases, and
3.8 What Strategic Moves are Rivals Likely to Make Next? 99
recent executive pronouncements. Such profiles are typically updated regularly and made
available to managers and other key personnel.
Those who gather competitive intelligence on rivals, however, can sometimes cross
the fine line between honest inquiry and unethical or even illegal behaviour. For example,
calling rivals to get information about prices, the dates of new product introductions, or
wage and salary levels is legal, but misrepresenting one's company affiliation during such
calls is unethical. Pumping rivals' representatives at trade shows is ethical only if one
wears a name tag with accurate company affiliation indicated.
In sizing up competitors, it makes sense for company strategists to make three
assessments:
1 Which competitor has the best strategy? Which competitors appear to have flawed or
weak strategies?
2 Which competitors are poised to gain market share, and which ones seem destined
to lose ground?
3 Which competitors are likely to rank among the industry leaders five years from
now? Do one or more up-and-coming competitors have powerful strategies and
sufficient resource capabilities to overtake the current industry leader?
The industry's current major players are generally easy to identify, but some of the
leaders may be plagued with weaknesses that are causing them to lose ground; other
notable rivals may lack the resources and capabilities to remain strong contenders given
the superior strategies and capabilities of up-and-coming companies. In evaluating which
competitors are favourably or unfavourably positioned to gain market ground, company
strategists need to focus on why there is potential for some rivals to do better or worse
than other rivals. Usually, a competitor's prospects are a function of whether it is in a
strategic group that is being favoured or hurt by competitive pressures and driving forces,
whether its strategy has resulted in competitive advantage or disadvantage, and whether its
resources and capabilities are well suited for competing on the road ahead.
CORE CONCEPT: Today's market leaders don't automatically become tom_o_rr_ow
_ ·s._ _ _ _ __.)
3.8.2 Predicting Competitors· Next Moves
Predicting the next strategic moves of competitors is the hardest yet most useful part
of competitor analysis. Good clues about what actions a specific company is likely to
undertake can often be gleaned from how well it is faring in the marketplace, the problems
or weaknesses it needs to address, and how much pressure it is under to improve its
financial performance. Content rivals are likely to continue their present strategy with only
minor fine-tuning. Ailing rivals can be performing so poorly that fresh strategic moves
are virtually certain. Ambitious rivals looking to move up in the industry ranks are strong
candidates for launching new strategic offensives to pursue emerging market opportunities
and exploit the vulnerabilities of weaker rivals.
Since the moves a competitor is likely to make are generally predicated on the views
their executives have about the industry's future and their beliefs about their firm's
100 Chapter 03 Analysing a Company's External Environment
situation, it makes sense to scrutinize closely the public pronouncements of rival company
executives about where the industry is headed and what it will take to be successful,
what they are saying about their firm's situation, information from the grapevine about
what they are doing, and their past actions and leadership styles. Other considerations in
trying to predict what strategic moves rivals are likely to make next include the following:
• Which rivals badly need to increase their unit sales and market share? What strategic
options are they most likely to pursue: lowering prices, adding new models and
styles, expanding their dealer networks, entering additional geographic markets,
boosting advertising to build better brand-name awareness, acquiring a weaker
competitor, or placing more emphasis on direct sales via their website?
• Which rivals have a strong incentive, along with the resources, to make major
strategic changes, perhaps moving to a different position on the strategic group map?
Which rivals are probably locked in to pursuing the same basic strategy with only
minor adjustments?
• Which rivals are good candidates to be acquired? Which rivals may be looking to
make an acquisition and are financially able to do so?
• Which rivals are likely to enter new geographic markets?
• Which rivals are strong candidates to expand their product offerings and en ter
new product segments where they do not currently have a presence?
To succeed in predicting a competitor's next moves, company strategists need to
have a good feel for each rival's situation, how its managers think, and what the rival' s
best strategic options are. Doing the necessary detective work can be tedious and time-
consuming, but scouting competitors well enough to anticipate their next moves allows
managers to prepare effective counter-moves (perhaps even beat a rival to the punch) and
to take rivals' probable actions into account in crafting their own best course of action.
CORE CONCEPT: Managers who fail to study competitors closely risk being caught napping
when rivals make fresh and perhaps bold strategic moves.
'-----
3.9 What are the Key Factors for Future Competitive Success?
n industry's key success factors (KSFs) are those competitive factors that most affect
A industry members' ability to prosper in the markelp~ce-the particular strategy
elements, product attributes, resources, competencies, competitive capabilities, and
market ac. hievements that spell the difference between being a strong competitor and a
weak competitor- and sometimes between profit and loss. KSFs by their very nature are
so important to future competitive success that all companies in the industry must pay
close attention to them or risk becoming an industry also-ran. To indicate the significance
of KSFs another way: how well a company's product offering, resources, and capabilities
measure up against an industry's KSFs determines just how financially and competitively
successful that company will be. Identifying KSFs, in light of the prevailing and anticipated
industry and competitive conditions, is therefore always a top -priority analytical and
3.9 What are th e Key Facto rs for Future Competitive Success? 101
strategy-making consideration. Company strategists need to understand the industry
landscape well enough to separate the factors most important to competitive success from
those that are less important.
CORE CONC.~~T: Key success factors are the product attributes, competencies, competitive
capab1ht1es, and market achievements with the greatest impact on future competitive suc-
cess in the marketplace.
In the b~er industry, the KSFs are full utilization of brewing capacity (to keep
manufacturing costs low), a stro~g netw~rk of ~holesale distributors (to get the company's
brand stocked and favourably displayed rn retail outlets where beer is sold), and clever
advertising (to induce b~er drinkers to buy the compan y's brand and thereby pull beer
sales through th~ estab~rshed wholesale/retail channels). In apparel manufacturing the
KSFs are appealing designs and colour combinations (to create buyer interest) and low-
cos~ manufactu~ing efficiency (to permit attractive retail pricing and ample profit margins).
In tin an~ alu~rnum cans, because the cost of shipping empty cans is substantial, one of
the keys is having can- manufa~turing faci~ities located close to end- use customers. Key
success factors thus vary from industry to industry, and even from time to time within the
same industry, as driving forces and competitive conditions change. Table 3.3 lists the
most common types of industry key success factors.
An industry's key success factors can usually be deduced from what w as learned from
the previously described analysis of the industry and competitive environment. Which
Technology-related KSFs • Expertise in a particular technology or in scientific research !important
in pharmaceuticals, Internet applications, mobile communications, and
most high-tech industries)
• Proven ability to improve production processes (important in industries
where advancing technology apel'IS the way for higher manufacturing
efficiency and lower production costsl
Manufacturing-related • Ability to achieve scale economies and/or capture learning/experience
KSFs cu rve effects {important to achieving low production costs)
• Quality control know-how (important in industries where customers
insist on product reliability)
• High utilization of fixed assets (important in capital-intensive, high-
fixed·cost industries)
• Access to attractive supplies al skilled labour
• High labour productivity (important for items with high labour content)
• Law-cost product design end engineering !reduces manufacturing
casts I
• Ability to manufacture or assemble products that are customized to
buyer specifications
TABLE 3.3 Common types of in dustry key succes s factors
10Z Chapler OJ Analysing a Company's External Environment
J,10 Does the Outlook for the Industry Present the Company with an Attractive Opportunity? 103

Only rarely are there more than five or six key factors for future competitive success. And
Distribution-related KSFs • A strong network of wholesale distributors/dealers
even among these, two or three usually outrank the others in importance. Managers should
• Strong direct sales capabilities via the Internet and/or having
therefore bear in mind the purpose of identifying key success factors- to determine which
company-owned retail oullets
factors are most important to future competitive success-and resist the temptation to label
• Ability to secure favourable display space on retailer shelves
a factor that has only minor importance a KSF. To compile a list of every factor that matters
Marketing·ralated KSFs • Breadth of product line and product selection even a little bit defeats the purpose of concentrating management atlention on the factors
• A wall-known and well-respected brand name truly critical to long-term competitive success.
• Fast, accurate technical assistance
Correctly diagnosing an industry's KSFs raises a company' s chances of crafting a sound
• Courteous, personalized customer service
strategy. The goal of company strategists should be lo design a strategy aimed at showing
• Accurate filling of buyer orders (few back orders or mistakes)
up well on all of the industry's future KSFs and trying lo be distinctively better than rivals
• Customer guarantees and warranties (important in mail-order and
on one (or possibly two) of the KSFs. Indeed, companies that stand out or excel on a
online retailing, big-ticket purchases, new product introductionsI
particular KSF are likely to enjoy a stronger market position- being distinctively better
• Clever advertising
than rivals on one or two key success factors tends to translate into competitive advantage.
Skills and capability· • Atalented workforce (important in professions I services like
Hence, using the industry's KSFs as cornerstones for the company's strategy and trying
related KSFs accounting and investment banking I
to gain sustainable competitive advantage by excelling at one particular KSF is a fruitful
• National or globe I distribution capabilities
competitive strategy approach.21
• Product innovation capabilities (important in industries where rivals
are racing to be first-to-market with new product attributes or
performance features)
CORE CONCEPT: A sound strategy incorporates the intent to show up well on all of the industry's
• Design expertise (important in fashion and apparel industries)
key success factors and to excel on one or two KSFs.
• Short delivery time capability
• Supply-chain management capabilities
• Strong e-commerce capabilities-a user-friendly website and/or
skills in using Internet technology applications to streamline internal
operations
3.10 Does the Outlook for the Industry Present the Company with an
Other types of KSFs • Overall low costs {not just in manufacturing) so as to be able to meet
Attractive Opportunity?
customer expectations of low price ---
• Convenient locations (important in many retailing businesses)
• Ability to provide fast, convenient after-the-sale repairs and service
• A strong balance sheet and access to financial capital {important in
T he final step in evaluating the industry and competitive environment is to use the
preceding analysis to decide whether the outlook for the industry presents the
company with a sufficiently attractive business opportunity. The important factors on
newly emerging industries with high deg re es of business risk and in
which to base such a conclusion include:
capital-intensive industries)
• Patent protection • The industry's growth potential.
• Whether powerful competitive forces are squeezing industry profitability to sub-par
levels and whether competition appears destined to grow stronger or weaker.
factors are most important to future competitive success flow directly from the industry' s
• Whether industry profitability will be favourably or unfavourably affected by the
dominant characteristics, what competition is like, the impacts of the driving forces, the prevailing driving forces.
comparative market positions of industry members, and the likely next moves of key rivals.
Jn addition, the answers to three questions help identify an ir1"Clustry's key success factors: • The degrees of risk and uncertainty in the industry's future.
• Whether the industry as a whole confronts severe problems- regulatory or
1 On what basis do buyers of the industry's product choose between the competing
environmental issues, stagnating buyer demand, industry overcapacity, mounting
brands of sellers? That is, what product attributes are crucial?
competition, and so on.
2 Given the nature of competitive rivalry and the competitive forces prevailing in the
• The company's competitive position in the industry vis-a-vis rivals. (Being a well-
marketplace, what resources and competitive capabilities does a company need to
have to be competitively successful? entrenched leader or strongly positioned contender in a lacklustre industry may present
adequate opportunity for good profitability; however, having to fight a steep uphill battle
3 What shortcomings are almost certain to put a company at a significant competitive
against much stronger rivals may hold little promise of eventual market success or good
disadvantage?
return on shareholder investment, even though the industry environment is attractive.)
104 Chapter OJ Analysing a Company's External Environment
• The company's potential to capitalize on the vulnerabilities of weaker rivals, perhaps
converting a relatively unattractive industry situation into a potentially rewarding
company opportunity.
• Whether the company has sufficient competitive strength to defend against or
counteract the factors that make the industry unattractive.
• Whether continued participation in this industry adds importantly to the fi rm' s ability
to be successful in other industries in which it may have business interests.
As a general proposition, if an industry's overall profit prospects are above average,
the industry environment is basically attractive; if industry profit prospects are b elow
average, conditions are unattractive. However, it is a mistake to think of a particul ar
industry as being equally attractive or unattractive to all industry participants and al I
potential entrants. Attractiveness is relative, not absolute, and conclusions one way or
the other have to be drawn from the perspective of a particular company. Industries
attractive to insiders may be unattractive to outsiders. Companies on the outside may
look at an industry's environment and conclude that it is an unattractive business for
them to get into, given the prevailing entry barriers, the difficulty of challen ging current
market leaders with their particular resources and competencies, and the opportunities
they have elsewhere. Industry environments unattractive to weak competitors may
be attractive to strong competitors. A favourably positioned company may survey a
business environment and see a host of opportunities that weak competitors cannot
capture.
r
CORE CONCEPT: The degree to which an industry is attractive or unattractive is not the same
for all industry participants and all potential entrants; the attractiveness of the opportunities
an industry presents depends heavily on whether a company has the resource strengths
and competitive capabilities to capture them.
\.
When a company decides an industry is fundamentally attractive and presents good
opportunities, a strong case can be made that it should invest aggressively to capture the
opportunities it sees and to improve its long-term performance and competitive position in
the business. When a strong competitor concludes that an industry is relatively unattractive
and lacking in opportunity, it may elect simply to protect its present position, investing
cautiously if at all and looking for opportun ities in other industries. A competitively weak
company in an unattractive industry may see its best option as finding a buyer, perhaps a
rival, to acquire its business. .II'
Summary
T hinking strategically about a company's external situation involves probing for answers
to the following seven questions:
j competitor and a weak competitor- and sometimes betw een profit and loss. KSFs
L 1 What are the industry's dominant economic features? Industries differ signifi cantl y
on such factors as market size and growth rate, the number and relative sizes of both
Summary 105
buyers and sellers, the geographic scope of competitive rivalry, the degree of product
differentiation, the speed of product innovation, demand-supply conditions, the
extent of vertical integration, and the extent of scale economies and learning-curve
effects.
2 What kinds of competitive forces are industry members facing, and how strong is
each force? The strength of competition is a composite of five forces: (1) competiti ve
pressures stemming from the competitive jockeying and market manoeuvring among
industry rivals, (2) competitive pressures associated w ith the market inroads being
made by the sellers of substitutes, (3) competitive pressures associated w ith the threat
of new entrants into the market, (4) competitive pressures stemming fro m supplier
bargaining power and supplier-seller collaboration, and (5 ) competitive pressures
stemming from buyer bargaining power and seller-buyer collaboration.
3 What factors are driving industry change and what impact will they have on
competitive intensity and industry profitability? Industry and competitive conditions
change because forces are in motion that create incentives or pressures for change.
The first phase is to identify the forces that are driving change in the industry; the most
common driving forces include the Internet and Internet technology applications,
globalization of competition in the industry, changes in the long-term industry
growth rate, changes in buyer composition, product innovation, entry or exit of
major companies, changes in cost and efficiency, changing buyer preferences for
standardized versus differentiated products or services, regulatory influences and
government policy changes, changing societal and lifestyle factors, and reductions
in uncertainty and business risk. The second phase of driving-forces analysis ls to
determine whether the driving forces, taken together, are acting to make the industry
environment more or less attractive.
4 What market positions do industry rivals occupy- who is strongly positioned and w ho
is not? Strategic group mapping is a valuable tool for understanding the similarities,
differences, strengths, and weaknesses inherent in the market positions of rival
companies. Rivals in the same or nearby strategic groups are close competitors,
whereas companies in distant strategic groups usually pose little or no immediate
threat.
5 What strategic moves are rivals likely to make next? This analytical step involves
identifying competitors' strategies, deciding which rival s are likely to be strong
contenders and which are likely to be weak, evaluating rivals' competitive options,
and predicting their next moves. Scouting competitors well enough to anticipate their
actions can help a company prepare effective counter-moves (perhaps even beating a
rival to the punch) and allows managers to take rivals' probable actions into account
in designing their own company's best course of action . Managers who fail to study
competitors risk being caught unprepared by the strategic moves of rivals.
6 What are the key fac tors for future competitive success? An industry's key success
factors (KSFs) are the particular strategy elements, product attributes, competitive
capabilities, and business outcomes that spell the difference between being a strong
by their very nature are so important to competitive success that all companies in
the industry must pay close attention to them or risk becoming an industry also-ran. ~
106 Chapter 03 Anelvsing a Compenv's External Environment

Correctly diagnosing an industry's KSFs raises a company's chances of crafting a

sound strategy.
Analysing a
7 Does the outlook for the industry present the company with sufficiently attractive
prospects for profitability? If an industry's overall profit prospects are above average,
the industry environment is basically attractive; if industry profit prospects are below
Company's
average, conditions are unattractive. Conclusions regarding industry attractiveness
are a major driver of company strategy. When a company decides an industry is
fundamentally attractive and presents good opportunities, a strong case can be made
Internal
that it should invest aggressively to capture the opportunities it sees and to improve its
long-term competitive position in the business.
This chapter has concentrated on suggesting which are the right questions to ask,
Resources and
explaining concepts and analytical approaches, and indicating the kinds of things to look
for. There is no substitute for cutting-edge strategic thinking about a company's external
situation-anything less weakens managers' ability to craft strategies that are well-matched
to industry and competitive conditions.
Competitive
The next chapter explores the methods of evaluating a company's internal
circumstances, resources and competitiveness. Capabilities
References
Crafting and Executing Strategy: Creating Sustainable
Sec endnotes. High Performance in South African Businesses

Part 3: Patt 4:
Part 1: Part 2:
Crafting a Strategy to Executing and
Scope and Dynamics of Concepts aod
Create Sustainable Aligning the
Strategy Analytical Tools
High Parformance Strategy

Concept•
and
Menegtriel
Whal It Kayo ta
Tools for
Strategy? Orgenlietlanal Succeufulty
Evalu1tlng
Integration e-utingand
and Strategic
a Company'• Perfarm•n~•
Aligning the
External and M1negamem
Alignment ChDten
Internal
Environment Str1tegy

Chapters Ch1pt1ra
Chapter 1 ~pter2
3 a. 4 Ohaptet7
8,9, • 10

Singlo Multi Business

Busrne.. or Oiver11fled
Companies Companies

107

Reading Oi7
How to build an
organization in which
executives will flourish:
A blueprint for strategic
leadership
Steven Wheeler. Walter McFarland, and Art Kleiner
T he challenge of leadership is not what it used to be. For the past few decades-at
least since the genre-defining book Leadership by historian James MacGregor Burns
was published in 1978-writers on business and society have understood that the
q.u~l~ty ~fa leader's character makes all the difference. Burns, for example, wrote that
civilization depended on its "transforming" leaders-those who didn't just solve the
pro~le~s handed to tJ_iem, but who helped to raise society as a whole to higher levels of
motivation and morality. Other business writers picked up the theme: corporations, as
Warren Bennis put it, also needed leaders who could not just "do things right" but also
"do the right thing."
B~t what sorts of leaders could be counted on to do the right thing? Creative,
experimental risk takers, like Richard Branson? Charismatic, domineering battlers like
Lee lacocca? Ruthless pursuers of performance like Jack Welch? Dedicated "servant
leaders" like Herman Miller's Max De Pree? Quiet stoics like Darwin Smith the Qi() f
~imberly~Clark wh.?m Jim Collins lauded in Goad to Great? Or simply peo~le whose 0
leadership secrets have been collected, like Attila the Hun? Each style has had its
advocates and aco.Iytes over the years. But for all the sophistication of the experts, for
all the books published on the subject, there is still no definitive consensus on the most
effective style of leadership.
Indeed, the quality of individual leadership matters. In case after case in
organizations and in society at large, when the single individual at the to~ is replaced
everything else changes-either for the better or for the worse. But the effectiveness of
leaders depends, more than is generally realized, on the context around them.
O~e~ ~ime, the leader's capability is shaped by the top team's quality. and by the
capab1hhes of the full organization. These can either provide invaluable support for the
R8B
Introduction RB9
changes a leader wants to make or render those changes impossible. Hence the ?est leaders
a great deal of attention to the design of the elements around them: they articulate a
pay sense of purpose, create effective
lucid · Iea dersh'ip teams, pnon
· ' tize and sequence th eir
·
initiatives carefully, redesign organizational structures to make good execution easier, and,
ost importantly, integrate all these tactics into one coherent strategy.
m One prominent example of this approach to leadership is Procter & Gamble under
chief executive A.G. Lafley. In 2007 Lafley was singled out for his leadership quality
by such management experts as Bennis and Noel Tichy (in their book Judgment: How
Winning Leaders Make Great Calls); Harvard Business School Professor Jos~ph L. Bo"_Ver
(in his book The CEO Within: How Inside-Outsiders Are the Key ta Successmn Planning);
Ram Charan (who is coauthoring a book with Lafley called The Game-Changer, (Crown,
April 2008)); and the Academy of Management, the worl~'s preeminent association of
business academics, which named Lafley its 2007 Executive of the Year.
As Jeffrey Sonnenfeld, the associate dean for executive programs at the Yale School
of Management, notes, Lafley is becoming "almost Jack Welch-like" in influencing the
executive style at other companies. No doubt P&G's stock price-which ha~ do~bled, ,
from US$30 to $60 per share, since Lafley took office in 2001-helps explam this CEO s
growing mystique. But neither outsiders who write ab~ut the company no.r Lafley himself
attributes P&G's success primarily to a focus on financrnls. Instead, they smgle out the
combined effect of P&G's sense of purpose, the strength of its top team, and its emphasis
on improving both processes and people. .
"Our job-and this is particularly true for CEOs," said the soft-spoken CEO m his
. .
Academy of Management award acceptance speech, "is to bring together the many
businesses, functions, and geographies and to leverage learning, scale, and scope." As
the most critical distinctive factors in P&G's success, he named purpose and values,
goals, strategies, strengths, organizational structure and systems, innovation, leadership,
and culture. He particularly emphasized the "rigorous, intentional way we approach
leadership development", including his own direct role in career planning for P&G's top
500 people. "I review their assignment plans, assess their strengths and weaknesses, and
determine where I can help them grow."
This comprehensive approach to leadership development is deeply embedded
throughout the company. When Lafley became CEO, according to the magazine of his
alma mater, Hamilton College, he removed the oak-panelled executive offices on the
11th floor of P&G's Cincinnati headquarters, lending the paintings that hung there to a
local museum. He moved the divisional presidents' offices nearer those of their staffs and
converted the former executive space to an employee learning centre. He did it, Lafley
said, "so people understand we're in the business of leading change". .
Other chief executives lauded for their leadership in recent years-includmg Jeffrey
Immelt at General Electric, Jim McNerney at Boeing, and New York City Mayor Michael
Bloomberg-all share with Lafley an emphasis on building a long-term capability for
generating results. To be sure, these accolades aren't always refle~ted in ~~rporate
stock prices; analysts tend to be justifiably sceptical of CEOs' loftie~ amb1h~ns. But
there is some evidence of the financial value of integrated leadership. Consider Fortune
magazine's list of the "100 Best Companies to Work For", a compendium produced by
R90 Hiiding 07 How to Build an Orgamzat1on 1n which Executives will Flourish
the Great Place to Work Institute in San Francisco. (Procter & Gamble, which has been
on the list five out of the six years since Lafley took office, ranked number 68 in 2007 .)
When our own firm, Booz Allen Hamilton, joined the list in 2005, we realized the
in-depth attention to organizational design that is needed to make the cut. Companies
must provide extensive quantitative and qualitative data on their workforce profiles,
programmes, and policies. The Institute's researchers survey at least 400 randomly
selected employees, and audit such employee-related factors as promotions and training,
pay and benefit practices, communications to and from management, celebrations, and
fun on the job. The criteria are weighted toward organizational structure (how companies
are set up to involve and engage people), strategic direction (how compelling their vision
is), and the optimism of the company's culture.
Whether or not you agree with the ranking of any particular "Best Company", the
success rate of this group over time suggests that attention to a multifaceted, broad-
based context for leadership is consistent with sustainable positive results. According
to Gurnek Bains in bis book Meaning, Inc. (Profile Books, 2007), annual investments
in the publicly held "Best Companies" would have yielded, from 1994 to 2006, a
return of more than 600 per cent. By comparison, an investment in the Standard
and Poor's 500 would have yielded 250 per cent, and the 18 companies lauded in
Built to Last, the 1994 bestseller written by Jerry Porras and Jim Collins, would have
yielded only 150 per cent. (The high returns for the "100 Best Companies" have
been confirmed by other research, such as one current study by economist Cullen
Goenner.)
Few companies will prosper by copying P&G, or any other member of the "100
Best Companies", directly. Great management practices are not replicable in recipe
fashion. But companies can develop a design for strategic leadership. It would draw
upon both long-established ideas and recent management research-emerging,
for example, from the University of Southern California's Center for Effective
Organizations, where faculty members such as James O'Toole, Edward Lawler,
Warren Bennis, Jay Galbraith, Chris Worley, Sue Mohrman, and Kathleen Reardon
have tracked the relationship between leadership styles and corporate performance
for more than 15 years.
A design for strategic leadership is an integrated group of practices that build a
company's capacity for change. To develop and maintain this capacity, four criti!al
elements need to be integrated together: the commitment to the company's purpose;
the make-up of the top management team; the capabilities and motivation of people
throughout the organization; and a sequence of focused, well-chosen strategic initiatives
that can take the company forward. (See Exhibit 1.)
Four starting points
onventional wisdom would have it that a crisis is the most common trigger for change.
C A company faces bankruptcy, court proceedings, or sudden, fierce, business-destroying
competition. Current strategies aren't working. Urgent turnaround is needed. And in fact,
the perceived threat of extinction is often a prelude to the dramatic entrance of a turnaround
Four Starting Points R91
EXHIBIT 1 Anatomy of strategic leadership
Four components that. when fully integrated, can in:;til strategic leadership in an orgamzation. The three diagnostic
questions provide a starting point for design.
CAMPAIGNS ORGANIZATION
What are the How can we
few initiatives equip the
needed organization
to deliver to develop
fundamental and deploy
change? the right
capabilities?
LEADERSHIP
How can we build and allgn the
top management team7
Sourc11. Booz Allen Hamil!Gn.
artist from the outside, such as Carlos Ghosn at Nissan in 1999, Robert Stevens "Steve" Miller
at Delphi in 2005, and Robert Nardelli at Chrysler in 2007. The fate of the company often
depends on how well this new heroic figure can draw upon leadership capabilities: bis or her
own, those of the senior leadership team, and those of people throughout the company.
In our experience, however, only about 15 per cent of the companies that voice a need
for change are truly in crisis. A far more common situation-involving as many as 60 per
cent of those companies-is a state ofinconsistency. A leader recognizes that, of the half
dozen or so strategic initiatives currently under way, one or more aren't delivering results or
living up to expectations. "Why aren't we getting a better multiple?" asks the leader. "How
can we improve our poor performers?" This was the condition of General Electric when
Jack Welch was appointed CEO in 1981; he famously dealt with it by decreeing that every
business unit would have to be number one or number two in market share in its niche;
otherwise, he would "fix, sell, or close" divisions. The number-one-or-number-two criterion
doesn't apply to every company, but the general challenge is much the same: to find a
prescient way to distinguish the value of activities and improve or prune the laggards.
We estimate that another 15 per cent of the companies that seek advice on leadership
are doing well, at least by their own criteria, but the leaders at the top want to take on
new challenges. They worry that the organization will not make the leap with them, if
only because the employees are too focused on executing day-to-day business. To combat
this complacency, John Barth, CEO of auto components manufacturer Johnson Controls
from 2002 through 2007, initiated what he called a "growth culture" at this already
profitable company-moving into Asian markets, driving for more competitiveness
against other component manufacturers, and expanding Johnson's air-conditioning and
heating systems and battery-manufacturing businesses into green technology enterprises.
R92 RHdlng 07 How to Build an Organization in which Executives will Flourish
The remaining 10 per cent of the companies that seek help are recovering from a
poorly designed full-scale transformation (an effort to change the entire firm's culture,
organizational structures, and leadership practices at once). Typically, the chief executive
had called for a bold new direction, and 20 or more initiatives had been started, all
overseen by a "turnaround leadership team" of seemingly committed executives. Some
shorter-term cost reduction efforts had paid off; bankruptcy or a forced sale may have
been averted. But it had soon become clear that it would take a lot more attention and
effort to grow the top line than anyone had expected. The company's leaders had thus
"declared victory", written up the preliminary results as a success, and moved back to
business as usual. Comparatively few of those companies reach out for further help-
they're usually too exhausted-but some do.
If you are a leader initiating a major change or a board seeking a leader to oversee
change, then those are your starting points: crisis, inconsistency, complacency, or
exhaustion. How long do you have to put in place a design for strategic leadership? For
an answer, consider the statistics on CEO tenure. Although chief executive terms may
last anywhere from one to 20 years in large global corporations, the average tenure for
the CEO of a global corporation is just under eight years, according to Booz Allen's most
recent annual study of CEO succession. This is consistent with Joseph Bower's estimate
in The CEO Within-that a chief executive has between six and 10 years to make a mark
and build a legacy.
And if the company needs to reposition itself or renew its capabilities, then all those
years will be needed. Harvard University professors John Kotter and James Heskett report
that, in 200 corporate transformation cases they studied, the most common time span
from beginning to end was five to seven years. Successful transformations-those that
don'~ produce a backlash, don't exhaust the organization, and do produce most of the
desired results-generally occur in waves. An overall strategy for change taking place
through strategic initiatives with relatively concrete goals, each requiring two to three
years, tends to provide maximum impact.
As is the case with most other comprehensive efforts to change a large system, several
things need to happen at once. A logical starting point is a set of diagnostic questions for
the CEO and other key leaders: how do we build and align the top management team?
What few initiatives do we need to deliver fundamental change? And how can we equip
the organization to develop and deploy the right capabilities to produce the resulp; we
want?
The "why" factor
uring its high-growth years in the early 1990s, the purpose of the computer company
D Dell Inc. was clear to its leaders and employees. Dell existed to reshape the personal
computer hardware business in its own image through its innovations in supply chain
management and real-time customization. One critical enabler of this purpose was a
reputation for offering the highest-quality customer service and support. When a Dell
computer broke, the company's help desk would often say, "Send it back to us, and we'll
send you a new one".
The "Why" Factor R93
Around the time that Michael Dell turned over the CEO role [to then Chief Operating
officer Kevin Rollins) in 2004, the company seemed to change direction. Dell began to
focus on cutting costs to beat back Asian competition. Among the casualties was the
help desk; customers suddenly began having a much harder time getting their computers
fixed, which was intolerable for a business dependent on mail order. In May 2007,
New York State Attorney General Andrew Cuomo sued Dell for deceptive business
practices and false advertising, mostly related to customer service. By that time, CEO
Kevin Rollins had resigned and Michael Dell had returned to the helm.
Why did Dell lose its way? Without a strong corporate purpose, the company did
not know how to set priorities. Rather than focusing on those distinctive customer-
focused factors that made it the leader of its industry, the company kept cutting prices
(in effect, training its customers to wait for discounts) and introducing products, such as
large-screen televisions, that required a different business model. Today, Dell is seeking
to regain its purpose as a company that once again can reshape and lead the personal
computer industry. To accomplish this, its leaders have recognized that they must reach
out to individual consumers through more diverse retail channels. And Dell is reportedly
rebuilding its customer support as a key component, not just of its value proposition, but
of its corporate identity.
That is the power of the "why" factor: a clear, focused explanation of a company's
purpose. Articulating "why we do what we do" allows leaders to set priorities and explain
the relevance of their decisions (or, as O'Toole and Lawler put it, to "frame the direction
of success"). The answer attracts a higher-quality group of employees, drawn not just
to making money but also to meaningful work. In their recent book, The Enthusiastic
Employee [Wharton School Publishing, 2005), David Sirota, Louis A. Mischkind, and
Michael Irwin Meltzer sum up the research showing the power of purpose in attracting
employees, particularly those between 17 and 30 years old. A well-articulated purpose also
motivates employees to go beyond "business as usual", it helps leaders set priorities and
balance short-term and long-term measures, and it gives the entire organization a sense
of confidence about the future. Most of all, it sets the stage for a focused set of strategic
initiatives (also known as campaigns). Not all will be successful, but all will be relevant, in
some way, to the company's ultimate success-if only as failures to learn from.
The two most powerful writers we know on the subject of purpose, Gumek Bains
(Meaning, Inc.) and Nikos Mourkogiannis (Purpose, Palgrave Macmillan, 2006), both
make the same basic point: strategic leaders don't simply invent an organization's
purpose in a vacuum. They draw forth a purpose that resonates with the values
and capabilities of its people, and with the nature of its existing business. Thus,
according to Bains, the Virgin Group succeeds because it exists to continually meet
fresh challenges. In 2005, when CEO Sir Richard Branson announced the formation
of Virgin Galactic, with plans to offer orbital space flights to paying customers, it let
his employees and customers know that they could be part of an audacious, risk-
taking, history-making enterprise for the rest of their careers. Similarly, according to
Mourkogiannis, BMW has always attracted both customers and employees because it
embodies excellence. To be sure, it makes a handsome profit, but first and foremost it
makes beautiful cars.
R94 Reading 07 How to Build an Organization in which Executi11es will Flourish
Purposeful lnitiati11es R95

Jeffrey lmmelt's Three-Part Story Line
Noel Tichy and Warren Bennis
When Jack Welch handed over the reins of General Electric to Jeffrey Immelt in
September 2001, Immelt knew that he would soon be making some changes. During
Welch's 20-year run as CEO, GE had dramatically outperformed the economy,
creating over US$ 400 billion of new market value. Still, Immelt knew that ifhe
limited himself to tinkering around the edges and making GE's current business
model run better, the company would not retain its pre-eminence for long.
Immelt officially became the chairman and CEO of General Electric on
7 September, 2001. Four days later, terrorists attacked the United States. In only
a few hours, just about every aspect of, and every assumption about, the future
direction of the world's economies and of geopolitical life was called into question.
At such times, a leader's capacity for laying out the future story of his or her fl
organization is vitally important. It provides a platform for making the key people,
strategy, and crisis judgements. To be effective, a leader's "story line" (as we call it)
has to answer three questions about the organization and its potential: where are we
now? Where are we going? How will we get there?
fl
To Immelt, the world in which GE had to operate after 2001 would be marked
by slower growth and more volatility. "There's not going to be a rising tide to lift
all ships universally," he said. "There are going to be businesses that win, and
businesses that lose; countries that win and countries that lose." To attract and
motivate good people in this environment, Immelt believed, GE needed to become
II
more humane. In fact, society and government would demand better corporate
behaviour. "Just being great isn't enough any more. Companies and people have to be
both great and good to be successful in the future."
Based on this story line, Immelt made judgments about what businesses GE
should be in and how it would conduct those businesses. Those judgements included
making sure that his own pay package was moderate compared to that of other CEOs
and that all his incentives were tied to GE performance.
The next element in his story line was to figure out how GE could operate most
'I
the judgement that GE would come up with a strong response. In 2005 GE launched
its Ecomagination initiative, a multidisciplinary campaign to apply GE technology to
drive energy efficiency and improve environmental performance. He also provided
much greater transparency to the investor community than GE had in the pest. He
proactively set standards for other companies in the post-Enron, post-Tyco, Sarbanes-
Oxley world. He is continuously pushing the boundaries of how transparent GE can
become without giving away too much information to its competitors.
Immelt also created a growth process for GE. This included, for example, hosting
"customer dreaming sessions" to drive innovation. These are one- to two-day sessions
held at the company's John F. Welch Leadership Development Center at Crotonville,
N.Y., with the CEOs and key leaders from the GE businesses. His job as a leader is to
create the platform for other GE leaders to make good strategic judgements.
Jeff Immelt works closely with the CEOs of the GE businesses on their strategy,
budgets, and succession planning, and on their involvement in corporate initiatives
such as lean Six Sigma quality programmes, growth platforms, leadership
development, and technology transfer. He personally teaches at Crotonville every few
weeks. He visits GE's Global Research Center as often as four or five times a year.
He gathers the heads of the business together with key corporate staff four times a
year for multiday workshops at Crotonville. Immelt also goes out to each business
unit to do succession planning reviews, all-day strategy reviews, and operating
plan reviews. Even though, as CEO, Immelt makes the final call on the big items,
judgement at GE is a team sport.
Noel Tichy
(editors@strategy-business.com) is a professor at the University ofMichigan's Ross
School of Business and the author o/The Cycle of Leadership: How Great Leaders
Teach Their Companies to Win [with Nancy Cardwell, HarperCollins , 2002) and
many other business bestsellers.
Warren Bennis

successfully in this changed world. The answer he arrived at was that GE coul'b
best generate organic growth by using its strong research and technology base to
develop new markets. Some of the markets offering huge opportunities would be
developing countries that needed to build infrastructure for power, water, energy,
and transportation. In the more advanced economies, the best opportunities would
be in unserved or underserved markets: health care, energy saving and production,
and environmentally friendly products. This assessment informed strategic decisions
that included buying Amersham, a leading company in the diagnostic imaging and
life sciences markets, and increasing investment in wind-generation and advanced
technology for the oil and gas industry.
The third element of Immelt's story line ("How will we get there?") describes
how GE will go about succeeding in these markets. Because he saw that global
'"-warming and the need for sustainable energy were serious concerns, lmmelt made
(editors@strategy-business.com) is distinguished professor of business administration
II at the University of Southern California, and the author a/Reinventing Leadership:
., Strategies to Empower the Organization [with Robert Townsend, Wmiam Morrow,
II 1995) and many other business bestsellers.
This article is adapted from Judgment: How Winning Leaders Mak e Great Calls , by
Noel Tichy and Warren Bennis (Portfolio, 2007).
Purposeful initiatives
ost executives recognize that significant change takes ~la~e. t~r?ugh action ..
-"
I
M And the familiar way to achieve this is through strategic m1h ahves: launchmg
a product, changing a practice, or staking out a market position. Unfortunately, that
R96 R11dlng 07 How to Build an Organization in which Executives will Flourish
often seems to mean "the more action, the better", especially when each potential
initiative, product launch, or improvement campaign has its own advocates within the
company.
This is the path to exhaustion. All too often, the strategic initiatives lack a clear
connection to the organization's purpose; therefore, their relevance is uncertain and they
generate little excitement. People comply in the sense of "checking off a box", but the
desired result is never realized.
A more effective approach to strategic initiatives starts by considering purpose. What
is this company here for? To discover new things? To dominate its niche? To serve
others? To operate in a globally responsible manner? Once the answer is articulated,
leaders can frame a campaign: a sequence of high·priority campaigns that reinforce one
another and that people throughout the enterprise feel comfortable with, even if those
actions represent a dramatic shift in direction.
When Carlos Ghosn came to Nissan in 1999, the company was moribund. Ranked as
the number-three auto manufacturer in its region, it was suffering from $30 billion in
debt and was viewed as inefficient and sluggish on product development. Ghosn almost
immediately began to articulate a purpose: the combined Nissan-Renault company
would become a new kind of automobile company, a "global alliance" (as he put it)
that was truly multicultural, and better positioned than any other company to bring
automobiles to every part of the world. Neither Nissan nor Renault had the capabilities
to achieve this purpose at the time. Ghosn set a three-part programme in motion to bring
Nissan to the point where it could fulfil its part.
Ghosn began the first phase, a cost-cutting strategic initiative called the Nissan
Revival Plan, by announcing a set of audacious goals: Nissan would raise the ratio of
operating income to sales margin to 4.5 per cent and reduce consolidated debt to less
than ¥700 billion (US$6 billion) by 2002. The automaker achieved those aims a year
ahead of schedule. The second campaign, which started in 2002 and was called Plan
180, set new five-year goals of zero debt, a million-car sales increase, and 8 per cent
return on sales; Nissan achieved each within three years. By late 2007, the company had
cash reserves of $165 billion, and was midway through its third initiative, christened
Value Up, with the goal of achieving 20 per cent return on invested capital, in part
through renewed emphasis on innovative products. Each campaign has helped build
the capabilities needed for the next one. And although Value Up is behind scfttdule, the
complexity of the challenges facing Ghosn's alliance has increased, and his success is
uncertain, the revival remains the only successful automobile company turnaround since
the 1980s.
As the Nissan story demonstrates, effective strategic leadership requires whittling
down the list of possible strategic initiatives to a manageable set; perhaps three
successive waves of activity, with four to six projects at one time, each designed to
build the capabilities needed for the next wave. Before engineering a million-car sales
increase, for example, Nissan needed not just the cash flow to pay for expansion, but
the capabilities that reducing debt and raising operating income had provided. These
initiatives are also d eliberately experimental. When some of them start to fail
(as some inevitably will), the organization and leadership can adjust and learn from
their mistakes.
Balanced Top Teems R97
Balanced top teams
ost of the executives we know are satisfied with the quality of their top
M management team; after all, these are generally handpicked colleagues with a
great deal of capability. And therein lies the problem, for human judgement about close
colleagues is notoriously vulnerable. "No matter how hard-nosed some leaders may
appear," write Tichy and Bennis in Judgment, "they have feelings about other people.
They become attached to them, or maybe detest them, to degrees that hardly ever apply
when they are considering strategic business plans. And it's these feelings that can keep
them from making good, objective calls [about the leadership team]."
As Max Weston and Andra Brooks of Panthea Strategic Leadership Advisors have
noted, many CEOs (consciously or not) handpick people they feel comfortable with to
sit on critical leadership teams. They recognize the need for technical and functional
expertise; the CIO must know about systems and the CMO must have marketing
experience. But CEOs do not typically assemble people who are diverse enough in their
personalities and backgrounds to play the complementary roles necessary in a business
context. Nor do they invest much in explicitly building the trust and accountability that
team members will need to work closely together.
Those companies that explicitly balance talents and temperaments tend to use a
variety of methods. The Myers-Briggs personality inventory is the best-known; some
companies that use this test assign people to teams so that strong and weak characteristics
are balanced. Panthea's TIME model of leadership skills (which suggests that different
leaders are better at either thinking, inspiring, mobilizing, or empowering) borrows from
the Andrews Munro "business challenges" framework, which identifies eight management
styles: the visionary, explorer, builder, lobbyist, integrator, regulator, troubleshooter,
and architect. Organizational systems consultant David Kantor proposes another set
of categories, in which, for example, some people are better at moving (initiating new
actions), and others prefer the roles of opposer, follower, and bystander. To Kantor, a team
is truly healthy when people can easily move among these roles, raising challenges one day
as an opposer, being an enthusiastic follower or mover the next day, and stepping back to
offer detached commentary as a bystander the following week.
Whatever the details and categories may be, some explicit design for team
composition can help prevent teams from being either stuck in recurring conflicts or
prone to groupthink. At Panthea, this design includes a diagnostic of team members
(see Exhibit 2) and an effort to add people who can fill in the personality gaps.
With the requisite diversity of thinking in place, the ability to plan and act together
requires in-depth rehearsal, over time, often with experts from outside companies who
can help provide perspective. That's why effective leadership teams are often proficient
at strategic exercises, where they role·play or conduct wargames involving typical
business problems, experimenting with various strategies in a fictional environment
before trying them in the real world. Meanwhile, the CEO should be planning his or her
succession, using the senior team as a crucible for developing others who will be capable
of filling the top position in the future.
ls it worth the trouble? One organization famous for this kind of practice is India's
Tata Group, a global conglomerate made up of 100 companies, 300 subsidiaries, and
40 diverse business units. Tata's broad range of business lines includes automobile
R98 Raadlng D7 How to Build an Orgamza1ton in which Executives will Flourish
The Right Questions R99

translated into specific behaviour changes. We've learned this at Booz Allen through our
EXHIBIT2 The case of an unbalanced teem
own work on building organizational capabilities for change, and in particular through the
This diagram shows tha mix of parsonalities and capabillties in a pooly balanced team at a financial-sarvices enterprisa.
Each patterned lina depicts the strengths and weaknesses of a different individual !as scored on the Andrews Munro body of practice known as "organizational DNA". By changing the reporting relationships
challenges scale I. Because this team lach any high-scoring "regulators· or "builders", tha analysis suggested it might and structures, the networks through which people exchange infonnation, the motivators
have difficulties following through after its deals. and incentives, and the decision rights in an organization, organizations can shift their
capabilities and motivate people to act in sync with the organization's purpose.
Vlslonary
These four "building blocks" (as organizational DNA theorists Gary Neilson
r end Bruce Pasternack call them) are not the only factors that leaders can use to
influence organizations. Indeed, management literature is rife with levers for change,
Architect .. Explorer
ranging from new information technology to new human resources practices. They all
have one thing in common: unless they are explicitly aligned with the purpose and
strategy of a company, they will tend to forestall and undermine the desired strategic
direction.
Consider the short time frame of executive assignments in many American and
European companies. Brand managers in consumer products and pharmaceutical
Troubleshooter Builder companies, for example, are accustomed to rotating positions every 18 to 24 months. This
means they often escape dealing with the consequences of their decisions, and they are
Each line
represents unwilling to make investments (such as in developing innovative new products) that will
a different outlast their tenure. But companies that try to counter this by making assignments last
team member
A
longer, as Japanese companies do, risk losing talented people who assume, "I'm a high~
B- potential person, and therefore I should be moving."
e .............. / To deal with this dilemma, a series of interventions may be needed, depending on
D ----- Regulator Lobbyist the purpose of the company and the nature of its industry. For example, if the company
E 1111111111111

F---
G-
H==== Integrator
Source: Panthea Strategic Leadership Advisors.
manufacturing, chemicals, insurance, electric power generation, publishing, tea,
and engineering services, which all fit together (as Gurnek Bains notes) in achieving
the common core purpose of building "what India needs next", Chairman and CE.il
Ratan Tata is known for selecting and fostering internal boards for the group's many
subsidiaries. The boards are not caretakers; they are expected to make strategic decisions,
and their leaders coalesce to coordinate major decisions for the Tata Group as a whole.
The boards are also expected to create managerial bonds among Tata's businesses while
maintaining their independence.
Organizational capabilities
hrough their actions, leaders have e great deal of influence over an organization's
T culture, but very little of that influence is direct. They can't make a team more skilled
or committed through directives alone; requirements mean very little if they cannot be
is focused on what Nikos Mourkogiannis calls "discovery" (the continual search for
new ways to do business and learn about the world) , it may be possible to keep a brand
manager in place by building the capacity for continual invention. This might mean
using informal networks-arranging regular calls and meetings, for example, between
marketing and R&D. It might mean giving people more opportunities to take courses or
collaborate with others outside the company. A company interested in altruistic goals,
like service, could offer very different incentives {such as a more flexible schedule that
allowed employees more control over their time} or more formal links between marketing
and customer service.
The right questions
A ?im?1ens~ body of literature already exists on each of the four areas highlighted
m this article: purpose, the top management team, organizational capabilities,
and strategic initiatives. But research in the strategic leadership field is so fragmented,
unreliable, and obscure that many designers of strategic leadership initiatives base their
approach on only a small fraction of the knowledge that exists.
That's a shame, because the broader your awareness of work in the field, the more
effective your design can be. It's helpful to know, for example, that (as David Sirota
and his colleagues report from their research on The Enthusiastic Employee) deliberate
efforts to accentuate fairness, camaraderie, and recognition lead to improved workplace
R10D R11dlng 87 How to Build an Organization in which Executives will Flourish The Right nuest1ons R1D1

productivity. Or that (as organizational researcher Elliott Jaques proposed) organizational This approach to designing strategic leadership will not appeal to every executive.
hierarchies work well when structured to fit with employees' cognitive capacity. Or Indeed, as companies experience increasingly intensive pressure from institutional
that {as neuroscientist Jeffrey Schwartz and executive coach David Rock have written) investors, regulators, private equity firms, and hedge funds , it sometimes feels as though
successful organizational change initiatives require day-to-day practices that focus the well-developed long-term leader is an endangered species. ("Just get a CEO who
people's attention in a habitual manner. can put a strategy in place, push people to execute it, and fire those who don't!") But a
Because every organization is different, diagnosing your situation and culture is growing group of CEOs, and their boards, recognize that the purely utilitarian approach
critical. The questions will vary with your company's situation. (See Exhibit 3.) The is not sustainable. It won't retain talent, it won't build competitive advantage, and, in the
process will involve your most talented and committed senior executives. And it may end, it will create only acquisition targets.
take several months of concerted effort before you all understand each other and feel A design for strategic leadership is the alternative. It is not a new approach; it is
comfortable with the company's purpose and in defining the right set of initiatives to simply the practised, considered strategy for change that the best and most long-lived
pursue. But sometimes you have to go slow to go fast. Extra time and care in bringing companies have always used. There is no real mystery to it, but it takes the kind of
people to a common understanding at the beginning means far less time lost in false commitment, dedication, and respect that truly makes a company a greatplace to work.
starts and retrenchment later.
References
EXHIBIT 3 Starting a strategic leadership initiative 1 Gumek Bains et al., Meaning Inc.: The Blueprint for Business Success in the
When undertaking a strategic leadership initiative, thu best way to apply the diagnostic questions (first column! from 21st Century (Profile Books, 2007): Creating a company that innately attracts
Exhibit 1 depends on the current chanenga facing your organization (across the top).
customers, employees, and shareholders to its purpose.
Crisis Inconsistency Complacency Exhaustion 2 Joseph L. Bower, The CEO Within: How Inside-Outsiders Are the Key to Succession
Howcanwa Is the top team ready How aligned with Is the existing purpose ls the top Planning {Harvard Business School Press, 2007): New research on the challenge of
build and for the challenge purpose are the right for the future of team aligned finding the next chief executive.
align the top of change? Which faltering initiatives? this organization? Is and working
3 James MacGregor Burns, Leadership (Harper & Row/Perennial, 1978): Explores the
management members of the next Have the faltering the top team aligned? toward
team? generation need to be initiatives bean Is it motivating the common maturation and moral influence of society's great leaders.
involved in solving the supported with the next generation to lead objectives? 4
most urgent problems? right resources and change? Is there true
Cullen Goenner, "Investing in Fortunes 100 Best Companies to Work for in America",
leadership team? commitment to Journal of Economics, forthcoming, www.business.und.edu/ goenner/research/
purpose? Papers/100%20Best%20T-Econ.pdf: The best places to put your money, too.
What are 5
What sequence of Are the faltering What campaigns or Which Art Kleiner, "Elliott Jaques Levels with You", s+b, First Quarter 2001 , www.strategy-
thafew initiatives during the initiatives critical? initiatives can build a initiatives business.com/press/article/10938: Introduction to the theorist of humane and effective
initiativu next five to seven years How have these capability for ongoing should be
needad can halt the crisis, end initiatives been
hierarchies.
change? placed on
to deliver then build long-term 6
structured? hold? Chuck Lucier, Steven Wheeler, and Rolf Habbel, "The Era of the Inclusive Leader",
fundamental sustainable advantage? s+b, Summer 2007, www.strategy-business.com/press/ article/07205: Annual CEO
change?
9 succession study reveals the average time frame a leader has for change: seven years.
Howcanwa What cultural and Are clear decision What motivators and What 7
aquiptha structural factors are rights and incentives structural changes motivators
David Magee, Turnaround: How Carhs Ghosn Rescued Nissan (HarperBusiness, 2003):
organization getting in the way of in place for the should be put in place should be Well-written story of Nissan's first two waves of strategic initiatives.
to develop effective response to success of all to allow ideas to introduced 8
and deploy
Milton Moskowitz, "Dirty and Clean Laundry" s+b, Fall 2005, www.strategy-business.
I
the crisis? campaigns? bubble up through the and structurer
the right organization? changes made
com/press/article/05310: Article on great (and awful} leadership by the coauthor of the
capallilities? to reinvigorate "100 Best Places to Work" survey.
the workforce? 9
Nikos Mourkogiannis, Purpose: The Starting Point of Great Companies (Palgrave
Source: Booz Allen Hamilton. Macmillan, 2006): Four archetypes for business identity and how they enable strategic
leadership.
 R102 Raadlng 07 How to Build an Organization in which Executives will Flourish
111
Gary Neilson and Bruce Pasternack, Results: Keep What's Good, Fix What's Wrong,
11
and Unlock Great Performance (Crown, 2005): Organizational DNA theory, experience,
and practice.
Geoffrey Precourt, "The Student of History", Hamilton College Alumni Review, Fall
2003, www.hamilton.edu/magazine/2003/fall/lafley.html: A.G. Lafley biography,
turnaround story, and anecdote source.
12
David Rock and Jeffrey Schwartz, "The Neuroscience of Leadership", s+b, Summer
2006, www.strategy-business.com/ press/article/06207: How "attention density" can
build capabilities that reinforce great leadership.
13
David Sirota, Louis A. Mischkind, and Michael Irwin Meltzer, The Enthusiastic
Employee: How Companies Profit by Giving Workers What They Want (Wharton
School Publishing, 2005): Equity, achievement, and camaraderie are the three most
wanted workplace factors,
14
Noel Tichy and Warren Bennis, Judgment: How Winning Leaders Make Great Calls
15
(Portfolio, 2007): Anecdote-rich evocation of the components of strategic leadership
(though the authors don't call it that).
Great Place to Work Institute website, www.sreatplacetowork.com: Explains research
methods and transformational viewpoint underlying the Fortune magazine and other
worldwide best workplace surveys.
About the authors
Steven Wheeler (wheeler_steven@bah.comJ is a senior vice president with Boaz Allen
Hamilton based in Cleveland, Ohio. He leads the firm's work focused on strategic
leadership and has served multiple industries with a focus on consumer packaged goods
and durables.
I'
Walter McFarland (mcfarland_walter@bah.com] is a vice president with Boaz Allen
based in McLean, Va. He specializes in maximizing human performance for public- and
private-sector clients, with extensive experience in human capital and learning systems
and leadership development.
Art Kleiner (kleiner _art@strategy-business.comJ is editor-in-chief of strotegy+bu'Hness.
A new edition of his 1996 book on the history of corporate change, The Age of Heretics,
will be published by Wiley Books in 2008,
Also contributing to this article were Adrienne Crowther, director of Boaz Allen 's
work in strategic leadership; s+b Contributing Editor Ann Graham; Max Weston, a senior
partner and founder of Panthea Strategic Leadership Advisors; and Andra Brooks, a
partner with Panthea.
Reading 08
Turning great strategy
into great performance
Michael C. Mankins and Richard Steele
T hree years ago the leadership team at a major manufacturer spent months developing
a new strategy for its European business. Over the prior half-decade, six new
competitors had entered the market, each deploying the latest in low-cost manufacturing
technology and slashing prices to gain market share. The performance of the European
unit-once the crown jewel of the company's portfolio-had deteriorated to the point
that top management was seriously considering divesting it.
To turn around the operation, the unit's leadership team had recommended a bold
new "solutions strategy"-one that would leverage the business's installed base to fuel
growth in after-market services and equipment financing. The financial forecasts were
exciting-the strategy promised to restore the business's industry-leading returns and
growth. Impressed, top management quickly approved the p lan, agreeing to provide the
unit with all the resources it needed to make the turnaround a reality.
Today, however, the unit's performance is nowhere near what its management team
had projected. Returns, while better than before, remain well below the company's
cost of capital. The revenues and profits that managers had expected from services and
financing have not materialized, and the business's cost position still lags behind that of
its major competitors.
At the conclusion of a recent half-day review of the business's strategy and
performance, the unit's general manager remained steadfast and vowed to press on.
"It's all about execution," she declared. "The strategy we're pursuing is the right one.
We're just not delivering the numbers. All we need to do is work harder, work smarter."
The parent company's CEO was not so sure. He wondered: could the unit's lacklustre
performance have more to do with a mistaken strategy than poor execution? More
important, what should he do to get better performance out of the unit? Should he do
as the general manager insisted and stay the course-focusing the organization more
intensely on execution-or should he encourage the leadership team to investigate new
strategy options? If execution was the issue, what should he do to help the business
improve its game? Or should be just cut his losses and sell the business? He left the
operating review frustrated and confused-not at all confident that the business would
ever deliver the performance its managers had forecast in its strategic plan.
R103
 R104 Reeding 08 Turning Great Strategy into Greet Performance
Talk to almost any CEO, and you're likely to hear similar frustrations. For, despite the
enormous time and energy that goes into strategy development at most companies, many
have little to show for the effort. Our research suggests that companies on average deliver
only 63 per cent of the financial performance their strategies promise. Even worse,
the causes of this strategy-to-performance gap are all but invisible to top management.
Leaders then pull the wrong levers in their attempts to turn around performance-
pressing for better execution when they actually need a better strategy, or opting to
change direction when they really should focus the organization on execution. The
result: wasted energy, Jost time, and continued underperformance.
However, as our research also shows, a select group of high-performing companies
have managed to close the strategy-to-performance gap through better planning and
execution. These companies-Barclays, Cisco Systems, Dow Chemical, 3M, and Roche,
to name a few-develop realistic plans that are solidly grounded in the underlying
economics of their markets and then use the plans to drive execution. Their disciplined
planning and execution processes make it far less likely that they will face a shortfall in
actual performance. And, if they do fall short, their processes enable them to discern the
cause quickly and take corrective action. While these companies' practices are broad in
scope-ranging from unique forms of planning to integrated processes for deploying and
tracking resources--our experience suggests that they can be applied by any business to
help craft great plans and turn them into great performance.
The strategy-to-performance gap
1 1
n the fall of 2004 our firm, Marakon Associates, in collaboration with the Economist
I Intelligence Unit, surveyed senior executives from 197 companies worldwide with
sales exceeding $500 million. We wanted to see how successful companies are at
translating their strategies into performance. Specifically, how effective are they at
meeting the financial projections set forth in their strategic plans? And when they
fall short, what are the most common causes, and what actions are most effective
in closing the strategy-to-performance gap? Our findings were revealing-and
troubling.
While the executives we surveyed compete in very different product markets and
geographies, they share many concerns about planning and execution. Virtui1fl.y all of
them struggle to produce the financial performance forecasts in their long-range plans.
Furthermore, the processes they use to develop plans and monitor performance make it
difficult to discern whether the strategy-to-performance gap stems from poor planning,
poor execution, both, or neither. Specifically, this is what we discovered.
Companies rarely track performance against long-term plans
In our experience, Jess than 15 per cent of companies make it a regular practice to go
back and compare the business's results with the performance forecast for each unit in
its prior years' strategic plans. As a result, top managers can't easily know whether the
projections that underlie their capital-investment and portfolio+strategy decisions are in
any way predictive of actual performance. More important, they risk embedding the same
The Strate11v·to·Perform ence Gap R105
disconnect between results and forecasts in their future investment decisions. Indeed,
the fact that so few companies routinely monitor actual versus planned performance may
help explain why so many companies seem to pour good money after bad-continuing to
fund losing strategies rather than searching for new and better options.
Multiyear results rarely meet projections
When companies do track performance relative to projections over a number of years,
what commonly emerges is a picture one of our clients recently described as a series of
"diagonal venetian blinds", where each year's performance projections, when viewed
side by side, resemble venetian blinds hung diagonally. If things are going reasonably
well, the starting point for each year's new "blind" may be a bit higher than the prior
year's starting point, but rarely does performance match the prior year's projection. The
obvious implication: year after year of underperformance relative to plan.
The venetian blinds phenomenon creates a number of related problems. First, because
the plan's financial forecasts are unreliable, senior management cannot confidently tie
capital approval to strategic planning. Consequently, strategy development and resource
allocation become decoupled, and the annual operating plan (or budget) ends up driving
the company's long-term investments and strategy. Second, portfolio management gets
derailed. Without credible financial forecasts, top management cannot know whether a
particular business is worth more to the company and its shareholders than to potential
buyers. As a result, businesses that destroy shareholder value stay in the portfolio too
long (in the hope that their performance will eventually turn around), and value-creating
businesses are starved for capital and other resources. Third, poor financial forecasts
complicate communications with the investment community. Indeed, to avoid coming up
short at the end of the quarter, the CFO and head of investor relations frequently impose
e "contingency" or "safety margin" on top of the forecast produced by consolidating
the business-unit plans. Because this top-down contingency is wrong just as often as it
is right, poor financial forecasts run the risk of damaging a company's reputation with
analysts and investors.
A lot of value is lost in translation
Given the poor quality of financial forecasts in most strategic plans, it is probably not
surprising that most companies fail to realize their strategies' potential value.
As we've mentioned, our survey indicates that, on average, most strategies deliver
only 63 per cent of their potential financial performance, and more than one-third of
the executives surveyed placed the figure at less than 50 per cent. Put differently, if
management were to realize the full potential of its current strategy, the increase in
value could be as much es 60 per cent to 100 per cent!
The strategy-to-performance gap can be attributed to a combination of factors , such
as poorly formulated plans, misapplied resources, breakdowns in communication,
and limited accountability for results. To elaborate, management starts with a strategy
it believes will generate e certain level of financial performance and value over time.
But, according to the executives we surveyed, the failure to have the right resources
in the right place at the right time strips away some 7.5 per cent of the strategy's
RtD& Reading 08 Turning Great Strategy into Great Performance
potential value. Some 5.2 per cent is lost to poor communications, 4.5 per cent to poor
action planning, 4.1 per cent to blurred accountabilities, and so on. Of course, these
estimates reflect the average experience of the executives we surveyed and may not
be representative of every company or every strategy. Nonetheless, they do highlight
the issues managers need to focus on as they review their companies' processes for
planning and executing strategies.
What emerges from our survey results is a sequence of events that goes something like
this: strategies are approved but poorly communicated. This, in tum, makes the translation
of strategy into specific actions and resource plans all but impossible. Lower levels in the
organization don't know what they need to do, when they need to do it, or what resources
will be required to deliver the performance senior management expects. Consequently,
the expected results never materialize. And because no one is held responsible for the
shortfall, the cycle of underperformance gets repeated, often for many years.
Performance bottlenecks are frequently invisible to top management
The processes most companies use to develop plans, allocate resources, and track
perfonnance make it difficult for top management to discern whether the strategy-to-
performance gap stems from poor planning, poor execution, both, or neither. Because
so many plans incorporate overly ambitious projections, companies frequently write
off performance shortfalls as "just another hockey·stick forecast". And when plans are
realistic and performance falls short, executives have few early-warning signals. They
often have no way of knowing whether critical actions were carried out as expected,
resources were deployed on schedule, competitors responded as anticipated, and so on.
Unfortunately, without clear information on how and why performance is falling short, it
is virtually impossible for top management to take appropriate corrective action.
The strategy-to-performance gap fosters a culture of underperformance
Jn many companies, planning and execution breakdowns are reinforced-even
magnified-by an insidious shift in culture. In our experience, this change occurs subtly
but quickly, and once it has taken root it is very hard to reverse. First, unrealistic plans
create the expectation throughout the organization that plans simply will not he fulfilled.
Then, as the expectation becomes experience, it becomes the norm that perforMance
commitments won't be kept. So commitments cease to be binding promises with real
consequences. Rather than stretching to ensure that commitments are kept, managers,
expecting failure, seek to protect themselves from the eventual fallout. They spend
time covering their tracks rather than identifying actions to enhance performance.
The organization becomes less self-critical and less intellectually honest about its
shortcomings. Consequently, it loses its capacity to perform.
Closing the strategy-to-performance gap
A s significant as the strategy-to-performance gap is at most companies, management
can close it. A number of high·performing companies have found ways to realize
Closing the Strategy-to·Performance Gap R107
rnore of their strategies' potential. Rather than focus on improving their planning and
e~acution processes separately to close the gap, these companies work both sides of the
equation, raising standards for both planning and execution simultaneously and creating
clear links between them.
our research and experience in working with many of these companies suggests they
follow seven rules that apply to planning and execution. Living by these rules enables
them to objectively assess any performance shortfall and determine whether it stems
from the strategy, the plan, the execution, or employees' capabilities. And the same rules
that allow them to spot problems early also help them prevent performance shortfalls
in the first place. These rules may seem simple-even obvious-but when strictly and
collectively observed, they can transform both the quality of a company's strategy and its
ability to deliver results.
Rule 1: Keep it simple, make it concrete
At most companies, strategy is a highly abstract concept-often confused with vision
or aspiration-and is not something that can be easily communicated or translated into
action. But without a clear sense of where the company is headed and why, lower levels
in the organization cannot put in place executable plans. Jn short, the link between
strategy and performance can't be drawn because the strategy itself is not sufficiently
concrete.
To start off the planning and execution process on the right track, high-performing
companies avoid long·drawn-out descriptions of lofty goals and, instead, stick to clear
language describing their course of action. Bob Diamond, CEO of Barclays Capital, one
of the fastest-growing and best-performing investment banking operations in Europe,
puts it this way: "We've been very clear about what we will and will not do. We knew
we weren't going to go head-to-head with US bulge bracket firms. We communicated that
we wouldn't compete in this way and that we wouldn't play in unprofitable segments
within the equity markets but instead would invest to position ourselves for the euro, the
burgeoning need for fixed income, and the end of Glass·Steigel. By ensuring everyone
knew the strategy and how it was different, we've been able to spend more time on tasks
that are key to executing this strategy."
By being clear about what the strategy is and isn't, companies like Barclays keep
everyone headed in the same direction. More important, they safeguard the performance
their counterparts lose to ineffective communications; their resource and action planning
becomes more effective; and accountabilities are easier to specify.
Rule 2: Debate assumptions, not forecasts
At many companies, a business unit's strategic plan is little more than a negotiated
settlement-the result of careful bargaining with the corporate centre over performance
targets and financial forecasts. Planning, therefore, is largely a political process-with
unit management arguing for lower near·term profit projections (to secure higher annual
bonuses) and top management pressing for more long-term stretch (to satisfy the board
of directors and other external constituents). Not surprisingly, the forecasts that emerge
from these negotiations almost always understate what each business unit can deliver
8108 Reading 08 Turmng Great Strategy into Great Performance
in the near term and overstate what can realistically be expected in the long term-the
hockey-stick charts with which CEOs are all too familiar.
Even at companies where the planning process is isolated from the political concerns
of performance evaluation and compensation, the approach used to generate financial
projections often has built-in biases. Indeed, financial forecasting frequently takes place
in complete isolation from the marketing or strategy functions. A business unit's finance
function prepares a highly detailed line-item forecast whose short-term assumptions may
be realistic, if conservative, but whose long-term assumptions are largely uninformed. For
example, revenue forecasts are typically based on crude estimates about average pricing,
market growth, and market share. Projections of long-term costs and working capital
requirements are based on an assumption about annual productivity gains-expediently
tied, perhaps, to some company-wide efficiency programme. These forecasts are difficult
for top management to pick apart. Each line item may be completely defensible, but the
overall plan and projections embed a clear upward bias-rendering them useless for
driving strategy execution.
High-performing companies view planning altogether differently. They want
their forecasts to drive the work they actually do. To make this possible, they have
to ensure that the assumptions underlying their long-term plans reflect both the real
economics of their markets and the performance experience of the company relative to
competitors. Tyco CEO Ed Breen, brought in to turn the company around in July 2002,
credits a revamped plan-building process for contributing to Tyco's dramatic recovery.
When Breen joined the company, Tyco was a labyrinth of 42 business units and several
hundred profit centres, built up over many years through countless acquisitions. Few
of Tyco's businesses had complete plans, and virtually none had reliable financial
forecasts.
To get a grip on the conglomerate's complex operations, Breen assigned cross-
functional teams at each unit, drawn from strategy, marketing, and finance, to develop
detailed information on the profitability ofTyco's primary markets as well as the product
or service offerings, costs, and price positioning relative to the competition. The teams
met with corporate executives biweekly during Breen's first six months to review and
discuss the findings. These discussions focused on the assumptions that would drive
each unit's long-term financial performance, not on the financial forecasts themselves.
Jn fact, once assumptions about market trends were agreed on, it was relatiVfly easy for
Tyco's central finance function to prepare externally oriented and internally consistent
forecasts for each unit.
Separating the process of building assumptions from that of preparing financial
projections helps to ground the business unit-corporate centre dialogue in economic
reality. Units can't hide behind specious details, and corporate centre executives
can't push for unrealistic goals. What's more, the fact-based discussion resulting from
this kind of approach builds trust between the top team and each unit and removes
barriers to fast and effective execution. "When you understand the fundamentals and
performance drivers in a detailed way," says Bob Diamond, "you can then step back,
and you don't have to manage the details. The team knows which issues it can get
on with, which it needs to flag to me, and which issues we really need to work out
together."
Closing tha Strategv-to·Perfarmencu Gap R109
Rule 3: Use a rigorous framework, speak a common language
To be productive, the dialogue between the corporate centre and the business units about
market trends and assumptions must be conducted within a rigorous framework. Many of
the companies we advise use the concept of profit pools, which draws on the competition
theories of Michael Porter and others. In this framework, a business's long-term financial
performance is tied to the total profit pool available in each of the markets it serves and
its share of each profit pool-which, in turn, is tied to the business's market share and
relative profitability versus competitors in each market.
In this approach the first step is for the corporate centre and the unit team to agree
on the size and growth of each profit pool. Fiercely competitive markets, such as pulp
and paper or commercial airlines, have small (or negative) total profit pools. Less
competitive markets, like soft drinks or pharmaceuticals, have large total profit pools.
We find it helpful to estimate the size of each profit pool directly-through detailed
benchmarking-and then forecast changes in the pool's size and growth. Each business
unit then assesses what share of the total profit pool it can realistically capture over
time, given its business model and positioning. Competitively advantaged businesses
can capture a large share of the profit pool-by gaining or sustaining a high market share,
generating above-average profitability, or both. Competitively disadvantaged businesses,
by contrast, typically capture a negligible share of the profit pool. Once the unit and the
corporate centre agree on the likely share of the pool the business will capture over time,
the corporate centre can easily create the financial projections that will serve as the unit's
road map.
In our view, the specific framework a company uses to ground its strategic plans isn't
all that important. What is critical is that the framework establish a common language
for the dialogue between the corporate centre and the units-one that the strategy,
marketing, and finance teams all understand and use. Without a rigorous framework to
link a business's performance in the product markets with its financial performance over
time, it is very difficult for top management to ascertain whether the financial projections
that accompany a business unit's strategic plan are reasonable and realistically
achievable. As a result, management can't know with confidence whether a performance
shortfall stems from poor execution or an unrealistic and ungrounded plan.
Rule 4: Discuss resource deployments early
Companies can create more realistic forecasts and more executable plans if they
discuss up front the level and timing of critical resource deployments. At Cisco
Systems, for example, a cross-functional team reviews the level and timing of
resource deployments early in the planning stage. These teams regularly meet w ith
John Chambers (CEO), Dennis Powell (CFO), Randy Pond (VP of operations), and
the other members of Cisco's executive team to dis cuss their findings and make
recommendations. Once agreement is reached on resource allocation and timing at
the unit level, those elements are factored into the company's two-year plan. Cisco
then monitors each unit's actual resource deployments on a monthly basis (as well as
its performance) to make sure things are going according to plan and that the plan is
generating the expected results.
 R11D R11dlng OB Turning Great Strategy into Great Performance
Challenging business units about when new resources need to be in place focuses
the planning dialogue on what actually needs to happen across the company in order to
execute each unit's strategy. Critical questions invariably surface, such as: how long will
it take us to change customers' purchase patterns? How fast can we deploy our new sales
force? How quickly will competitors respond? These are tough questions. But answering
them makes the forecasts and the plans they accompany more feasible.
What's more, an early assessment of resource needs also informs discussions about
market trends and drivers, improving the quality of the strategic plan and making it far
more executable. In the course of talking about the resources needed to expand in the
rapidly growing cable market, for example, Cisco came lo realize that additional growth
would require more trained engineers to improve existing products and develop new
features. So, rather than relying on the functions to provide these resources from the
bottom up, corporate management earmarked a specific number of trained engineers to
support growth in cable. Cisco's financial-planning organization carefully monitors the
engineering head count, the pace of feature development, and revenues generated by the
business to make sure the strategy stays on track.
Rule 5: Clearly identify priorities
To deliver any strategy successfully, managers must make thousands of tactical decisions
and put them into action. But not all tactics are equally important. In most instances, a
few key steps must be taken-at the right time and in the right way-to meet planned
performance. Leading companies make these priorities explicit so that each executive has
a clear sense of where to direct his or her efforts.
At Textron, a $10 billion multi-industrial conglomerate, each business unit identifies
"improvement priorities" that it must act upon to realize the performance outlined in its
strategic plan. Each improvement priority is translated into action items with clearly defined
accountabilities, timetables, and key performance indicators (I<Pls) that allow executives to
I I
tell how a unit is delivering on a priority. Improvement priorities and action items cascade
I
to every level at the company-from the management committee (consisting of Textron's
top five executives) down to the lowest levels in each of the company's ten business units.
Lewis Campbell, Textron's CEO, summarizes the company's approach this way: "Everyone
needs to know: 'Ifl have only one hour to work, here's what I'm going to focus on. ' Our goal
deployment process makes each individual's accountabilities and priorities clear.
The Swiss pharmaceutical giant Roche goes as far as to turn its business plans into
detailed performance contracts that clearly specify the steps needed and the risks that
must be managed to achieve the plans. These contracts all include a "delivery agenda"
that lists the five to ten critical priorities with the greatest impact on performance. By
maintaining a delivery agenda at each level of the company, Chairman and CEO Franz
Humer and his leadership team make sure "everyone at Roche understands exactly
what we have agreed to do at a strategic level and that our strategy gets translated into
clear execution priorities. Our delivery agenda helps us stay the course with the strategy
decisions we have made so that execution is actually allowed to happen. We cannot
control implementation from HQ, but we can agree on the priorities, communicate
relentlessly, and hold managers accountable for executing against their commitments."
Closing the Stretegv-to·Performence Gap R111
Rule 6: Continuously monitor performance
Seasoned executives know almost instinctively whether a business has asked for
too much, too little, or just enough resources to deliver the goods. They develop this
capability over time-essentially through trial and error. High-performing companies
use real-time performance tracking to help accelerate this trial~and-error process. They
continuously monitor their resource deployment patterns and their results against plan,
using continuous feedback to reset planning assumptions and reallocate resources. This
reaMime information allows management to spot and remedy flaws in the plan and
shortfalls in execution-and to avoid confusing one with the other.
At Textron, for example, each KPI is carefully monitored, and regular operating
reviews percolate performance shortfalls-or "red light" events-up through the
management ranks. This provides CEO Lewis Campbell, CFO Ted French, and the other
members of Textron's management committee with the information they need to spot and
fix breakdowns in execution.
A similar approach has played an important role in the dramatic revival of Dow
Chemical's fortunes. In December 2001, with performance in a free fall, Dow's board
of directors asked Bill Stavropoulos (Dow's CEO from 1993 to 1999) to return to the
helm. Stavropoulos and Andrew Liveris {the current CEO, then COO) immediately
focused Dow's entire top leadership team on execution through a project they called
the Performance Improvement Drive. They began by defining clear performance
metrics for each of Dow's 79 business units. Performance on these key metrics was
tracked against plans on a weekly basis, and the entire leadership team discussed any
serious discrepancies first thing every Monday morning. As Liveris told us, the weekly
monitoring sessions "forced everyone to live the details of execution" and let "the entire
organization know how we were performing".
Continuous monitoring of performance is particularly important in highly volatile
industries, where events outside anyone's control can render a plan irrelevant. Under
CEO Alan Mulally, Boeing Commercial Airplanes' leadership team holds weekly
business performance reviews to track the division's results against its multiyear plan.
By tracking the deployment of resources as a leading indicator of whether a plan is being
executed effectively, BCA's leadership team can make course corrections each week
rather than waiting for quarterly results to roll in.
Furthermore, by proactively monitoring the primary drivers of performance (such
as passenger traffic patterns, airline yields and load factors, and new aircraft orders) ,
BCA is better able to develop and deploy effective countermeasures when events
throw its plans off course. During the SARS epidemic in late 2002, for example,
BCA's leadership team took action to mitigate the adverse consequences of the illness
on the business's operating plan within a week of the initial outbreak. The abrupt
d.ecline in air traffic to Hong Kong, Singapore, and other Asian business centres
signalled that the number of future aircraft deliveries to the region would fa ll-
perhaps precipitously. Accordingly, BCA scaled back its medium-term production
plans (delaying the scheduled ramp-up of some programmes and accelerating
lhe.s~utdown of others) and adjusted its multiyear operating plan to reflect the
anticipated financial impact.
 R11Z ReadJn11 08 Turning Greet Strategy into Greet Performance Closing the Stretegy· to·Performance Gap 8113

Rule 7: Reward and develop execution capabilities result is a performance premium on the company's stock-one that further reward
stretch comm~tments ~nd ~erformance delivery. Before long, the company's reput:tion
No list of rules on this topic would be complete without a reminder that companies
among potential recruits nses, and a virtuous circle is created in which talent begets
have to motivate and develop their staffs; at the end of the day, no process can be better
perf?rmance, performance begets rewards, and rewards beget even more talent. In short,
than the people who have to make it work. Unsurprisingly, therefore, nearly all of the
dosmg the strategy-to-performance gap is not only a source of immediate performance
companies we studied insisted that the selection and development of management
improvement but als o an important driver of cultural change with a large and lasting
was an essential ingredient in their success. And while improving the capabilities of a
impact on the organization's capabilities, s trategies, and competitiveness.
company's workforce is no easy task-often taking many years-these capabilities, once
built, can drive superior planning and execution for decades.
For Barclays' Bob Diamond, nothing is more important than ''ensuring that [the
company] hires only A players". In his view, "the hidden costs of bad hiring decisions Mich~el C. Mankins {mmankins@marakon.com) is a managing partner in the San
are enormous, so despite the fact that we are doubling in size, we insist that as a top team Francisco office of Marakon Associates, an international strategy-consulting firm. He is
we take responsibility for all hiring. The jury of your peers is the toughest judgment, so also a coauthor of The Value Imperative: Managing for Superior Shareholder Returns
we vet each others' potential hires and challenge each other to keep raising the bar". It's (Free Press, 1994). Richard Steele {rsteele@marokon.com) is a partner in th e firm 's
equally important to make sure that talented hires are rewarded for superior execution. New York office.
To reinforce its core values of "client", "meritocracy", "team", and "integrity", Barclays
Capital hes innovative pay schemes that "ring fence" rewards. Stars don't lose out just
because the business is entering new markets with lower returns during the growth
phase. Says Diamond: "It's so bad for the culture if you don't deliver what you promised
to people who have delivered ... You've got to make sure you are consistent and fair,
unless you want to lose your most productive people."
Companies that are strong on execution also emphasize development. Soon after he
became CEO of 3M, Jim McNerney and his top team spent 18 months hashing out a new
I I
leadership model for the company. Challenging debates among members of the top team
led to agreement on six "leadership attributes"- namely, the ability to "chart the course",
"energize and inspire others", "demonstrate e thics , integrity, and compliance'', "deliver
results", "raise the bar", and "innovate resourcefully". 3M's leadership agreed that these
six attributes were essential for the company to become skilled at execution and known
for accountability. Today, the leaders credit this model with helping 3M to sustain and
even improve its consistently strong performance.

The prize for closing the strategy-to-performance gap is huge-an increase in •

performance of anywhere from 60 to 100 per cent for most companies. But this almost
certainly understates the true benefits. Companies that create tight links between their
strategies, their plans, and, ultimately, their performance often experience a cultural
multiplier effect. Over time, as they turn their strategies into great performance, leaders
in these organizations become much more confident in their own capabilities and
much more willing to make the stretch commitments that inspire and transform
large companies. In turn, individual managers who keep their commitments are
rewarded-with faster progression end fatter paycheques-reinforcing the behaviors
needed to drive any company forward.
Eventually, a culture of overperformance emerges. Investors start giving management
the benefit of the doubt when it comes to bold moves and performance delivery. The

Reading 09
The role of strategy,
culture and leadership
in the Nedbank
turnaround-The Tom
Boardman story
@NEDBANK
MAKE THl~GS HAPPEN
Executive summary
W hen Tom Boardman was announced as the Chief Executive Officer (CEO) of
Nedbank in late 2003, the bank was about to go on to record full year results of
Headline Earnings down 98 per cent (to R55 million), and a Return on Equity (ROE)
of 0.4 per cent. Nedbank's market capitalization was the lowest of the 'Big Fout', end
on a downward trajectory in direct contrast to the competitors' upward trajectory, at
R17 billion. Their parent company Old Mutual pie would have to inject R2 billion of
secondary capital to keep it afloat, and R5.2 billion primary capital had to be raised
through a rights issue. Coupled with the poor financial view, market sentiment of
the appointment of the CEO whose job it was to lead Nedbank out of these troubled
times was negative, and a day after the announcement Nedbank's share price tumbled
6 per cent. At the same time, Nedbank was in the midst of the complicated merger with
BOE, which involved not only aligning people, culture, and values, but was becoming
more costly the longer it took to implement, and thus real "savings" were not being
immediately realized.
It was immediately clear that a Jot of hard work would be required in order to
turn around one of South Africa's oldest and traditionally "aspirational" banks.
R114
It All Starts With a Vision, Driven by Strategy R115
Everything from the way it did business (corporate strategy and operations}, to the way
that the employees functioned (corporate culture}, to the way it ensured successful
implementation, execution and attainment of goals and objectives (corporate leadership}
bad to be reviewed and reinvented.
It all starts with a vision, driven by strategy
' ' To become Southern Africa's most highly rated and respected bank ... by
our staff, clients, shareholders, regulators and communities
Tom Boardman, 2004 ' '
T he vision of an organization gives it direction. This is enabled and underpinned by
its corporate strategy and values. In the absence of a vision, an organization has no
direction.
' ' If you don't know where you are going then any road will take you there.
Cheshire Cat, Alice in Wonderland ' '
Strategically, Tom realized that there were a number of pressing and immediate issues
that had to be dealt with quickly in order to fully carry out his vision. To address these
pressing concerns, Tom launched the "Journey Back to the Top" initiative, underpinned
by a three-year planning process. This was meant to provide focus to these and other
key initiatives aimed at the turnaround of Nedbank, and ensured that each responsible
business division, as well as Tom, would be actively tracked and measured against these
items.
At the same time, in 2004, Tom personally led the Strategy, Values and Brand (SVB}
workshops. These were held for the top senior leadership in Nedbank to brainstorm the
strategic direction, corporate aspirations, key focus areas, and core values. A number
of these workshops were held to constantly evolve and improve these aspects. The
summaries of the discussions from every workshop, together with amendments to the
group strategy, values and brand, were consolidated into one document, which was
presented to, and approved by, the Nedbank Group Executive Committee. The result was
a finalized group strategy and clear direction for the Nedbank Group brand campaign and
values-the "Dagwood".
10 Steps for shifting an organization
1 Develop a vision, mission, strategy and operating plan.
2 Set high expectations with specific goals and objectives.
3 Build trust.
4 Define person's and group's goals, responsibilities and job content.
5 Agree on measures for people to track how they are doing.
6 Give frequent feedback and relate to plans.
7 Continuously update people on external situation.
8 Recognize and praise success and progress.
R11& Reading 09 The Role of Strategy, Culture and leadership in the Nadbank Turnaround-The Tom Boardman Story Transformation R117

9 Reward success and the desired behaviour. Another key concept as a result of the SVB workshops was "Deep Green". This idea
10 Celebrate success together and share setbacks. was about a composite culture, encompassing the vision, and driven by a depth of
aspirations, values, and focus areas ("Deep"), built around the brand imaging of Nedbank
Global research has shown that highly successful companies often use a single concept
("Green"). It represented the feeling that the senior leadership team at the time of the
that focuses all the efforts in their organizations. Powerful single concepts are built on SVB workshops felt best summarized the Nedbank that they had planned to see, and
three pillars: what the organization is passionate about, what sets the organization apart
would work towards.
from competitors and what drives the organization's economic engine. Tom believed
that Nedbank could be the best et understanding their clients' needs and that they could
deliver value propositions that would meet these specific needs better than any other Deep Green aspirations
bank in Southern Africa. He believed that being more client-driven would set Nedbank
apart from the rest and would be a cornerstone in the "journey back to the top''. • Great Place to Work.
Furthermore, and in line with the strategy of becoming a more client-driven • Great Place to Bank.
organization and to remove the silo mentality from the business, the frontline business
• Great Place to Invest.
model had to be reviewed. As a result, the existing retail and operations business
structures were reviewed and a new business model was introduced with the aim of • Unleashing Synergies.
unifying the business, which in turn would support a more client-centric approach. The • World-class at Managing Risk.
review was based on feedback received from all Nedbank employees, and by evaluating • Community of Leaders.
best practice in other international markets. This is aligned to the maxim of "the wisdom • Most Respected and Aspirational Brand.
of many is better than the wisdom of few".
• Highly Involved in the Community and Environment.
• Leading Transformation.
Corporate culture and values • Living our Values.
The culture of an organization or any group of individuals is a reflection of

''
To enable Deep Green, the 'Leading For Deep Green' (L4DG) programme was constituted.
the values, beliefs and behaviours of leaders of the group. This encompassed employee and team mastery and effectiveness, while also focusing
Richard Barrett
The excellent companies developed cultures that incorporated the values '' on community involvement and staff volunteerism. One of the workstreams that was
constituted was a combined leadership and strategy process. It was a unique process

'' and practices of their great leaders, and those shared values can be seen to
survive for decades.
that had been developed for Nedbank by the Centre for Conscious Leadership (CCL),
a team of organizational psychologists. The process was built on the latest thinking in

''
Tom Peters leadership development. The key aspects of this was to be aware of oneself in terms of
ones personality, leadership style, and on the impact and influence on others, and how
Organizational transformation begins with personal transformation of the

''
Nedbank could harness the synergy of differences and leverage our insight to build a
leaders. Organizations do not transform; people do. sustainable future for Nedbank. To date 162 teams and 1969 staff members have gone

• ''
Richard Barrett on the programme, and it is continually being enhanced to ensure an effective working
corporate culture and values.
T he breaking down of silo behaviour within Nedbank was another one of the key
challenges. To encourage unity one set of values were developed-values that were
shared by staff in all the clusters and divisions, and that were also in line with the values
of the broader Old Mutual group. Four values which aligned to the greater Old Mutual Transformation
group, and which were adapted for Nedbank, were chosen, as well as a fifth which was

''
It is our responsibility to break down barriers of division and create a
chosen specifically in order to create a sense of uniqueness and relevance to Nedbank.
country where there will be neither Whites nor Blacks, just South Africans,
All staff was invited for their input in selecting the fifth value as this represented buy-in
free and united in diversity.

''
into the shifting of the corporate culture which was a prerequisite for the turnaround. Oliver Tambo
Being people-centred was eventually selected, to go along with Integrity, Respect,
Accountability, and Pushing Beyond Boundaries. In order to create a "High Performing nother area where much change occurred and excelled under the ~eadership of Tom
Culture" it was critical these values were adopted, accepted and lived by all employees,
and be seen to exist within top leadership.
A is that of Transformation. He saw that Nedbank, as a leading bankmg group, had
an "opportunity to effect and influence transformation at a number of levels-not only
R118 Ra11dlng D9The Role of Strategy, Culture end Leadership m the Nedbenk Turnaround-The Tom Boardman Story
internally but also in the markets that we serve, among our corporate clients, in capital
formation projects, and in all out business interactions."
Transformation is not just a numbers game, where it looks like it's all about
employment equity targets and black economic empowerment. This checklist mindset
can diminish the socio-economic actualities of what transformation is really about.
It's about human rights, equality, justice, and dignity. It's about a belief in an abundant
future for all.
Nedbank's transformation truths
1 It is the right thing to do. Transformation is a business imperative.
2Transformation affects every single area of our business.
3It is the responsibility of every person to make it happen.
4Trust and transparency is required. Everyone should be heard.
5Transformation at Nedbank must be unifying, fair and transparent.
6Transformation will have short-term cost with long-term benefit.
7Transformation targets will be embedded in our strategies and business plans
through ongoing consultation.
8 We will proactively grow and develop our own talent pool.
9 We will focus strongly on the support and empowerment of blacks, with particular
emphasis on Africans, all women and all people with disabilities.
10 Transformation is non-negotiable.
The financial sector charter was one of the first movers in organizing business to
set up a governing charter that would prioritize Black Economic Empowerment (BEE)
within the sector and guide financial services institutions in its implementation. The
Financial Sector Charter (FSC) was developed by the major players in the sector and
brought into effect in January 2004. It sets out key strategic measures to promote BEE
across the sector, together with targets for implementation. The Department of Trade and
Industry (DTI) have since introduced the BEE Codes of Good Practice, which forms an
addendum to the B-BBEE Act and provide a means of measuring BEE on the broad-based
terms introduced with the Act. This marks a further step to motivate transformanon in
the private sector.
In all the measurement areas of Ownership, Management Control, Corporate Social
Investment (CSI), Enterprise Development, Preferential Procurement, Skills Development
and Employment Equity there has been a steady increase, and in some cases surpassing
annual targets, since their introduction.
This is not only directly related to the leadership of Tom being an example
of a positive role model in his belief of Transformation, but also in his ability to
gel comprehensive buy-in from all levels of employees to the merits and spirit of
Transformation. Indeed, the success of the transformation of the employee composition
of Nedbank contributes greatly to it being named as the third most empowered company
in South Africa in 2008, and ahead of its other "Big 4" competitors.
leadership R119
Leadership
n his book Let Africa Lead, Reuel Khoza refers to the Doughnut Leadership model.
I The highest level of attainment in this model is that of an organization which is led
by a value-based leader. "Guiding the 21st-century business are value-based leaders
who depend on experts. to shape innovation and create networks of exchange. The
implementers-no longer mere 'workers'-are those who share the vision and carry it
into the workplace and the marketplace. "
The seven keys to business
1 Trust your Subordinates: You can't expect them to go all out for you if you don't
trust them.
2 Develop a Vision: Contrary to some executive's suspicions, planning for the long
term pays off. People want to follow someone who know where he or she is going.
3 Keep your Cool: The best leaders show their mettle under fire.
4 Encourage Risk: Nothing demoralizes the troops like knowing that the slightest
failure could jeopardize their entire career.
5 Be an Expert: From board room to mail room, everyone had better understand that
you know what you are talking about.
6 Invite Dissent: Your people aren't giving you their best or learning how to lead if
they are afraid to speak up.
7 Simplify: You need to see the big picture in order to set a course, communicate it,
and maintain it. Keep the details at bay.
When Tom took over in late 2003, one of the more immediate organizational structure
tasks was the reorganization and appointment of a new Executive Committee. This
was coupled with a reorganization of the Nedbank divisions in order to align it to
a synergistic, client-driven business model. It was vital that he chose leaders that
would not only be able to buy into his vision, but who would also be great leaders in
their own right and be able to galvanize their employees in the achievement of the
turnaround. Tom and his senior leadership had to be values-based and had to lead by
example.
One of the key elements of Tom's first "Five Point Plan" was that of improving
transparency. This was not only related to transparency with regards to accounting
policies and reporting, which was also important, but more so with regards to employee
communications, specifically to the early days of the "Journey to the Top".
A variety of mediums were utilized to ensure that all levels of employees were kept
informed of strategic decisions being made which would undoubtedly affect morale and
confidence. A key of this was the "Talk to Tom" concept, a vehicle for employees to
share with Tom their concerns, fears and suggestions. This ensured that he was in touch
with what all of the employees were feeling and thinking, but also more importantly,
it opened the doors for employees to him and made him more accessible and the
relationship more personal. All great leaders are great communicators.
R120 Reeding 09 The Role of Strategy, Culture and Leadership in the Nedbenk Turnaround- The Tom Boardman Story When Its All Said and Done R121

Five keys to effective leadership which is indicative of an improvement in staff morale, and working towards the less than
1 A Leader Plans. 1 o per cent value would result in healthy functioning of the organization.
The Nedbank Staff Survey (NSS) was another annual survey used to measure the staff
2 A Leader has a Vision. morale of the organization. There ere 12 dimensions measured, with an "Overall" value
3 A Leader Shares His or Her Vision. also tracked which is a composite of all the dimensions. All of the dimensions showed
4 A Leader Takes Charge. major improvement since 2005, some as high as 38.7 per cent, and overall the score
improved by 26 per cent. Staff morale had indeed turned for the better.
5 A Leader Inspires Through Example.

When it's all said and done

Measurement and tracking ' ' There is no miracle moment. Incremental wins in a common direction will
A strong culture is said to exist where staff respond to stimulus because

''
of their alignment to organizational values. In such environments, strong
cultures help firms operate like well-oiled machines, cruising along with
outstanding execution and perhaps minor tweaking of existing procedures
here and there.
Dean McFarlin ' '
I t has been said that "what cannot be measured, does not count". This is also applicable
in the areas of cultural change, transformation, and staff morale. These dimensions
in particular were carefully monitored and tracked on a monthly and annual basis by
Nedbank. All of these dimensions have shown marked improvement, year on year.
If you are losing good people, look to their immediate manager. Immediate
restore Nedbank to a highly rated & respected financial institution ' '
Tom Boardman, 2004
om Boardman's time at Nedbank can be described as one where success has been
T achieved in the face of extreme adversity. This adversity included negative market
sentiment, low staff morale, a dysfunctional organizational culture, no clearly articulated
vision and strategy, and a low confidence level in the senior leadership of Nedbank.
The effective turnaround of Nedbank happened as Tom had promised: at the end
of the first cycle of the three-year planning process. The "hard" target measures of
20 per cent ROE and 55 per cent cost-to-income ratio were delivered and celebrated. But
all of this would not have been possible without strong leadership, a determination and

'' manager is the reason people stay and thrive in an organization. And
the reason why people leave. When people leave they take knowledge,
experience and contacts with them, straight to the competition. People
EXHIBIT 1 Dagwood 2004

- To become Southern Africa's most highly rated and respected bank...

...by our staff, clients, shareholders, regulators and communities.
= DEEP GREEN
leave managers not companies.

''
GtHt pt.ce to war•
Marcus Buckingham
Gr. .t pJa<e to bonl< Gre1t place to lrwetl

In order to track alignment of employee's personal values versus current UnloHhlnv •Y""VI" World-clue at managing rial< Communhy of leaden

organizational culture values versus desired organizational culture values, Tom enlisted
the help of Richard Barrett. In his annual Barrett Surveys, which have seen the number
of respondents in 2005 increase from 1827 (or 20 per cent of employees) to 18 206
(or 63 per cent of employees) in 2009, the number of matches of culture dimensio s
increased (between current culture to desired culture) steadily over the years, from
3 matches to 6 (out of the top 10 dimensions selected). This was indicative of an
organizational culture shift in a positive direction, aligning what employees wanted to
Strategic ROCOYary • Tumoround Offlc9
see from the organizations culture, to what it actually experienced of the organization.
DrMltron- Altgn thl- orgenlallon
Another important element of the Barrett Survey is that of the measurement Beyond
icqu:~,~~\ ~':~,onf
1 Build a high Optlmlzo mix to• •vn•rg•st5c
trontformmlon
(group. oogmoot and d 1ent.dtlven
of Entropy, which is a measurement of the degree of dysfunctionality within petfotmance cufturt
lfSC. """"""""~"
::..""""'~) product)

~--·
buolnosamodol I

an organization's culture. A less than 10 per cent value is a healthy functioning

organization. The best employers have the lowest entropy, and the employers with the Bod<tobaoicl full tpOCtrvm bantlnv ~hern Africa focu1

lowest entropy also have the highest financial returns (Hewitt Associates & Barrett Values
Centre, 2008). In 2005 this value stood at 25 per cent, which meant that there were
significant problems requiring attention. In 2009 the value almost halved to 13 per cent,
°"··- lnlogrity
 R122 Reading 09 The Role of Strategy, C:uhure end leadership in the N1db1nk Turnaround-The Tom Boardman Story When Its All Said end Done 8123

conviction to change the culture and values, and more importantly, to win the support
EXHIBIT 4 Entropy improvement
and belief of not only the outside investor community, but of all employees.
25%
EXHIBIT2 Nedbank staff survey
20% i..-
25% I -~ -
-
Overall
75. 1 (+26.0%1 .__ 19% ..........
Rewards, Recognition 15%
~

11,.. I -- - 13% -
& Performance ...
64.71+32.
10% - - I--
14%
-

5% i..-
- - '--
-
0%
·- ~ ~
- I

2005 2006 2007 2008 2009

Entropy Risk Bands
< 11>%: Healthy functioning
Relationships & Trust 10% -19%: Some problems requiring careful mo nitoring.
21>% - 29% : Slgn!flcant problems requiring attention.
30% - 39% : Crisis situation requiring immediat e change.
Above 41>% : Impending risk of implosion, bankruptcy, or failure.
Operational Culture & 79.61+18.6%}
Communication
Values
75.3 (+ 19.0%)
1 1
Training &
Development

- 2005 - 2006 - 2007 - 2008 EXHIBIT 5 Improvement in business ratios

6,000
72.5% 71.8%
EXHIBIT 3 Ned bank transformation-employment equity
The increasing represantitvity of Black employeei at Nedbank.

74%

3,000 40o/i.

21.4% 20. %
8.6%

______________________, oo/o

o
'
-
-
.
.
.
_
~
.
.
.
,
,
_
Rm 2003 2004 2005 2006 2007 2008

Headline Earnings - ROE - Efficiency Ratio

Senior Middle Junior Total

Management Management Management Management

2004 • 2005 • 2006 • 2007 • 2008

- 2008 Targets
 PART 06
Cases in Crafting
and Executing
Strategy

C1
 Case 01
Robin Hood
Joseph Lampel
New York University

I t was in the spring of the second year of his insurrection against the High Sheriff
of Nottingham that Robin Hood took a walk in Sherwood Forest. As he walked he
pondered the progress of the campaign, the disposition of his forces, the Sheriffs recent
moves, and the options that confronted him.'
The revolt against the Sheriff had begun as a personal crusade. It erupted out of
Robin's conflict with the Sheriff and his administration. However, alone Robin Hood
could do little. He therefore sought allies, men with grievances and a deep sense of
justice. Later he welcomed all who came, asking few questions and demanding only a
willingness to serve. Strength, he believed, lay in numbers.
He spent the first year forging the group into a disciplined band, united in enmity
against the Sheriff and willing to live outside the law. The band's organization was
simple. Robin ruled supreme, making all important decisions. He delegated specific tasks
to his lieutenants. Will Scarlett was in charge of intelligence and scouting. His main job
was to shadow the Sheriff and his men, always alert to their next move. He also collected
information on the travel plants of rich merchants and tax collectors. Little John kept
discipline among the men and saw to it that their archery was at the high peak that their
profession demanded. Scarlock took care of the finances , converting loot to cash, paying
shares of the take, and finding suitable hiding places for the surplus. Finally, Much the
Miller's son had the difficult task of provisioning the ever-increasing band of Merryman.
The increasing size of the band was a source of satisfaction for Robin, but also a
s ource of concern. The fame of his Merryman was spreading, and new recruits were
pouring in from every corner of England. As the band grew larger, their small bivouac
became a major encampment. Between raids the men milled about, talking and playing
games. Vigilance was in decline, and discipline was becoming harder to enforce. "Why,"
Robin reflected, "I don't know half the men I run into these days."
The growing band was also beginning to exceed the food capacity of the forest. Game
was becoming scarce, and supplies had to be obtained from outlying villages. The cost
of buying food was beginning to drain the band's financial reserves at the very moment
when revenues were in decline. Travellers, especially those with the most to lose, were
now giving the forest a wide berth. This was costly and inconvenient to them, but it was
preferable to having all their goods confiscated.

--
Copyright-- --by--------------------
e 1991, Joseph Lampel.
C4 C111H 01 Robin Hood
Robin Hood CS

Robin believed that the time had come for the Merryman to change their policy a A rundown of the issu es he needs to address
of outright confiscation of goods to one of a fixed transit tax. His lieutenants strongly
b An appropriate action plan that includes
resisted this idea. They were proud of the Merrymen's famous motto: "Rob the rich
and give to the poor." "The farmers and the townspeople," they argued, "are our most - a mission,
important allies. How can we tax them, and still hope for their help in our fight against - a set of performance objectives,
the Sheriff?"
- a strategy for dealing with the issues/problems he confronts, and
Robin wondered how long the Merryman could keep to the ways and methods of
_ the action s teps that will need to be taken to implement the strategy
their early days. The Sheriff was growing stronger and becoming better organized. He
effectively.
now had the money and the men and was beginning to harass the band, probing for
its weaknesses. The tide of events was beginning to turn against the Merryman. Robin Please provide supporting analysis and persuasive argument for your recommended
felt that the campaign must be decisively concluded before the Sheriff had a chance to course of action (you must convince him to do what you suggest!) and you need to be
deliver a mortal blow. "But how," he wondered, "could this be done?" specific about what to do and how to do it.
Robin had often entertained the possibility of killing the Sheriff, but the chances
for this seemed increasingly remote. Besides, killing the Sheriff might satisfy his
personal thirst for revenge, but it would not improve the situation. Robin had hoped
that the perpetual state of unrest, and the Sheriff's failure to collect taxes, would lead
to his removal from office. Instead, the Sheriff used his political connections to obtain
reinforcement. He had powerful friends at court and was well regarded by the regent,
Prince John.
Prince John was vicious and volatile. He was consumed by his unpopularity among
the people, who wanted the imprisoned King Richard back. He also lived in constant fear
of the barons, who had first given him the regency but were now beginning to dispute his
claim to the throne. Several of these barons had set out to collect the ransom that would
release King Richard the Lionheart from his jail in Austria. Robin was invited to join
the conspiracy in return for future amnesty. It was a dangerous proposition. Provincial
banditry was one thing, court intrigue another. Prince John had spies everywhere, and he
was known for his vindictiveness. If the conspirators' plan failed, the pursuit would be
relentless, and retributions swift.
The sound of the supper horn startled Robin from his thoughts. There was the
smell ofroasting venison in the air. Nothing was resolved or settled. Robin headed for
camp promising himself that he would give these problems his utmost attention after
tomorrow's raid.
1 As Robin Hood's most trusted adviser (and as someone knowledgeable in t$ ways
of crafting and executing effective strategies), please prepare an action plan for
Robin Hood's consideration. It is your job to convince him to pursue your proposed
plan; hence your report should include full justification and arguments to support
your recommended course of action.
2 Since you are Robin Hood's most trusted adviser and are most knowledgeable about
crafting and implementing effective strategies, he has called upon you to advise
him on how to proceed in light of the situation. Within the next few hours, Robin
Hood expects you to provide him with:
 The Grupo Modelo Story; Built to be a Local Leader C7

Case 02 EXHIBIT 1 World's top 1D beer brands, 2005 end 2006 (millions of barreJs-shipmentsl

Brands 2005 2006 20D6Market

Corona beer: From a local 8t1d Light 39.3 41.1

Shara
3.0%

Mexican player to a 3
4
2 Budweiser
Skol
Snow
34.6
27.9
13.5
33.7
23.6
25.3
2.5
2.1
1.9
global brrand 5
6
Corona
Brahma Chopp
24.5
20.6
25.6
21.6
1.9
1.6
Ashok Som 7 Heineken 20.D 21.4 1.6
8 Miller Lite 18.2 1a2 1.3
ESSEC Business School
9 Coors Light 16.5 16.8 1.2
10 Asahi Super Dry 15.D 1!! ...1L
Total top 10 229.9 247.6 18.2%
Sourcu Grupo modelo annual report. 2007.

I t's a typical Friday afternoon in 2007, and Carlos Fernandez, chairman of Grupo
Modelo's board since 1997, was making an unexpected stop at one of his company's
brewing facilities in Zacatecas, Mexico, where the plant was going through major
renovations to increase capacity. Grupo Modelo S.A. de C.V. (Modelo) was Mexico's
largest beer producer and distributor. It was expanding production capabilities across
the board. Among the company's many brands was Corona Extra, which had been the
world's fourth best-selling beer in terms of volume (see Exhibit 1 for world ranking}.
With an investment of more than $300 million to renovate its facilities, Modelo aimed to
increase production to face growing international demand. Carlos Fernandez clarified his
ambition soon after his appointment as CEO in 1997:
{I want] Modelo to leapfrog the competition and catapult itself into the
ranks of the world's top five brewers.
And they did that when Grupo Modelo surpassed Heineken for bragging rights as the
number one selling import in the United States in 1997. Yet competitors did not let that
happen without reacting, and Grupo Modelo soon faced tough times both in its domestic
market and abroad. • shares and became sole owner of the company in 1936, with financial help from Banco
How did Modelo build up its domestic power? How did it consider the attack on the
US market? Could the company sustain its success trend against competition? Those
were some of the questions analysts asked at the time.
- - - - - -- - - - - - - -- -- -~-~
This case was written by Ashok Som, Professor, Management Area at ESSEC Business School.
Tho author grat?fully acknowledges the contribution ofGooi:se M. Skarpathiotaltis, ESSEC MBA Exchange
student and Guillaume Poutrel. ESSEC MBA student for their research help. This case was based on
published sources and generalized experience. Jt was developed as n basis for class discussion rather
!~an .to illustrate either effective or ineffective handling of an administrative situation. Reproduction or
d1str!bution of this case is strictly prohibited without the prior permission of the author. To obtain reprints
of this case, ECCH Reference number 308-110-1, please contact the ECCH al http://www.ecch.com.
Cl 2010 Ashok Sam. All Rights Reseived.
C&
The Grupo Modelo story: Built to be a local leader
ervecerie Modelo S.A. was formed on March 1922, and officially opened its first
B
Cbrewery three years later, with a strategic aim to focus on Mexico City and the
surrounding areas. Modelo was the first brand to be produced by the group, followed a
month later by Corona.
Headed in the early days by Pablo Diez Fernandez, Braulio Iriarte, and Martin
Oyamburu, the company was soon controlled by Diez and Oyamburu after Iriarte died
in 1932. Under the operational direction of Diez, Cervecia Modelo started producing
Corona in clear quarter bottles in response to consumers' preference for clear glasses.
Diez oversaw the expansion of the group's brewing capabilities that would turn it into
Mexico's largest and most modern producer.
The 1930s were trying years for Modelo. After surviving the prohibition policy and
the death of the company's president during the early 1930s, Diez bought Oyamburu's
Nacional de Mexico. The company has remained under the majority ownership of the
Fernendez family ever since.
In 1935 once financial stability was restored to the company, Cerveceria Modelo
bought the brands and assets of the Toluca y Mexico Brewery. From then on, Victoria,
the country's oldest established brand of beer, would spearhead the company's fight to
dominate the popular market. With these acquisitions, the 1940s proved to be a period
of strong growth for the company, with production sky-rocketing as did its popularity.
While most Mexican companies were focusing on selling beer to the American army
for WWII efforts, Diez decided to concentrate domestically and improve distribution
methods and production facilities within Mexico.
As Mexico became industrialized, the country's infrastructure allowed for large-
scale distribution. The key element behind the rapid growth domestically during the
post-WWII era was a new way of distribution: direct with profit sharing.
Cl Casa 02 Corona Beer: From e Local Mexican Player to a Global Brand The Beer Market, a Progressive Consolidation CS

Modelo's sales were revolutionized by the idea of direct distribution with

the executive in charge getting a share of profits. A key element of this EXHIBIT 2 Tote I imported beers in the United States, 2006-2007 (thousands of casesl
second stage was specialized concessions, In other words, splitting beer
Brand 2006 2001•
from groceries and making it an exclusive business gave rise to direct
Corona Extra 116,155 ltS,060
distributors-sometimes run by the concessionaire or his successors, or 2 Heineken 68,790 68,100
sometimes by a person sent from head office, a traveling agent, supervisor, 3 Modelo 19,606 22,404
or manager who would be moved from area to area. 4 Teeate 17,480 19,050
5 Guinness 12.725 13,360
In 1971 Antonino Fernandez was appointed CEO of Modelo. He was the husband 6 Corona Light 11,056 12,207
of Pablo's niece. Under his control, Corona was listed on the Mexican Stock exchange 7 Labatt Blue 12,500 12,000
in 1994. At that time, Anheuser-Busch acquired 17.7 per cent of the equity and had an 8 Heineken Light 7,520 9,775
option to increase its ownership to 50.2 per cent over time. The 50.2 per cent represented 9 Stella Artois 6,175 8,335
10 Amstel Light 8,900 8,188
only 43.9 per cent of voting rights in order to preserve the ownership of the Diez family Total top 10 280,905 288,479
over Grupo Modelo S.A.
•Estimate.
Sourr:rr. Grupo Modelo's annual report, 2007.

A local leader going abroad

odelo's first entry into the US beer market came in 1979 with Corona distributed
M by Amalgamated Distillery Products Inc. (later renamed Barton Beers Ltd.). Due to
its non-refundable policy, its clear and unique bottle, and different marketing, Corona
quickly distinguished itself from the competition and gained popularity in southern
states. Corona's sales experienced rapid growth throughout the 1980s, and by 1988 it
had become the second most popular imported beer in the United States. It wasn't until
late 1991, with the doubling of federal excise tax on beer, that Corona's rise to the top
of America's import beer market was slowed considerably (a decrease of 15 per cent).
An important change in the pricing strategy by Corona's distributor, namely to absorb
the tax rather than pass it on to consumers, in 1992 rectified the downward trend, and
Modelo has experience increasing sales of Corona ever since.
In 1997, with his grandfather still chairman of the board and taking over for his
uncle, Carlos Fernandez was appointed the new chief executive office of the company.
At the young age of 29, Carlos encompassed all the attributes needed to take the
company into the new millennium. Not only had the young man dedicated h;imself
to the family business since he was 13, when he first started working at the company,
but he carried with him a vision of an international business model- one that had
the company expand internationally in order to capitalize on the newly introduced
North American Free Trade Agreement (NAFTA) and streamline the company's focus.
In just 12 years since his appointment, Carlos accomplished one of his more ambitious
goals of leapfrogging his international competitors to become one of the top five beer
companies in the world.
In 1997, at 37 years of age, Carlos Fernandez was named chairman when his
grandfather stepped aside. In 2007 Grupo Modelo was exporting five kinds of beer to
the United States: Corona Extra, Corona Light, Modelo Especial, Pacifico Clara, and
Negra Modelo. These exports represented 131 million cases in 2005 and three Grupo
Modelo brands ranked among eight firsts in the United States {see Exhibit 2 for detailed
rankings).
The beer market. a progressive consolidation
M odem beer was first brewed in Europe in the 14th century. The industry
developed differently in every country in order lo address local tastes and specific
recipes. This resulted in a clustered industry with many local breweries. The lack
of a transportation network made exportation impossible for centuries and brewing
remained a local and then a national domain for a long time. The first steps of national
consolidation were carried out in the 19th century in the United Kingdom and the
United States to achieve economies of scale. In other, smaller countries, with several
mid-size players, the consolidation process was lighter and local breweries survived
and became specialists. One determining factor behind the type of domestic beer was
the national taste of the particular country. Some countries have distinct cultural tastes,
where beer is not the alcoholic drink of preference. In countries such as Italy and France,
wine outperforms beer for consumption per capita, whereas in countries like Germany
and Ireland, the reverse is true. Whereas Italy and France have a few-national beer
brands, Germany and Ireland both have numerous medium brewing companies that are
well respected domestically and internationally.
In the 1990s a new phenomenon appeared whereby national leaders began expanding
abroad. For example, the Belgian company Interbrew acquired breweries in 20 countries
and expanded its sales to 110 countries, leaving local managers controlling the local
brands while enjoying their presence to develop sales of its flagship brand: Stella Artois.
This trend also might be due in the fact that initial startup costs of a brewery have always
been extremely high and the need for a constant cash flow for maintenance and the
fluctuating price of resources. That structure of the industry supported concentration.
Other companies followed the same strategy and the consolidation process led to
a small number of global players. On 3, March 2004, the world's third largest brewery
company, Belgiumwbased Interbrew, and the world's fifth largest brewery, Brazil-based
AmBev, announced plans to merge their operations. In a deal valued at $12.8 billion ,
the merger created the world's largest brewing company in terms of volume. In 2007
CtO C•H 02 Corona Beer: From a Local Mexrcan Player to 8 Global er11nd Grupo Modelo Expanding Abroad C11

that Anheuser-Bush could capture 75 per cent of the industry's total operating profits
EXHIBIT3 Top brewing companies (in millions of hectolitres) emphasized the volume effect in the industry.
Mexico, the world's 11th most populated country, was one of the largest beer markets
ln2DOO ln2005 in the world. This is impressive considering that Mexico is the birthplace and still home of
1 Anheuser-Busch- 121 1 lnBev-233.5 the most affluent tequila market in the world. For a country that hes a large proportion of its
2 He.neken- 74 2 Anheuser-Busch-152 alcoholic industry split between beer and another beverage, Mexico is an anomaly
3 Ambev-63 3 SABMiller-135
considering the variety of beers it hes to offer. Mexico hes a large variety of brands with
4 Miller Brawing-53 4 Hemeken-107
5 SAB (South Africa Brewerias)-43 S Carlsberg-78 8 vast array of testes, from the darker and more sophisticated tastes of!Dos Equis to the

6 lnterbrew-87 6 Scottish & Nawcastla-52

the panorama of the brewing industry was clear, showing the top players es lnbev,
Anheuser-Bush, SABMiller, and Heineken ranking as the market leaders. See Exhibit 3
for the top six global producers as of 2005.
Key world markets
T he United States had the largest beer market in the world until China surpassed
it in 2003. Yet the consumption per capita remained almost six times higher
in the United States than it was in China at the time (see Exhibit 4 for global beer
consumption). The growth expectations were significantly reduced in the United States,
but performance was not consistent across the clusters.
The top three breweries controlled almost ao per cent of the US market, with
45 per cent for Anheuser-Busch, 23 per cent for Miller Brew and 10 per cent for Adolph
Coors. That being said, 300 breweries remained in the country thanks to a dense network
of regional craft brewing. These companies struggled to find profitability since vertical
integration and economies of scale were the main drivers to operating margins. The fact
light end citrus flavor of Corona. However, even with this diversity, the market is essentially
8 duopoly split among two producers with very few microbreweries. Those two companies
are Grupo Modelo and FEMSA. In 2007, Grupo Modelo captured 62.8 per cent of the
Mexican market (compared with 50 per cent in 1989) and FEMSA owned the rest of the
market.
In addition to owning the main beer brands of the domestic market (Corona, Dos Equis,
and Sol) FEMSA and Grupo Model had built up strategic alliances with some major
distributors that were enjoying the NAITA environment. Grupo Modelo could enjoy
the link with Anheuser-Busch to broaden its international impact, while FEMSA was
distributing Coca-Cola products in Mexico and decided to have a partnership with Heineken
to attack the US market. To sum it up, the two Mexican players decided to attack the US
market but could not do it alone considering entrance barriers. FEMSA's CEO presented it this
way in 2006:
"It was an exceptional year for exports. We continued to attract new
consumers, and our volume growth exceeded expectations, up to 15.3%.
Through our distribution agreement with Heineken USA, we significantly
expanded our bmnds' availability and developed our bronds' value across
our U.S. market territories."

EXHIBIT 4 Beer consumption around the world

Grupo Modelo expanding abroad
Corona and the early successes
Since its entrance into the American beer market, Corona built a marketing campaign
around the idea of "fun in the sun." A myth surrounding the beer was that it was
\ discovered by Californian surfers while traveling the Mexican Pacific coast looking for the
) next big wave. Amid mixed reviews among beer enthusiasts, Corona's ascent to stardom
could be attributed to its brilliant and unique marketing campaign which was a direct
result of the international strategy undertaken by Grupo Modelo when it expanded into the
Beer cansumpclon US. While continuing to produce the beer domestically, Modelo entered into distribution
lin heclolilresl
contracts with companies that had local knowledge of the market and gave them autonomy

!
150-
125-U9.9 to market the product fittingly, yet maintained an active involvement in the decision
100-124.9
75-999 making. The result was the rise of Corona from e beer sold primarily in the states bordering
50-74 9
- 499 Mexico, to the number one imported beer in America. An analyst underlined:
QNodato
"In recognition of the outstanding performance of Corona, Modelo Especial
Saurcir b:tp;Jlu!)fotO vrkfmld11 QrVdiotililltomngas.'\lnt!Aip cl WSJdd W wprld by bee: c:ms.nnatjgp G"CI· and Negro Modelo in the U.S. import segment, they have been included in
Nattr. Chinese beer consumption was allegedly 16 litres in 2003. Impact Magazine "Hot Brands" list. This happened ten times in the last
eleven years."

C12 c118 02 Corona Beer: From a Local Mexican Player to a Global Brand
International expansion tlirough competitive distribution channels
hen Corona first entered the American beer market, it chose Chicago-based Barton
W Beers Ltd. as its distributor. According to Modelo executives, the choice to align
itself with Barton Beers was an easy one because it was the largest beer importer in the
25 western states and was experienced in the marketing and sales of imported, premium
beers. It was through Barton that the marketing image of "fun in the aun" was born. In
1986, to continue its growth within the US and to supply the eastern states, Modelo
decided to select a second distributor, Gambrinus Inc. , which was headed by a former
Modelo executive. Each company was responsible for its own 25 states and according to
Valentin Diez, Modelo's vice chairman and chief sales officer:
"There was a healthy competition that existed between th e two of them,
even if they didn't cover the same geographic area."
Modelo's agreement with its distributors was that each importer would be responsible for
essentially all activities involving the sale of the beer. except its production, which took
place in Modelo factories in Mexico. Everything including transportation of the beer,
insurance, custom clearance, pricing strategy and creativity of the advertising campaigns
were the importers' responsibility. Although the importers were essentially autonomous
to make these decisions, Modelo always took an active role in the decis ion making and
maintained the final say on anything involving the brand image of its beers. In order to
oversea all operations in the US, Modelo set up Procermex Inc, a subsidiary whose sole
purpose was to coordinate, support and supervise the two distributors. The ~trength
of the relationship between the importers and Modelo was very strong, as evidenced
with the tax increase in 1991. After talks with Modelo, Grambrinus, followed shortly by
Barton Beers, decided to absorb the increase instead of passing it on to customers (while
all other imported beers did) after being reassured by the Mexican producer that they
would be subsidized.
Marketing, the other key leading to success
ronically, the key of Modelo's success _had be~n for~seen by .th~ main casualty of that
I success story when Michael Foley, Heineken s president, said m 1993:
"There's no mystery about brewing beer. Everyone can do it ... Beer is all
marketing. People don't drink beer, they drink marketing."
Corona's ingenious marketing philosophy, which was born out of Modelo's
international expansion strategy of giving autonomous control to experienced local
distributors, focused on "fun in the sun" and quickly saw Corona in an ever-increasing
number of bars and restaurants in the United States. The marketing campaign's
distinguishing feature was that it did not focus on the classical target market for beer
drinkers, which were males between the ages of 25 and 45. Campaigns geared toward
this target market had historically been testosterone driven, focused on attractive women
and party scenes. Premium imported beers differed slightly as they focused on the beers'
distinguished quality, usually as a result of superior brewing and rich heritage.
Corona did away with this status quo. It needed to develop an image of a beer that
would attract everyone, yet position itself as a premium import, necessary due to the
~---------------......-
The 21st-Century Challenges C13
import taxes and resultant higher price paid for the beer. With the "fun in the sun"
campaigns, it sold the idea of escape and the idea of leaving behind everyday life for one
that is relaxing. Whereas taste and quality are subjective and different for each consumer,
general guidelines and surveys consistently and accurately show quality brewing
standards. Undeniably, images of escape, enjoyment and relaxation are even more
(ree·form, allowing the customers to make what they will about the image of the brand.
From the beginning, Corona's advertising accented this image as it focused on
minimalist and often humorous, scenes of escape. Common to all advertisements was
that these scenes of escape come in the form of relaxing on the beach. The advertisements
never had a lot of action (in fact, most had little to no human action), and if there were
people enjoying their time at the beach, their faces were never shown. The Corona bottle
was always in the centre of the screen, with no soundtrack other then the sounds of the
sea and surrounding nature.
The most recent advertising slogan ("Miles away from ordinary"! associated with
Corona continues to conjure ideas of removing oneself from daily activities. In one
advertisement, the scene shows a person relaxing by the beach on a slightly rainy day.
In order to protect his Corona, he places his cellular phone above the bottle's neck so
as not to allow water to drip in. By focusing on this image of escape, and not following
the trend of testosterone-driven campaigns. Corona found a following like no other
beer before it. Coupled with the fact that it had an unobtrusive or bland taste (a fact
that beer enthusiasts continue to laud). Corona was able to get the non-beer-drinking
population to drink beer, specifically, females. Eager to please the new market for
beer drinkers, bars and restaurants decided to sell the beer, increasing its consumer
reach. And because of its availability, it became a dependable second choice for beer
drinkers who were frustrated with not having their favourite beer sold at the current
establishment.
A good advertisement is not enough without the budgets to broadcast it widely.
In 1996 Modelo spent $5.1 million in the United States, compared with $600 000 in
1985. Yet the same year Heineken spent $15.1 million and Anheuser-Busch spent
$192 million. It must be precised that in the case of imported beers, advertising costs are
shared by the producer and its distributors, the repartition being negotiated according to
the campaign. Considering the performances of Heineken and Corona in 1996, the impact
of the message was able to overcome a relative financial weakness.
The 21st-century challenges
G rupo Modelo had rarely played the role of the established brewery, or having
one of its brands define a category. Even from its entrance into the Mexican beer
market in 1925, it was a start-up company that sought to focus on Mexico City and the
surrounding areas, competing against the already established breweries for market share.
When Corona was introduced into the international market, more specifically the US
beer market, it paled in comparison to the then-established import leader, Heineken.
However, this status as the beer industry's underdog soon shifted.
Since 1997 Corona has been the best-selling import beer in the United States. In 2004
Corona outsold the former number one by about 50 per cent. And with a 56 per cent
market share of the domestic Mexican market, Grupo Modelo is the undisputed leader
C14 C1n 02 Corona Beer: From a Local Mexican Player to a Global Brand The 21st-Century Challenges C15

in one of the world's largest beer markets. And this success can be seen worldwide as Supplementing its beverage portfolio is the fact that FEMSA is the exclusive distributor
well. Not only is Corona Extra the fourth best-selling beer in the world (by quantity) but of Coca-Cola products in Mexico and Central America.
Grupo Modelo is one of the top 10 biggest breweries in the world. The investment in a quality beer product, associated with the ownership of the
complete distribution channel, has paid off with respect to the Mexican beer market.
Remain Mexican leader .•. From 1997 to 2004 FEMSA continuously took more of the domestic beer market for
Grupo Modelo. More significant is the fact that while domestic sales were decreasing for
According to surveys, the top seven best-tasting beers in Mexico are produced by a
Modelo, FEMSA continued to experience steady growth which was in line with industry
subsidiary of FEMSA, Mexico's second largest beer company in terms of market share
averages.
(see Exhibit 5 for details). Until recently, FEMSA had been a distant second in the
However, despite FEMSA's strength in the domestic market, it did not experience the
duopoly that is the Mexican beer industry.
same in the international arena. FEMSA beers are not nearly as popular as Modelo's in
In an industry so heavily dependent on distribution channels. FEMSA decided the United States. It launched a large marketing campaign in the mid-1990s, but failed
it wanted to control its beer from production to point of purchase. Not only did to capture the imagination of the American customers and barely made an impact on the
FEMSA produce all its beer domestically in Mexico, but it also owns Oxxo, Central market. However, as economic conditions of the company improved, FEMSA decided to
America's largest chain of convenience stores (and one of the biggest in North America). re-attempt to mass-market its beers north of the Mexican border. FEMSA recently entered
into a marketing agreement with Heineken USA. With the expertise of one of the largest
EXHIBIT 5 Taste test results for Mexican beers and most recognizable brands in the market leading the charge, FEMSA (and Heineken)
The following ere the highest rated beers brewed in Mexico as they appear in the ranks et BateBeer.cpm.
hoped to dethrone Corona as the best-selling import in the United States. So far, exports for
A minimum of 10 ratings is required to make the list Beer scores ere weighted means so that more ratings for FEMSA's top three beers have greatly improved; in the 3rd quarter of 2005, the company
11 beer increase the score's tendency to the bee(s actual mean. realized an 18.7 per cent growth in exports mainly driven by the US market's demand.
Name Brewar Ratings
Although Mexico's domestic beer market is one of the largest in the world, Carlos
Score
Fernandez knew that the future of Grupo Modelo was to go international. Mexico had
1 Caste Unica Especialidades Cerveceras {FEMSA) 29 3.61
2 Caste M1lenie Especialidedes Cerveceres (FEMSA) 73
the most trade agreements than any other country in the world, and the introduction of
3.59
3 Cesta Urilc e Castana Espec1alidades Cerveceres IFEMSAI 17 3.48
NAFTA in 1994 further reinforced the vision for Mexican companies that they had to
4 Caste Morena Especialidades Cervaceres (FEMSA) 142 3.45 have a global focus. However, with the opening of the international markets for Mexican
5 Caste Dared e Especialidades Cerveceras (FEMSA) BO 3.13 companies comes the fact that the Mexican markets are also open to international
6 Caste Bruna Especialidades Cerveceras (FEMSA) 105 3.12 companies. Specifically, with NAFTA and the beer market in Mexico, the newly
7 Potra Cerveceria Mexicano S.A. De C.V 18 3.09 introduced agreement opened the door for Canadian and American beer companies to
8 lodio Femsa 18 2.86
9 Casta Triguera Especielidadas Cervaceras (FEMSA)
operate in a previously highly protected market. Although their domestic market was
89 2.83
to Noche Buena Femsa 24 2.83 now threatened by international companies, the years following 1994 showed that
11 Negra Modelo Grupo Modelo (Corona) 618 2.82 imported beer accounted for only 1 per cent of beer sales in Mexico. Of that, half were
12 Dos Equis XX Amber Femsa 616 2.55 sales from Anheuser-Busch products, which is, distributed by Modelo. (Although the
13 Leon Nagre Grupo Modelo (Corona) 21 2.55 Fernandez family is still the primary stock holder of the company, Anheuser-Busch
14 Victoria Grupo Modelo (Coronel 23 2.42
15 Bohemia {Mexicol Femsa
has a significant stake in the company, owning 50.6 per cent of the available stock.)
252 2.41
16 Dos Equis XX Special Leger Femsa 405 2.24 The volatility of the Mexican economy was another reason to seek international
17 Superior Femsa 25 2.15 markets for stability. With the devaluation of the Mexican peso in 1995, exporting
18 Pacifico Clara Grupo Modelo (Coronal 350 2.13 became increasingly expensive, which led to a large decrease in sales. By having more
19 Montejo Grupo Modelo (Coronal 19 2.10 operations internationally, Modelo would be able to rid itself of the dependency on the
20 Modelo Especial Grupo Modelo (Corona) 226 2.01 unstable peso for its profits. The proximity to the world's largest economy and the size
21 Carte Blanca Femsa 154 2.01
22 Tee ate Femsa 369 1.86
of its beer market offered an opportunity for Modelo to create a beachhead for further
23 Corona Extra Grupo Modelo (Corona) 1245 1.72 international expansion.
24 Sol Femsa 318 1.67 Whereas Modelo sought to hedge its risk against the devaluating peso by pursuing
25 Chihuahua Femsa 17 1.65 international revenues, FEMSA went about doing the same by focusing on its core
26 Tacata Light Femsa 12 1.49 competency within Mexico. With the failed attempt to gain American market share in
27 Corona Light Grupo Modelo {Coronal 300 1.35
the 1990s, FEMSA realized it had a competitive advantage in Mexico through its
Sourer www.a111b11t 'gllllBalloulfggBH~B~CgualO! mZCg11alO!lll 133. distribution channel, namely OXXO, its chain of convenient stores. By owning the
complete distribution channel for its different brands (therefore not having to exchange
Ct& Casa 02 Corona Baer: From 11 Local Mexican Player to a Global Brand
currency to transport or sell its products}, coupled with the fact that its beers were
made domestically, FEMSA's profits would not be significantly affected by a devaluated
currency. Helping to stabilizing the company was the fact that it had the exclusive rights to
Coca-Cola in Mexico. By distributing one of the most desired brands in the world, FEMSA
held in its portfolio a brand that would not be susceptible to economic conditions.
... to be a global player
Since the end of prohibition in the United States in 1935 and the introduction of imported
beers shortly thereafter, the Dutch import Heineken was the undisputed best-selling import
in the United States, which was consistent with its reputation for being among the top·
selling beers in the world. Heineken did not see the introduction ofModelo's Corona in the
United States in 1979 as threatening to its market share, nor did it see that Corona could
eventually compete with it for pole position as the best-selling import. In fact, Heineken
executives mocked the golden beer, saying it was nothing more than a novelty drink.
Like Modelo, Heineken decided that it would produce all its beer domestically in
Holland and export to foreign markets. In contrast, Anheuser-Busch produced its beers in
the foreign markets. Heineken did invest locally in its distribution channels as contracts
were signed with local distributors for functions such as importing, distribution, and
marketing. However, even here, Heineken headquarters remained in control as the
companies that had the contracts were owned and operated by the Heineken parent
company. This was the case in the United States, where Heineken USA (formerly known
as Van Munching & Company) had the distribution contract for the Dutch beer but was
owned and ultimately operated by executives from Holland.
Heineken's reputation throughout the years was built around marketing campaigns
developed on positioning the beer as a premium import with superior taste. Because
imports were subject to import taxes, distributors usually passed this tax on to their
consumers to protect their profit margins, necessitating the need for the image of a
premium product. To create this premium image, advertising for Heineken almost always
focused on its superior quality, with little attention devoted to any other aspect of its brand.
However, this narrow-sighted vision of the beer eventually opened the door to other
competitor, such as Corona, to create innovative campaigns that created more intangible
myths surrounding their beers. By 1996 Corona had reached an import volume that was
almost equal to Heineken's. Its "fun in the sun" advertising campaign paid no attention
to taste.
Even Heineken's executives realized this issue. In reference to their declining sales in
the 1990s, the new head of Heineken USA decided the company needed a new approach
to marketing. Foley said:
There aren't many brands with myths in any segment of business. I think
Heineken has a myth ... that's almost intangible.
He continued to say that all that was needed was for Heineken to market that myth
differently than they had in the past in order to turn the tide of decreasing sales. Over
the next few years, Heineken repositioned its image through its marketing. After a few
failed attempts at harnessing what they thought were their strengths in their brand image,
i.e., focusing on the red star as the focal point of the brand, market share continued
Future Challenges C17
to decline, and in 1997 Corona surpassed Heineken as America's top imported beer.
This trend continued with Corona's import volume through 2003 growing at a double-
digit pace, and in 2004 it outsold Heineken by 50 per cent. However, Heineken was
determined to become number one again with respect to the US market and had
approved a new marketing budget that would see an aggressive campaign in the United
States, Results came soon, and in 2006 the CEO could assert:
In particular, our growth has been driven by the USA, where the
introduction of Heineken Premium Light has made a major contribution to
overall performance.
Future challenges
n 2007 Corona was Mexico's best-selling beer, the top-selling imported beer in the
I United States, and the world's fourth best-selling beer. It propelled Modelo into the
elite class of being among the top 10 beer producers in the world. Grupo Modelo's
CEO could proudly claim in the annual report (see Exhibit 6 for financials of Grupo
Modelo):
Grupo Modelo is a growth company. Net sales have risen 7.8 per cent on a
compounded basis over the last 10 years, demonstrating solid performance
in the domestic market and the growing export market year after year ...
The total volume of beer sold in 2005 was 45.5 million hectolitres, an
increase of 6.4 per cent compared with the previous year. This reflected
growth of 4.0 per cent in the domestic market and 12.3 per cent in the
export market, Export sales comprised 30.2 per cent of total volwne for the
year, compared to 28.6 per cent in 2004.
This feat was accomplished by Modelo as it sought to expand internationally through
smart strategic partnerships with experienced distributors that knew the local market,
and wisely differentiated Corona from other imported beers through its marketing.
But faced with increasing competition domestically and internationally as other top
international brands gained momentum by spending more on media budgets. Corona's
sales were decreasing domestically and in the United States. Corona's position as the
world's most recognizable Mexican beer was becoming threatened.
Yet organic growth seemed to have limits, and global players aimed at more
spectacular moves, as the Financial Times revealed on April 2:
There was one question on everyone's mind when Carlos Brito. InBev's
chief executive, presented the brewer's annual earnings last month-was
the group in preliminary merger talks with US rival Anheuser-Busch? Such
an alliance would form a brewing colossus with more than one-fifth of the
world beer market by volume and could transform the sector.
Rumors of mergers and acquisitions deals in the beer industry are a
dime a dozen at present amid speculation that mid-tier brewers such as
Anheuser, Scottish & Newcastle, Carlsberg, Heineken, and Molson Coors
will all be forced to consolidate to compete with industry behemoths InBev
and SABMiller, which have been expanding globally.
C1B Cesa 02 Corona Beer: Fram a Local Mexican Player to a Global Brand

EXHIBIT & Grupo Modelo's financial highlights, 2004-2005

Grupg Modflla: S.A. de C.Y. and subsidiaries figures in millions of constant Mexican pesos as of 31 December 2005 except sales
al baer, per shtre data and employees.
Case 03
2005
Year ended December
2004 Change
MTN in Nigeria:
Sales of beer (millions of hectolitresl
Domestic market 31.80 30.59 4.0%
12.3%
Exceeding expectations
Export market 13.74 12.23
62.82 6.4% Andre Parker
Total market 45.54
Net sales 49,551 46,307 7.0%
Gross profit 26,776 26,082 2.7%
Operaling income 13,773 13,588 1.4%
Net majority income 7,291 6,389 14.1%

Total assets 80,281 75,914 5.8%

Total liabilities 12,169 13,075 -6.9%
Majority stockholder's equity 52,365 48,283 8.5%

Funds provided by operating activities 10,292 10,486 -1.9%

EBITDA 15,817 15,418 2.6% NIGERIA
Capital expenditures 4,027 4,444 -9.4%
Return on equity 13.9% 13.2% DAblljl
Outstanding shares at year end (millions) 3,252 3,252 0.0% oOgbomosho
Earnings per share 2.24 1.96 14.1% Olbadan
17.8% ... 0-
Dividend per common share 1.07 0.91 Lagos
Closing stock price 38.50 30.66 25.6%
PcntHa~urt CAMEROON
Number of employees and workers 40,617 44,591 -8.9% GulfofGurneg

Hence, many expectations and challenges were in store for Grupo Modelo, which
had to face its new status on the market in order to make its success story a Nigeria today
sustainable one. Overview
References Nigeria is Africa's most populous country with 132 million inhabitants, of whom
1
44 per cent are under the age of 44 and the annual population growth rate is 2.3 per cent.
"Mexico: 'Distrust' in Light Beers", Probrewery.com. 17 Sept. 2004. http://probrewezy. GDP currently stands at around $100 billion per annum, with real growth of
com/news/news-002325.pho. 4,2 per cent per annum averaged over the decade ending 2005. In more recent times the
2
"U.S. Free-Trade Law Seen Aiding Mexican Beers; Cinqo de Mayo Highlights economy has been boosted by oil revenues which have exceeded $50 billion per annum,
Popularity of South-of-the-Border Brews." MSNBC.com. 5 May 2005. http://msnbc. resulting in increased GDP growth to the 6-8 per cent range.
msn.com/id/7746223. After the turbulent years of the late 1990s when the country was ruled by military
3 http://www.baramerica.com/bsreview/lager/014.html. dictatorship, Nigeria has made considerable progress on the road to democracy, with last
year's elections proceeding relatively freely and fairly (and peacefully) by Nigerian standards.
4
Raul Beamish, and Anthony Goerzen. "The Global Branding of Stella Artois", Ivey
Management Services (Ivey Publishing), London. Reference #: 9BOOA019.
Politics
5
ClA Fact book: Mexico. http://www.ciafactbook.com. On 21, April 2007 Nigeria held presidential elections , marking the first time in
Nigeria's history that the country passed control from one civilian government to
0 2010 Ashok Som. All Rights Reserved.

C19

c20 c... D3 MTN m Nigena: Exceeding Expectations
oo7 Umar Musa Yar'Adua took over as president of the
ano ther. 0 n the 29 tvfnY 2 • , · 1 ·
ad under a cloud of opposition parties challenge to his e action
country and labour , h h ·
. bis term thus far President Yer Adua has placed eavy emp as1s on
VJctory. Dur.in8
Jding of the rule of law and the ehmmahon o corrup on m iger1a •s publ.ic
• · . . . f ti' • N' · 2010.
t h e up h 0
!lervici:i.
Nevertheless, given Nigeria's relatively high levels of poverty and diverse ethnic
and religious mixes, the present administration continues to face major challenges in
addressing the fundamental needs of the population. A challenge that will continue to
dominate the political landscape is the unrest in the Niger Delta as well as the lack of
infrastructure development within the energy sector.
Economics
Oil accounts for 95 per cent of exports by value and 80 per cent of government revenue
in Nigeria. With current output at 2.3 million barrels per day, set to rise to 4 million
barrels per day by 2010, Nigeria is now the world's eighth largest exporter of oil.
Nigerian authorities are expected to spend US$15 billion on further exploration over
the next five years. Recent developments in the liquefied natural gas sector have led to
a production boom with revenues set to reach US$12 billion by 2009, and expected to
overtake oil revenue within a decade. Although there is great potential in the agricultural
and solid minerals sectors, these and all other sectors beyond oil and gas have been
underdeveloped in recent decades.
President Yar'Adua's new government is expected to announce a detailed economic
policy document in the near future. This new policy is unlikely to differ greatly from the
National Economic Empowerment and Development Strategy (NEEDS), which expired at
the end of 2007.
Very high export earnings generated by oil and gas exports will result in current-
account surpluses over the next few years despite an increase in imports. Foreign direct
investment, mainly in the oil sector, will remain high over the medium tenn, at over
US$2 billion per annum. In 2007 exports amounted to US$61.81 billion, dominated by
petroleum and petroleum products (95%), cocoa and rubber. Imports during the same
year amounted to US$30.35 billion, made up largely of machinery, chemicals, transport
equipment, manufactured goods, food and live animals.
Prospects
The Economist Intelligence Unit (EIU) has the following current view of prospects in the
country:
• Major challenges for the president, Umaru Yar'Adua, will be to bring stability to
the turbulent Niger Delta region and to find a solution to the ongoing energy crisis,
under which nationwide power cuts are commonplace.
• Economic policy reform will be slow, as the country stands at a crossroads between
implementing tough. unpopular market reforms and pandering to nationalistic and
pro-subsidies interest groups.
~---------- .........
MTN Nigeria Overview C21
• With the oil sector operating below potential and the non-oil sector suffering
from the global financial crisis, real GDP growth is expected to fall back from
the levels witnessed in recent years, to 4.6 per cent in 2009 and 5.4 per cent in
MTN group overview
he MTN Group Limited (MTN) is a leading provider of communication services,
T offering cellular network access and business solutions.
Launched in 1994, MTN is a multinational telecommunications group, operating
in 21 countries in Africa and the Middle East. At the end of September 2008 it had
81 milJion subscribers across its operations. In 2007 the group reported revenues
of R73 billion ($10.4 billion) and EBITDA at R31.8 billion ($4.5 billion), a massive
42 per cent up on the previous year.
The group operates in Botswana, Cameroon, C6te d'Ivoire, Nigeria, Republic of
Congo (Congo-Brazzaville), Rwanda, South Africa, Swaziland, Uganda, Zambia, Iran,
Afghanistan, Benin, Cyprus, Ghana, Guinea Bissau, Guinea Republic, Liberia, Sudan,
Syria and Yemen. MTN has been, and is forecast to remain, in the top 10 mobile growth
stories in both revenue and EBITDA terms globally for companies with market caps
above US$5 billion.
Among many other plaudits, MTN also won the prestigious inaugural African
Business of the Year and Brand of the Year awards presented in London by the
Commonwealth Business Council. The African Business of the Year award recognizes
companies that have shown outstanding returns and growth rates coupled with
innovative working techniques, and the development of staff and the community it
operates in. The Brand of the Year award recognizes companies that have achieved
outstanding brand recognition in the past 12 months, with wide appeal and wider
recognition both in Africa and worldwide.
MTN Nigeria overview
M TN paid $285 m for one of four GSM licences in Nigeria in January 2001. To date,
it has invested in excess of US$1.8 billion building its mobile telecommunications
infrastructure in Nigeria.
Since its launch in August 2001 MTN has steadily deployed its services across
Nigeria. It now provides services in 223 cities and towns, more than 10 000 villages
and communities and a growing number of highways across the country, spanning the
36 states of the Nigeria and the Federal Capital Territory.
The company's digital microwave transmission backbone, the 3400 kilometre
Y'elloBahn was commissioned by President Olusegun Obasanjo in January 2003 and is
reputed to be the most extensive digital microwave transmission infrastructure in all
of Africa. The Y'elloBahn has significantly helped to enhance call quality on MTN's
network, thereby giving it an edge over its competitors.
C22 Ca11t 03 MTN in Nigeria: Exceeding Expectations
MTN Nigeria also recently expanded its network capacity to include a new numbering
range with the prefix 0806, making MTN the first GSM network in Nigeria to have
adopted an additional numbering system, having completely exhausted its initial
subscriber numbering system as a result of rapid subscriber growth.
MTN Nigeria performance
Financial
A recent placement of shares in MTN Nigeria by the parent company in order to
fund their aggressive expansion programme, valued the enterprise at an amazing
$10 billion.
Profitability indicators for the year ended 31December2007 include:
• Subscribers@ 16.5m (+34 per cent for the year).
• Revenue @$2.9 billion.
• EBITDA @ $1.65 billion (+36 per cent for the year, 36 per cent share of MTN group,
versus $1.39 for MTN South Africa).
• EBITDA margin@ 57.3 per cent (versus 35 per cent for SA).
An unbelievable performance for an August 2001 start-up!
Other
2007 awards achieved by MTN Nigeria include:
• Best Corporate Tax Payer in the communications industry for the year 2005/2006.
• TITANS OF TECH AWARD as GSM Company of the Year awarded by JCT Africa.
• Distinguished Corporate Award for contributions to the development and
promotion of the human resources profession in Nigeria, awarded by the Chartered
Institute of Personnel Management.
• GSM Company of the Year Award at the Lagos Enterprise Awards.
• Best Health Merit Award, awarded by the Lagos State government.
How it all began ....
Rob Nisbet, MTN's Group Financial Director, joined MTN in his current position in
1995, soon after the formation of the telecommunications company a year earlier, and
has been at the forefront of the executive team that's transformed MTN into what it is
today. He recounts how a strategic miscalculation gave MTN a head-start into Africa
versus their competitors: "In 1995 we thought that our South African market would top
out at around 400 000 to 450 000 subscribers. Pre-paid didn't exist, so we were looking
only at customers who one could give credit to. In those days, DSTV only had around
800 000 subscribers, so that was the total market size we were looking at. We thought that
g~owth was going to disappear within 3 years, so we decided to expand into Africa and
did so from 1996 onwards, not because we recognized it as an unbelievable opportunity
MTN Nigeria Perfonnance C23
"cause they just don't have any communications, but because we looked at South African
growth petering out and we thought, where to next? We agreed, let's go to Africa ".
Two things become clear from this anecdote:
• First, that the overwhelming reason for MTN entering Nigeria was that of a firm in
search of growth.
• Second, one should bear in mind that strategic planning is not an exact science,
therefore requiring top management to conduct regular reviews, as well as display
flexibility in order to profit from emerging opportunities.
The first licence to operate in Nigeria was obtained by MTN in the 1990s at a cost of a mere
$5 million. However it was in the tumultuous days before General Olusegun Obasanjo
became Nigeria's president in 1999 (for the second time), so the company felt that the
country risk was unacceptably high and therefore decided not to utilize their licence.
In January 2001 MTN bought one of four GSM licences on offer as part of the globally
lauded Nigerian GSM auction conducted by the Nigerian Communications Commission
in Nigeria, and on 16 May MTN became the first GSM network to make a call in Nigeria.
Thereafter the company launched full commercial operations, beginning with Lagos,
Abuja and Port Harcourt.
Key success factors (KSFs) employed by MTN in order to explore the
Nigerian opportunity
• Because telecommunications are regulated by governments in all countries in
which MTN operates, and Nigeria is no exception, governments are often conflicted
because they also own the fixed-line business. "The playing fields, especially in
the early years, weren't always level," says Rob. Effective liaison with government
therefore became an essential prerequisite for MTN if they were to operate under
benign conditions in Nigeria.
In addition, the scourge of corruption was alive and well in Nigeria in the
early days. It is MTN's way to always looks for good local partners to assist their
in-country affiliate in coming to terms with local operating issues, including the
opening-up of channels of communication with all levels of government and
overcoming local attempts at extortion and corrupt practices. To quote Rob: "We've
always said no to corruption and have always looked for good apolitical local
partners to help us without having to pay off officials ."
MTN likes to have a controlling stake in their affiliates, preferably above
75 per cent in order to allow for the easy passage of special resolutions (however,
they often have to enter in a minority position and manage through a s eparate
management contract until they're able to build their shareholding to the desired
level over time, as and when opportunities present themselves).
This approach worked extremely successfully for MTN in Nigeria, wh ere
they went out of their way to carefully vet and select five solid apolitical
local businessmen from different regions as their local partners. Today MTN
International owns 77 per cent of MTN Nigeria, with around 18 per cent held by
these Nigerian partners.
 C24 C111 03 MTN in N1gana: Exceading Expectations
Rob mentions an instance when MTN had 130 containers of critical equipment
stuck in Lagos port, despite the best efforts of their management team to have them
released. It was only intervention by their local partners who had 'skin in the game'
(in the form of pressurizing the right persons, as opposed to bribery} that resulted in
the eventual release of the shipment.
• To further regulate their relationship with key stakeholders and prescribe the
desired conduct from their employees, MTN has published the following mission
statement and values for their Nigerian affiliate:
MTN's overriding mission is to be a catalyst for Nigeria's economic growth and
development, helping to unleash Nigeria's strong developmental potential, not only
through the provision of world-class communications, but also through innovative
and sustainable corporate social responsibility initiatives.
MTN Nigeria's core values are:
• Leadership.
• Integrity.
• Innovation.
• Relationships.
• 'Can do attitude'.
The successful role played by both MTN's Nigerian partners, as well as its clearly
communicated set of values and mission statement, is underscored by the accolades
earned as described above.
In addition, these facts go a long way in helping establish MTN Nigeria as a
local firm with international links in the eyes of Nigerian stakeholders (as opposed
to a foreign-owned MNC operating in the country.)
• MTN Nigeria is one of the mobile phone world's penetration growth stories, which
i I are defensive or 'decoupled' from economic issues such as inflation and an economic
I
slow-down, In Nigeria the surprise has been that average revenue per user (ARPU}
at around the $16 per month mark, has not declined as quickly as expected (in fact,
has not decreased at all since day one of their operations), while penetration has
increased ahead of expectations to 19 million at last count (a factor that MTN has
traditionally underestimated, with disastrous effects on capacity planning).
This fantastic achievement may largely be attributed to the following three
factors:
1 First mover advantage, which is especially critical in the mobile phone industry.
In Rob's words: "to gain market share from an established player in a market is
difficult and extremely costly, as borne out by our experience in South Africa".
2 Rob views MTN's key competitive advantage as a philosophy that differs from
that of their competitors: "We took the view that if the demand was there,
we would not starve an affiliate of its cash requirements. We would willingly
supply more cash from SA in order to develop the business infrastructure as
quickly as possible in order to take up any slack before our competitors do, Our
competitors, on the other hand, would rely on the affiliate to fund itself through
MTN Nigeria Performenca C25
its own cash generation which obviously takes longer. Our view has always
been long term and to never, ever starve an operation from its legitimate cash
requirements."
Over the past three years, capex as percentage of revenue averaged around
30 per cent or $600 million per annum. MTN has relied heavily on its South
African parent in order to generate the considerable cash requirements needed to
build infrastructure in new markets, including Nigeria.
3 Brilliant execution is a hallmark of MTN's Nigerian operation. Strong branding,
including 'painting the town yellow' is evident throughout Nigeria's cities. So
too is the availability of MTN's pre-paid cards sold in small denominations by
enthusiastic street vendors who move through the traffic in congested streets, as
any visitor to Lagos will tell.
• Estimating market potential before entering any African market proved to be no
easy task, especially because official GDP information excluiies the considerable
impact of the informal sector. For MTN this fact resulted in them typically
under-reading the potential market size. According to Rob, the potential of the
Nigerian market continues to confound MTN to this day: "In 2001 we estimated
15 m subscribers. 3 years ago we upped this to 45 m. Today we estimate 85 m
subscribers by 2012!" Given Nigeria's population of 140 million, this translates to
60 per cent of Nigerians subscribing as mobile phone users (perhaps this estimate,
too, may be on the low end when compared to South Africa's ratio of one hand-set
per citizen).
Although MTN continues to invest heavily in infrastructure in order to keep
pace with the growth in demand and not to leave gaps for competitors (who are
increasingly entering the country}, Rob believes that MTN has Jost substantial
profits due to their inability to invest aggressively enough in order to meet the
growth in demand.
"From an overall demand perspective, we always underestimate the size of the
market. If we had been better at this from the start, you'd probably find that our
bottom line profitability would today be 15-20 per cent better as a result of market
share losses." If one were to convert Rob's estimate of earnings lost into monetary
terms, the opportunity cost of MTN being out of capacity in its largest profit
contributing market, Nigeria, has been massive.
• MTN's South African parent performed a further critical role in that it provided the
skills base in the form of expatriates that allowed them to swiftly and efficiently
"set up shop" in Nigeria, to where as many as 120 expatriates were seconded in the
early days.
However, Rob stresses that "in terms of staffing, MTN's long-term objective is
to develop the local employees", citing the fact that, despite its massive growth,
Nigeria today operates successfully with only 15 expatriates (while their operation
in Swaziland, has been fully localized.)
• MTN Nigeria does not shirk its responsibility to the community in which it
operates. Apart from giving monetary support to deserving causes through the
MTN Foundation, a hallmark of their effort is the involvement of their staff
 CZ& C•H 03 MTN in Nigeria: Exceedmg Expectations MTN Nigeria Performance C27

members who, together with MTN Group staff across the company's 21 operations pyramid through the sale of inexpensive pre-paid cards as well as innovations such
I 1

in Africa and the Middle East, embark on a month-long 'Y'ello Care' programme, as setting up 'umbrella men', where handsets are shared with those in possession of
I
a volunteerism campaign that involves every employee in community building a pre-paid card, but who cannot afford a handset. Handset prices, too , are coming
projects. down rapidly and are now available for as little as $15 each.
Launched in 2007, 'Y'ello Care' is aimed at achieving participation and ensuring
sustainability of the culture of volunteerism among all MTN staff, regardless of Sources
where they are situated. MTN Nigeria staff are involved in various community
projects, including initiatives to support disadvantaged children with school work, • Personal interview with Rob Nisbet, MTN Group FD, on 17 November 2008.
clinics, healthcare facilities and other social support and development programmes, • MTN website. Available: www.MTN.com (accessed 20 December 2008).
including hospices and orphanages, neighbourhood clean-ups and environment • MTN Group Limited Integrated Business Report for the year ended 31 December,
awareness campaigns, football clinics and donations in kind. 2007: 1-8,28,17,58,70,73.
In addition, soccer-mad Nigeria is also a beneficiary of the MTM group's • MTN Group Limited Interim Results for the 6 months ended 30 June 2008: 2.
decision to sponsor football in a big way. It is a global sponsor of the FIFA 2010
• The Economist website. Available: www.economist.com (accessed 20 December
World Cup South Africa and an established partner of football throughout the
continent, as demonstrated by their ownership of football properties such as the 2008).
MTN CAF Champions League and the MTN Africa Cup of Nations. MTN also • Macquarie First South Securities research report published 5 September 2008: 47.
sponsors various football clubs in its countries of operation. This commitment • Citigroup equity research report published 1October2008: 9-10, 19-21 and 31-33.
also includes innovations such as MTNfootball.com which enables football fans to
view live matches and get updated information about the game. MTN's status as a
multinational and leading provider of telecommunications in emerging markets has
enabled the company to draw individuals from diverse backgrounds and experience
towards a common goal of making a difference in all countries in which the
company operates. This status has made football the natural medium for MTN to
channel its contribution as a unifying force. According to a MTN spokesperson,
the FIFA World Cup is indisputably one of the most popular sporting events in the
world and hosting it in Africa is a strong signal of the confidence and expectation
the world has of Africa and its people.
• "Finally, one of the unique successes that MTN Nigeria has managed to achieve is
its proven ability to commercialize the sale of call time to consumers at the BOEP
(base of the economic pyramid.) According to Rob, MTN has always taken the view
that they would not 'cream-skim': that is, not only meet the easy-to-reach demand
at full prices from more affluent consumers. In Uganda, for instance, MTN built up
a customer base of 30 000 subscribers in their first year of operation, whereas th&ir
competitor at the time, who had been active in the country for five years, had only
5000 subscribers to show for its efforts.
MTN's South African experience of achieving massive market penetration gave
them the confidence to pitch their brand and product offerings at the broader mass
of poorer consumers. "Our target market stretches to consumers who earn well
below $100 per month," says Rob. This represents an income level that's not too far
off the $1 per day income level right at the bottom of the economic pyramid.
In fact, MTN's average Nigerian subscriber spends $17 per month on call time,
so those below this average certainly include some $1 per day earners. The fact
that MTN retains its position as market leader in Nigeria with a share of 43 per cent
and is able to grow its subscriber base at a rapid rate to reach 18.6 m at last count is
testimony to its ability to reach poorer consumers towards the base of the economic
 SABMiller Pie Overview C29

the ruling party, the Chama Cha Mapinduzi {CCM), and the main opposition, the
Case 04 Civil United Front. The long-standing political divisions and the future of Zanzibar
will continue to be a major challenge to the country. Even though Zanzibar's political
landscape might have an insignificant impact on the mainland, speedy resolutions will
SABMiller·s trek contribute towards cementing the country's stability.
The resignation of Prime Minister Edward Ngoyayi Lowassa (as well as the central

into Africa: Tanzania bank governor) in February 2008 amid a parliamentary inquiry implicating him in
corruption, forced President Jakaya Kikwete to dissolve the cabinet. The process
accorded the President an opportunity to streamline his government, and the new cabinet
Breweliies Limited now consists of 26 full ministers and 21 deputies, compared with 29 full ministers and
31 deputies previously. The reduction of departments is expected to ease coordination of
Andrll Parker policies within the government. In addition, this decisive action against the corrupters,
despite their high office, sends the right message to all Tanzanians and Africans alike.

Economics
Tanzanian's economy continues to show good overall macroeconomic performance.
Sustained economic reforms over the past several years have enabled the economy to
RW~ OMw;i
:;r.;i: : ; :
KENYA ..-
grow an average of 6 per cent between 2000 and 2006. During 2007 the economy began to
B~ ~ show signs of recovery from drought experienced in late 2005 into 2006, driven by strong
growth in the mining, manufacturing and tourism sectors. The government's commitment
/ ,
to develop non-traditional sectors (especially mining and tourism) should help to address
TANZANIA T1nga ,
Dadoma c Zlnzibar4
the problem of overdependence on the agricultural sector.
(PoUticlle1pltal) O, It is expected that the economy will have grown by an average of 7.3 per cent in 2008.
DD ES Sllulii
_ (Commerdllcapftlt)' d' This economic expansion will also be driven by gross fixed-capital formation, which is
1

~·0~~ -
expected to grow by about 11.0 per cent annually. This will be due to increased activities
in the construction, mining, telecommunications and tourism sectors.

MAtAWI MOZAMBIQUE
Prospects
~----'
The EIU view is as follows:
• President Kikwete will continue to face the most challenging period of his
presidency, as high inflation erodes living standards. However, the fragmented
opposition is unlikely to be able to pose a challenge.
Tanzania today • The ruling CCM party is likely to choose Mr Kikwete as its candidate in the 2010
Overview presidential election. He is expected to win, but with a smaller majority in a lower
turnout, as the electorate expresses its discontent.
Tanzania has been one of Africa's success stories, transforming itself in the early 1990s
into a multi-party democracy and opening up its economy to the private sector after • The government will stick to its pursuit of market-orientated reforms, including the
many years of decline during the country's flirtation with "African socialism," as promotion of private-sector growth by improving infrastructure and maintaining
expounded by Julius Neyerere. macroeconomic stability, but progress will be slow.

Politics SABMiller pie overview

Tanzania's political landscape continues to be characterized by a deep democracy Rapid growth
entrenched in stability. Although the political stability is evident on the mainland, the One of the world's largest brewers, SABMiller has brewing interests and distribution
semi-autonomous island of Zanzibar still faces challenges posed by tension between agreements across six continents. They directly own and manage operations in

C28
C30 C11e 04 SABMiller's Trek into Africa: Tanzania Breweries Tanzania Breweries Ltd (TBL) Overview C31

31 countries. Their wide portfolio of brands includes premium international beers such
EXHIBIT1 SABMiller pie's 5-year financial progression
as Pilsner Urquell, Peroni Nastro Azzurro, Miller Genuine Draft and Grolsch along with
market-leading local brands such as Aguila, Miller Lite, Snow, Castle and Tyskie. Six Revenue (USSml EBITA IUSSml
of these brands are among the top 50 in the world, while SABMiller is also one of the
world's largest bottlers of Coca-Cola products. 5000 25000
Over the past 21 years SABMiller has grown rapidly from its original South African
base into a global operation, developing a balanced and attractive portfolio of businesses 4000 20000
in markets that range from developed economies, such as North America, to fast-growing
developing markets, such as China and India.

Strategic approach 2000 10000

According to the company's website, SABMiller is committed to being a responsible

company because it makes sense. It's not about being altruistic for its own sake, it's about 1000 5000
understanding how behaving responsibly has a positive impact on profitability and on
economic growth.
Their aim is to secure economic benefits for the local communities where they 04 05 06 07 08 04 05 06 07 08
grow raw materials and brew beer and also for their shareholders who benefit from a
sustainable business and a return on their investment.
Environmental sustainability is also critical, whether in terms of using less water It may rightly be said that SABMiller h as managed to transform TBL from a broken-
to make more beer or reducing its energy and carbon footprint. There are many down, state-owned enterprise into a profitable modern publicly listed company, to the
examples- local sourcing, HIVI Aids campaigns, education and training-that show benefit of all key stakeholders (shareholders, government, customers and consumers and
how both the company and local communities can reap mutual benefit. the Tanzanian community at large).
Global framework, local action: SABMiller has a clear strategic focus founded on
four key priorities: Reasons for SABMiller investing in TBL
• To create a balanced and attractive global spread of businesses. Danie singles out the following reasons:
• To create a portfolio of brands that matches the aspirations and preferences of • The relatively low cost of entry meant that the downside potential was limited,
consumers within each market. even though this was one of SAB 's first forays onto the global stage. The extremely
• To keep raising the performance of local operations. hostile Tanzanian business environment prevalent at that stage was partially
• To gain maximum value from its global scale. mitigated by the fact that SAB's entry was in the form of a JV with the Tanzanian
government, which meant that they became an ally rather than a potential obstacle
in SAB's way towards transforming the business.
Tanzania Breweries Ltd (TBL) overview • • Prospects for recovery by the Tanzanian economy had improved due to government
ditching Nyerere's disastrous African socialist experiment in favour of a freewmarket
Development
economy (under pressure from the World Bank and IFC).
The South African Breweries (forerunner to SABMiller) acquired a 45 per cent stake
and management rights in TBL for US$20 million in late-1993, when the Tanzanian • SAB's core South African market was mature and the brewer needed to find new
government privatized its bankrupt state-owned brewing company. sources of growth.
SAB soon nursed the business back into robust health under the leadership of Danie • The due diligence process of TBL by SAB's team clearly showed the existence of
Niemandt who was seconded as MD for the first five years of the JV's existence. substantial pent-up demand that TBL was unable to satisfy (in fact, at that stage
Today, 52 per cent of the shareholding in TBL is owned by SABMiller plc and more beer was imported into Tanzania than what TBL was able to produce itself).
23 per cent is owned by Tanzanians, including around 20 000 individuals, who bought This was the result of a combination of under investment in assets and people, as
shares when government sold off a large portion of their holding via a listing on the well as poor management processes- all problems that were relatively easy for SAB
fledgling Dar Es Salaam stock exchange. to correct as it played to their core skills.
C32 Case 04 SABMiller's Trek into Africa: Tanzania Breweries Key Su ccess Factors Employed by SABMiller m Order to Turn TBL Around C33

• Although they were JV partners with SAB, government was initially extremely
EXHIBIT2 TBL financial performance achieved
suspicious and defensive when it came to supporting SAB management's turn-
5-yeer review 211118 2007 2006 2005 2004 around plans. However, once results became evident, they became most supportive.
Sales revenue 260628 229644 197 982
To quote Danie: "While government was supportive (in public anyway), out
383181 314 878
{T shillings millfon) of the public eye we were forced into about 10 board meetings in the first year to
Profit before tax 109168 95 603 85584 69332 57 471 try and explain what we were doing and why. There was also a very vocal group,
{T shillings millton) including some local newspapers, which saw the deal as nothing but 'a theft of the
Market capitalization 490466 442436 395 472. 330 132 130 156 crown jewels' by foreigners. Rectifying this misconception took up an enormous
{T shillings billionl amount of management time."
Earnings per share 242209 193157 128122 110 119 130 104 • Soon after taking up the management of TBL, the company was hit by a large
{T shilllngsl
number of lawsuits relating to the pre-JV days (mainly by ex-employees, but also
2flDB volumes reached 2.8 million hectolitres [a 9·fold increase from the 1994 start-upl
by suppliers) for payments either outstanding or claimed as such. While a number
2008 performance converted ta US$. Sales revenue = $305 m
were pure chance-takers, others had some substance, and all required time and
Profit before tax = $90 m[negative at start-up I
management, especially since the last thing SAB wanted to do was go to court
where, in those days, one could well lose despite the obvious merits of one's case.
• Despite completing a through due diligence exercise, cash flow during the first year
was atrocious, as Danie's team had completely underestimated the restructuring
• There was a further strategic imperative as SAB was keen to obtain a foothold
and operoting costs, especially the once-off costs. Danie takes up the theme: "For
in East Africa where the British brewer, Guinness, had already established
instance, we had been assured there were only some 3000 employees. In fact, there
interests in neighbouring Kenya and Uganda-if it were to acquire TBL as well,
were another 1000-odd 'casuals' that had, because of prior mismanagement, become
Guinness would have dominated the region, effectively blocking out SAB for
entitled to full employee benefits. We had to go begging for cash to pay salaries
good.
and wages during the first few months, and I had to curtail some very expensive
expatriate benefits."
Other achievements • In the early days, some corrupt practices were encountered, especially when it
came to clearing goods out of the Dar Es Salaam port. These were rebuffed and
In 2007 TBL was voted the 'most respected company' in Tanzania from an East African
government informed accordingly, where necessary. In this instance, SAB's clear
survey undertaken by PricewaterhouseCoopers and Nation Newspapers. The company
and unambiguous stance against corrupt practices simplified matters for Danie's
had received this accolade for the three preceding years.
team-they simply had no choice but to say no!
In an award ceremony organized by the Association of Tanzania Employers, TBL was
named the overall winner in the Category of Human Resources.
In this year's Employer of the Year Award ceremonies, TBL was awarded first
prize in the Training and Development, Occupational Safety and Health and Large Key success factors employed by SABMiller in order to turn TBL
Enterprise categories, and second prize for the fight against HIVI AIDS, Corporate 3acial around
Responsibility and Employee relations.
• In order to ensure fair play between the two JV partners in the early days, the IFC
and a consortium of international banks were invited to take a minority stake
Difficulties encountered by SABMiller in Tanzania in TBL, including a seat on the board. This helped eliminate initial suspicions
that existed among the two partners and laid the foundation for a unified JV that
• The assets purchased were in a state of shocking disrepair, as were the country's survives to this day (although government has sold down to a minority position by
utilities and infrastructure. listing most of its shares in TBL on the local stock exchange.)
• The existence of massive over-employment in the company (over 4000 heads, • The chaotic state of TBL at the time of SAB's entry into the business meant that
well over double the required amount), as well as extremely costly supply and SAB had to rely heavily on a team of experienced expatriate managers seconded
distribution agreements (both hallmarks of the socialist system at work). These had from South Africa. An initial team of 22 had to rebuild the TBL organization, its
to be dismantled forthwith, despite local opposition to such drastic action. people (including retrenching many heads surplus to requirement). physical assets
C34 CHe 04 SABMiller's Trek into Africa: Tanzania Breweries
and brands, virtually from scratch. "When a turnaround is required, don't put in
only one person to do it-put in a turnaround team", is Danie's view.
A happy coincidence for SAB was the fact that their affirmative action
programme in SA had meant that they had had a core group of experienced middle-
aged managers at their disposal to second to businesses such as TBL, thereby
opening opportunities for previously disadvantaged candidates in SA. These
secondees proved to be an excellent fit in terms of transferring basic knowledge and
skills to TBL staff.
The choice of Danie Niemandt as MD to head up the team was mission-critical.
He had built a successful 20-year career in South African Breweries (SAB), initially
as a Human Resources practitioner and later in General Management. Apart from
having the necessary experience (his human resources exposure turned out to be a
particular bonus due to the number of people issues that had to be dealt with), his
proven track record meant that he had earned the respect of those that worked for
him, also from the team of battle-hardened expatriates (some of whom who could
be difficult to manage because of their "know-it-all" attitude.)
Danie comments as follows: "With only one exception, the team of expatriates
was excellent, not only in performing their job but in mixing with the local
employees and teaching, coaching and mentoring them."
It should be pointed out that self-sufficiency was an important attribute for the
expatriate team, especially in those pre-mobile phone and pre-Internet days. This
turned out to be another area of strength in Danie's make-up.
• Fortunately, local staff responded well to the SAB systems and processes,
resulting in TBL recovering sooner than expected. In Danie's view: '!While
there were some baddies and some big problems, the Tanzanian employees
responded really well to initiatives we put in place, From our side, we fixed
staff ablutions and canteens before worrying about management offices plus we
improved safety and working conditions, got basic employee communications
going and initiated training as soon as we could." The training and development
of local staff members was an absolutely critical element in order to establish a
unified workforce that took ownership for business results and became off-site
ambassadors for TBL, thereby giving further credence to TBL's claims as being
"truly Tanzanian".
The extent of the local employees rising to the occasion is underscored by the
fact that the subsequent expatriate complement has been reduced to single figures,
despite massive growth in the business over subsequent years. The message from
Danie is: "Focus on the employees-get them to understand what you're on about
and involve them."
• Danie and his team went out of their way to "think and act local" in their
interactions with community and government stakeholders. "You may disagree with
them, but do it in the right way." They also tried to ensure that they didn't become a
closed SAB expel community that worked and played only with each other.
• Danie soon found out that "cash was king". The SAB approach to acquisitions
was that the new affiliate must be self-sufficient for its cash requirements from
TBl's Vision, Mission and Values C35
day one-the parent company was not going to inject further cash into TBL.
"Of necessity we had to focus on cash-flow, and I learned (and have always
remembered} that profits are great, but without cash-flow you don't sleep! "
Fortunately, this approach bore fruits, as Danie observes: "Interestingly enough,
the IFC was right in what we all thought was a very optimistic forecast about cashflow
and profits, and our cashflow was positive within 12 months, with the bottom line
black within 18 months-we had reckoned on about twice as long to get there."
The downside of this "pay as you go" approach was that TBL battled to keep up
with the growth in demand for its products, frequently running out of stocks during
the peak summer months.
• Apart from taking the SAB ways of operating (systems and processes) with them,
the secondees also arrived with SAB's mission, values and business philosophies,
all of which contributed greatly in shaping the 'new TBL' as far as these critical
issues were concerned, as may be seen from the current set adopted by TBL.
TBL's vision, mission and values
Vision
To be the most admired Company in the beer industry in East Africa:
• The investment of choice.
• The employer of choice.
• The partner of choice.
Mission
To own and nurture local and international brands which are the first choice of the
consumer.
Values
• Our people are our enduring advantage:
• The calibre, passion and commitment of our people set us apart.
• We value and encourage diversity.
• We select and develop people for the long term.
• Performance is what counts.
• Accountability is clear and personal:
• We favour decentralized management and a practical maximum of local
autonomy.
• Goals and objectives are aligned and clearly articulated.
• We prize both intellectual rigour and emotional engagement.
• We are honest about performance.
• We require and enable self-management.
C36 Can 04 SABMjller's Trek into Africa: Tanzania Breweries TBl:s Vision, Mission and Values C37

• We work and win in teams: tough due to price competition from informal home brewers and eventually sold
• We actively develop and share knowledge within the Group. this business.
• We consciously balance local and group interests. TBL's distilling arm, however, achieved substantial success by offering
• We foster trust and integrity in internal relationship. Konyagi, their popular gin brand, in 20ml plastic sachets at competitive prices
to BOEP consumers. This market continues to flourish to this day, although TBL
• We encourage camaraderie and a sense of fun.
is concerned about instances of alcohol abuse that may be associated with this
• We understand and respect our customers and consumers: offering.
• We are endlessly concerned with our customers' needs and perceptions.
• We build lasting relationships, based on trust. sources
• We aspire to offer the preferred choices of product and service. • Personal interview with Danie Niemandt, ex TBL MD on 16 November 2008.
• We innovate and lead in a changing world.
• SABMiller website. Available: www.sabmiller.com (accessed 18 December, 2008).
• Our reputation is indivisible:
• The Economist website. Available: www.economist.com [accessed 21 December
• Our reputation relies on the actions and statements of every employee. 2008).
• We build our reputation for the long term. • Macquarie First South Securities research report published 5 September 2008! 56.
• We are fair and ethical in all our dealings. • Tanzania Breweries Limited annual report 2008, Dar Es Salaam: 2,5 and 7.
• We benefit the local communities in which we operate.
An interesting aspect of TBL's vision and set of values is the manner in which they
have been expanded in order to foster a better understanding amongst all staff me~bers.
• SAB was quite clear about its intention to add value to TBL's product offering
through improved quality, packaging, availability, brands and consumer choice, as
a means of enticing the consumer to pay a reasonable price (not cheap) in order to
generate cash at decent margins. In this way they were not only able to reward their
shareholders appropriately for their investment (high-risk), but also finance the
aggressive capex programme that TBL required in order to return to robust health.
• SAB's "tight/loose" business model (HQ sets the rules and then empowers the
affiliates to operate freely) was perfect to meet the challenges that they encountered
in Tanzania- their proven approach had to be overlaid with the need for local
knowledge and responsiveness.
"If necessary, amend them, but try and keep the basic processes and systems
that work/or the group in place", is Danie's advice.
In fact, Danie and his men clarified and simplified the SAB processe!Mn order
to develop an execution-based business approach for TBL that was understood and
shared by all staff members.
• They further embraced technological advances in order to accelerate the
turnaround process. The later advances made in the areas of mobile phone and
Internet technology was a great help. New brew houses built in Dar Es Salaam and
Mwanza were fitted out with the latest state-of-the art, automated PLC systems from
Europe.
• The approach taken in TBL's beer business was to focus on the middle and upper
classes, although more recently, efforts to extend into the economy segment are
beginning to be explored more. Their traditional beer (made from sorghum and
maize) business, however, was aimed at BOEP consumers, but TBL found the going

- - -

, 1 I ' II• 1 11 r , Iii 11

 Ethiopia Today C39

democratization and the empowerment of civil society was interrupted in the May 2005

Case 05 general election which plunged the country into violence and political chaos.
Ethiopia has a long history of conflict with two of its neighbours, Eritrea and
Somalia.
Sabco's business Economics
tulinarround ot Coca-Cola The economy has enjoyed double-digit growth rates since 2004, but this success has
come at the cost of rapid inflation and a steep fall in foreign currency reserves.

Sabco in Etfliopia Government has embarked upon an ambitious infrastructural investment programme.
Five new hydropower plants and e wind-power facility ere being built. Between
them these will expand the country's installed generation capacity from the current
Andre Parker
660 megawatts to some 3600 megawatts by 2012.
Inflation reached a historic high of 40 per cent in May, 2008, driven by fuel prices,
currency devaluation, the spill-over from the construction boom and rapidly rising
food prices. As a result, people are withdrawing cash from the banks and from savings
and spending it, partly because they expect prices to continue to escalate (inflationary
expectations), but also because real interest rates are negative so that money in the bank
YEMEN loses its value.
Competitiveness is a worry too, because the real exchange rate is strengthening, w ith
the consequence that Ethiopia's current-account deficit is now very large, at around
20 per cent of GDP. However, exports continue to boom. Since 2004 Ethiopia's share of
DfreO&waa_
Addl1 AINlba c -o Harar SOMAUA the global coffee market has increased by 50 per cent. Export shares for its other main
ONaztel
products-flowers and oilseeds-have also increased.
ETHIOPIA In terms of wages, Ethiopia is reckoned to be one of the most cost-effective (and
poorest) countries on the continent, with a manual worker earning US$60 a month as
against US$190 in China.

Prospects
The EIU paints the following picture:
• The ruling Ethiopian People's Revolutionary Democratic Front (EPRDF) should
Ethiopia today remain firmly in power over the forecast period.
Overview • Political tensions will begin rising during 2009, as all parties start to regroup and
One of the few African countries not to have been colonized during its history, Ethiopia plan for the next general election, due in May 2010.
has 80 million mainly rural, poor inhabitants. • Relations with Eritrea and Ethiopia's involvement in Somalia will continue to
dominate the foreign policy agenda throughout the forecast period, and tensions in
Politics the region will remain high.
From 1974 to 1991 the country was run by a Marxist junta under Mengistu Haile Mariam, • According to the IMF's latest report on the economy, growth will slow over the
destroying whatever industrial base that had existed as well as overseeing many acts of next five years, reflecting the combination of high inflation (which will have to be
genocide against Ethiopian citizens in opposition to their regime. tackled by tightening fiscal and monetary policy), the infrastructural deficit (which
In 1991 the Ethiopian People's Revolutionary Democratic Front (EPRDF) toppled will constrain production} and declining competitiveness, caused by real exchange
the Marxist junta in a welcome move to a more democratic political system. The rate appreciation.
EPRDF has since remained in power, however, displaying increasingly authoritarian • It is likely that the Birr will continue to depreciate over the next two to
tendencies under its leader Prime Minister Males Zenawi. The slow progress towards three years.

C38
C40 Cne 05 S11bco's Business Turnaround of Coca-Cola Sabco in Ethiopia
Coca-Cola Sabco (CCSabco) overview
CCSabco is a family-owned Coca-Cola bottler who operates franchises in South Africa,
Namibia, five East African and five Asian countries. The group started as a purely
South African play, expanding into Africa at the end of the apartheid-era in late-1994
when The Coca-Cola Company (TCCC) approached it to become the company's anchor
bottler in East Africa. CCSabco subsequently also entered the Asian countries of Vietnam,
Sri Lanka, Cambodia, Laos and Nepal.
The group employs more than 9500 people and operates 25 bottling plants aimed
at fulfilling the refreshment needs of more than 240 million consumers that live in its
markets.
The Gutsche family is the controlling shareholder in CCSabco, with TCCC holding a
minority stake of 20 per cent in the business. It is head-quartered in Port Elizabeth.
The Group's vision is simply: "We will be the Best Coca-Cola bottler in the World".
This vision statement is amplified as follows:
• "The Best: In sales volume and in return on capital employed".
• "Coca-Cola Bottler: A consumer driven, customer oriented, manufacturer, sales
and distribution company that markets the products and brands of The Coca-Cola
Company".
• "In the World: We measure ourselves against the best Coca-Cola bottlers in the
World". · country's 7-10 per cent annual growth in economic activity continues to outstrip
CCSabco's values have been formalized as follows:
"We will create an environment where our people are passionate about performance.
This will be based on :
• Integrity: be honest, open and sincere.
• Individual Initiative: take proactive steps to drive performance.
• Customer Value: exceed customer expectations and add value to customers'
businesses.
• Teamwork: work with and support colleagues to raise overall performance.
• People Development: realize employee potential through training and development.
• Mutual Trust and Respect: Treat each other with respect and dignity and earn trust.
• Commitment: be accountable and do as you say."
How CCSabco turned around their Ethiopian affiliate
Background
• In 1994 the CCSabco group concluded an agroement with The Coca-Cola
Company (TCCC) , owner of the Coca-Cola franchise, to be TCCC's anchor bottler
in East Africa. When the Ethiopian franchise became available in 1998, TCCC
therefore offered it to CCSabco.
• Apart from its obligation to TCCC, CCSabco was attracted to the fantastic growth
potential offered up by the Ethiopian franchise, which in 1998 accounted for
How CCSabco Turned Around Their Ethiopian Affiliate C41
annual volumes of a mere 4 million unit cases or roughly one Coke unit consumed
per capita per annum.
The fact that CCSabco's Ethiopian volumes have quadrupled since taking on the
franchise has certainly vindicated the group's assessment of the opportunity for
growth.
• Murray Loggie is a South African Chartered Accountant who was transferred by
CCSabco to their Ethiopian affiliate as MD in 2005, a position that he held for
three years during which this affiliate made great progress, following a faltering
start after purchasing the business in 1998, al a time when the Ethiopian business
environment was particularly hostile to privately owned foreign investors.
Difficulties encountered
Al the time of their entry into Ethiopia, and even lo this day. CCSabco took on one of the
most demanding business environments on the continent.
• Really poor infrastructure (roads, power, water) is a hallmark of Ethiopia, a vast
country of mainly rural people (out of a population of 80 million, Addis Ababa
with 5 million inhabitants is the only city of substance). Chinese state-owned
investors are beginning to make an impact as they construct roads and build dams
(essential in order to supply hydro-electric power), but on the other hand, the
these improvements.
The cost of delivering soft drinks to generally poor rural consumers is
prohibitive and posed a major challenge for the company to overcome in its quest
for market growth.
• Communication channels are also poor, a situation exacerbated by the Ethiopian
government's strict control over this strategic resource. CCSabco was unable to get
permission from the authorities to use its own satellite in order to submit real-time
information to HQ, and therefore could not roll out SAP to Ethiopia, unlike all
other countries in which it operates.
• Most of Ethiopia's industries remain state-owned, in particular support industries
such as mechanical end electrical engineering workshops which are extremely
poorly equipped in terms of skills and machinery.
In addition, as CCSabco embarked on an ambitious refurbishment and
expansion campaign, it soon found that most suppliers of new bottling equipment
and the like did not have permanent local resources capable of delivering the
requisite after-sales service levels.
• Although local Ethiopian talent has proven to be extremely trainable and
enthusiastic, CCSabco was confronted with an extreme Jack of critical technical
skills as a result of state ownership of most industries. Technicians at relatively
well-run Ethiopian Airlines offered some counter-balance to the dearth of talent.
• Language also proved to be an issue in communicating with the workforce,
especially amongst older employees who were only able to converse in Amharic,
whereas younger qualified Ethiopians are conversant in English.
 C4Z Casa 05 Sabco's Business Turnaround of Coca-Cola Sabco in Ethiopia
• A lack of local supply of row materials meant that the company has had to import
materials at considerable cost and/or invest in local facilities.
The company itself refines locally produced sugar in order to meet quality
specs as set by TCCC. It also generates its own C02 • It still experiences problems
with the supply of locally manufactured glass bottles, although the position has
improved over the years (the glass manufacturer is government-owned and used to
supply as little as 30 per cent of the company's needs), while the privately owned
manufacturer of crowns has still not come up to scratch.
I
I '
• High levels of economic growth, coupled to limited exports, has resulted in a
critical shortage of foreign exchange, resulting in delays of around three months
being experienced before the company is able to remit payment to offshore
suppliers.
CCSabco has taken a long-tenn view of its investment in Ethiopia, re-investing all
profits earned to date and thereby not requiring foreign exchange ta remit as dividends
to their offshore owners (which would typically be harder to came by than in the case of
paying for imported materials.)
• When CCSabco took on the franchise in 1998, it had to also take local shareholders
on board who weren't known to them and who held a total stake of 38 per cent in
the local company, thereby having the right to block special resolutions from being
passed. This frustrated CCSabco when it came to raising capital in order ta fund
its aggressive investment programme. The situation was further exacerbated when
some of the partners were subsequently imprisoned for nefarious dealings-also
when the owner of the competitor Pepsi bottler acquired a 12 per cent stake in their
affiliate from previous partners who were forced to liquidate their holdings.
CCSabco were subsequently able to convert company debt into equity and
increase their shareholding to 80 per cent as a result, thereby crossing the 75 per
cent threshold required in order to pass special resolutions.
• On a positive note, Murray experienced generally good levels of governance es
practised by the authorities. Corruption and crime weren't issues at ell. He puts it
down to the intolerance of dishonest practices displayed by Ethiopians.
Key success factors employed in order to turn the business around
These included the following:
• Getting volumes up to a critical mass was essential in order to build a business
capable of doing better than break-even, win the confidence of its owners and then
invest aggressively in order to really exploit the potential for TCCC's powerful
portfolio of brands.
In order to do so, early investment in the two Ethiopian bottling plants took the
fonn of cautiously rehabilitating existing assets, rather than spending big on new
replacement plant. Capacities were initially expanded to meet the potential of the
surrounding areas only and only third party hauliers were used to truck product to
agents. Funding was obtained from local sources (not from shareholders.)
How CCSebeo Turned Around Their Ethiopian Affiliate C43
Pricing, too, was conservative with annual increases held at below-inflation
levels in the early years in order to get volumes up to critical mass levels and
explore the potential for the Coke range of products. Only later, when a position of
full supply had been reached, did CCSabco Ethiopia begin to price more fully in
order to begin to earn a return on their substantial earlier investments .
This cautious, 1'pay·as·you-go" approach had the desired effect in that it
gave CCSabco the confidence to expand more aggressively in the second phase,
installing new equipment that sufficiently increased capacity in order that it could
fully service the entire country. The bottler also bought 15 of its own hauliers in
order to improve service levels to rural agents and simultaneously lower the cost of
doing so.
• With the help of TCCC, CCSabco effectively lobbied government to reduce
the excise tax levied on its product from 50 per cent to 30 per cent of the cos t
of production. CCSabco's undertaking to ra.invest profits made it easier for
government to meet its demands.
• "Sabconisation" is the term that Murray uses to describe the group's set of core
systems and processes, aided and abetted by TCCC's worldwide standards for its
franchise bottlers. These served CCSabco well in fast-tracking change after taking
over the Ethiopian bottler. Only minor adaptation to local conditions was required,
of which the major one was to replace SAP with a PC· driven information system
because of government interference.
• Expatriates have been a key component of the successful tum-around achieved by
CCSabco in Ethiopia. Apart from requiring CCSabco's very best talent ta head up
the general management and finance functions , the lack of local skills meant that
full+and part-time expatriate skills remain an essential component of the technical
function to this day.
• The local company places great emphasis on troining and development of
Ethiopians, including the establishment of a training centre where CCSabco's
processes and systems are taught to local employees. This training is supplemented
by visits to observe best-in-class practices in other countries within the Caca-
Cola family, although costs often become exorbitant. The success of the training
and development programme is underlined by the fact that three Ethiopians are
currently serving as expatriates in other CCSabco affiliates.
• TCCC's focus on operotional excellence has been fully taken on board by the
CCSabco group of bottlers, also in Ethiopia where it fonns the backbone of their
continuous improvement programme.
• CCSabco's business model is decentrolized, and becoming more so. Functional
support services to the Ethiopian affiliate such as human resources, previously
supplied from its East African divisional office in Nairobi, have been discontinued
in favour of strong in-country functions backed up by high-level support, if
required, from their Port Elizabeth HQ. "Country management teams run their own
businesses with support from the centre," is how Murray explains the CCSabco
model at work.
C44 c11a 05 Sabco's Business Turnaround of Coca-Cola Sabco in Ethiopia
Results achieved
CCSabco's Ethiopian turn-around really gathered momentum from 2001 onwards and
although the unlisted nature of the affiliate means that profit numbers are not in the
public domain, the following indicators attest to the extent of the turn-around achieved
by Murray and his team:
• Compound volume growth, as well as net sales revenues (as measured in USS) have
both grown by 24 per cent per annum to date. The latter feat also means that the
company was able to extract real price increases, as the Ethiopian Birr has been
devaluing against the US$ over this period.
• Net income before tax has turned from loss-making into a meaningful profit result.
• Return on invested capital has turned from negative into +26 per cent.
• CCSabco's market share (its major Ethiopian competitor is the foreign-owned Pepsi
bottler) bas increased from below 30 per cent to almost 60 per cent.
• CCSabco's franchisor, The Coca-Cola Company (TCCC) has given the bottler a
favourable concentrate price in order to help fund its investment in expanding
the business. TCCC, however, has also benefited substantially from the increase
in concentrate sales on the back of Ethiopia's 24 per cent compound growth in
volumes-a win-win situation which makes for the perfect franchisor/franchise.a
relationship.
• The Coca-Cola Company's dashboard of operational efficiency and quality
measures, by which it measures the performance of all its bottlers, has shown vast
improvements on all fronts for CCSabco Ethiopia.
Sources
• Personal interviews with Murray Loggie (ex-CCSabco Ethiopia MD) and Phil
Gutsche, CCSabco Chairman on 16 December 2008 and 15 December 2008
respectively.
• Coca-Cola Sabco website. Available: www.cocacolasahco.com (accessed
22 December 2008).
• The Economist website. Available: www.economist.com (accessed 30 Decen:iber
2008).
• The Economist Intelligence Unit newswire, The price of success. Available: http://
www.economist.com/daily/news (accessed 30 December 2008).
Case 6.1
Maria Ramos:
Transforming Transnet
strategy
t was 21 February 2006. Maria Ramos, CEO of Transnet, one of
I
the largest parastatals in South Africa, was facing a strike by the
unions, representing more than 85 000 people. After consulting
government and key customers, the Transnet board had chosen
to cut away those of its businesses not associated with freight
transport after the government, its sole shareholder, had given it a
mandate to reduce the cost of doing business.
The memorandum given by the unions to Alec Erwin, the Minister of Public
Enterprises, stated that they were embarking on rolling mass action in protest against
"unilateral decision·making, unilateral implementation, undermining and disrespecting
labour and its members". It said: "Labour wishes to place on record the following:
We remain ideologically opposed to privatisation of strategic public assets which can
benefit the masses of our people, the workers and the economy as a whole particularly
infrastructure delivery, training and job retention and creation." It declared that the
unions were "absolutely right to insist on a genuine process of negotiation over the
restructuring of the Transnet Group." 1
Strike action had started in the Eastern Cape on 13 February. The Northern Cape and
Western Cape followed suit on 14 February. Transnet workers in Gauteng, North West,
Mpumalanga and Limpopo had then joined the protests on 20 February. 2
Ramos and Pradeep Maharaj, Transnet's group executive of strategy, were reviewing
COSATU's statement, which declared: "The unions are absolutely right to insist on a
genuine process of negotiation over the restructuring of the Transnet Group, including
proposals to privatize Freight dynamics, the Transnet Pension Fund Administration,
Autopax and the Blue Train, and plans to transfer SAA, Metrorail and Shosholoza Meyl
out of Transnet and to move other business units within Transnet."3 They looked at each
other. Had they made the right strategic decisions?
This case was prepared by research associate, Barbaro Nussbaum, with lecturer, Dr Thabo Mosala. The
case is not intended to demonstrote effective or ineffective handling of an administrotive situation. It is
intended for classroom discussion only.
Copyright C)2009 Graduate School of Business Administration, University of the Witwatersrand. No part
of this publication may be reproduced in any format-:--e~ectronic, photocopied. or otherw!se-w~thout
consent from Wits Business School. To request perm1ss1on, apply to: The Case Centre, Wits Business
School, PO Box 98, Wits 2050, South Africa, or e-mail case.centre@wits.ep:o
C45
- ------ - ---- - -

C46 Case &.1 Marni Ramos· Transforming Transnet Strategy
Diagnosing the problems at Transnet
amos reflected back to 2004, when she first joined Transnet. It was floundering. The
R organization was in deep trouble financially, strategically and operationally. A loss
of R6 billion was reported in 2003/2004. Although the transport networks were more or
less running, it was clear that a new policy focus from government was necessary.
South Africa's president at the time, Thabo Mbeki, in his commitment to tackle
problems of unemployment and poverty, was interested in seeing a dramatic increase in
the rate of economic growth, led by exports. In his state of the nation address on 21 May
2004, he had committed the government to ensuring that the public sector discharged its
responsibilities to the people of South Africa in the process of growth, reconstruction and
development of the country, by reducing the cost of doing business in South Africa. To
achieve this, the government needed a well-functioning, efficient and low-cost transport
system. Thus the political importance of Transnet's role in the economy increased
substantially.
Over the previous 10 years the organization had been through a number of
unsuccessful change efforts. There had been three different CEOs, each serving a three-
to five-year term. Saki Macozoma joined Transnet at CEO in 1996. He was followed by
Mafika Mkwanazi in 1999 and, in January 2004, Maria Ramos was appointed as CEO by
the Transnet board.
The Minister of Public Enterprises also decided to appoint a board of independent·
and experienced business people, because he insisted on very high corporate governance
standards. The team decided that it was going to run Transnet using corporate
governance reporting standards, "as if we were a listed company" .4 Still, there was
tremendous resistance to change among some of the other stakeholders. (See Exhibit 2 for
a list of board and executive committee members.)
Ramos brought with her years of experience in financial management. She had
previously been the director general of the National Treasury. Her rise to the post of
director general began when she joined the ANC's economic planning department in
1990. She was described by colleagues as meticulous and tenacious-a reputation won
through her ability to focus on the issues that really mattered. As head of the National
Treasury, she had been responsible for state debt management, which included both
domestic and foreign debt.n
When Ramos took the reins as CEO ofTransnet in 2004, it was clear in her mind tliat the
current structure of Transnet simply did not provide the platform necessary to maximize
the growth and competitiveness needed for the South African economy. The GDP target
envisaged in AsgiSA was 6 per cent, and the inefficiencies at Transnet were hampering the
achievement of that target. Many problems faced Transnet and inhibited the organization's
ability to respond to the demands of its business environment. She needed to find a way to
formulate an appropriate strategy that would bring about the desired change.
In the beginning, Ramos gave herself time to acclimatize, in order to understand what
was going on. Initially, it was easiest lo see the financial issues-they were "in your
-- - - - - - - - - - - -
• MSouth ~~rica's Highllying Businesswomen", 2 July 2004. Ramos managed a debt portfolio totalling
R410.B.b1ll1on by 2002; cash and asset management; and macroeconomic and fiscal planning, among other
portfol1os. (www.southqfricq.info/doinc businessltrend,~lwomenlbur:jneRswomen.htm)
Diagnosing the Problems atTransnet C47
race". It was much more difficult to understand the operational issues. "I knew that the
operational issues would take longer to diagnose and to solve, as nothing had been done
about them for years," she said. 5
She realized from her years of experience working in the Treasury that one only really
learned about what was going on by getting involved. So she did. She would go out into
the operations; she went to see what iron-ore shut-downs were like; she went up on cranes
in the port of Durban, and walked into the bottom of places of construction in Saldanha
Bay. Ramos had always preferred a hands-on approach.. "I d~n't .know how el~e you
learn.'' she said. "It's not about saying, 'I am not an engineer . It is about walking around
8
and talking to the people on the ground in order to understand what needs to change."
Amongst a myriad of problems, Ramos found that there was mediocre financial
performance and weak controls. Almost every week, she was told .a bout one ~orruption
charge or another at Transnet. She noticed that although Transnet s core business of the
freight businesses-which included rail and ports-were performing well below par,
collectively they could generate a profit. Risk management and governance were also
poor, and there was a lack of capital investment-in a sector where having up-to-date
infrastructure was key.
Lack of ownership and strategy fatigue
In addition, during her first few months at Transnet, Ramos was struck by both the poor
morale and the lack of a clear sense of purpose at the corporate head office. She said:
"People were disgruntled. There was a culture of hiding things. No-one spoke. There was
a dissonance between what people felt that they could take ownership with, and what
they felt was decided by the board. People were tired of multiple strategies and change.
The organisation felt like a complex foggy ecosystem, where there were not one but many
cultures." 7
It was difficult for Ramos to see what was going on. "It was easy to get lost, as there
were so many financial problems," she explained. During an early strategy session
at corporate headquarters, a longserving employee provided a strong clue about the
atmosphere at Transnet. "I have been with the company for over 30 years," he said.
"Well, for the past 10 years, I have received three different retrenchment letters from
three different CEOs. Each of those CEOs is long gone, so what's going to be different?
All I had to do is keep my head below the radar screen; the CEO would come and go and
nothing would have changed. "8
Maharaj observed: "That is the kind of victimized culture that existed at Transnet. It
said that CEOs come and go every three years. It said that strategies will keep changing
on paper, but that it would not affect the real operations. Life at Transnet, in the minds
of many employees, would just carry on the way it has always carried on. There was
scepticism, there was strategy fatigue, change fatigue and people didn't believe things
could change. There was great resistance to change.•'9
Silos and fragmentation
Ramos also found a company that was completely fragmented. Over time, Transnet
had come to comprise more than 20 businesses. (See Exhibit 1 for details of the major
C48 Casa &.1 Maria Ramos: Transforming Transnet Strategy
EXHIBIT 1 Transnet major transport businesses
NPA (National Ports Authority): Provides port infrastructure and marine-related
services; manages port activities in a landlord capacity for eight ports. During 2004,
this division reported a R2.14 billion profit.
SAPO (South African Port Operations): Port and cargo operator in all the major ports
of South Africa, managing port, terminal and cargo operations. The most import and
export commodities are handled through South Africa's six largest ports: Richards
Bay; Durban; Saldanha; Cape Town; Port Elizabeth and East London. SAPO handles
the cargo and also implements logistics solutions for its container, bulk, bulk break
(multipurpose) and car terminal operations. During 2004, this division reported a
R348 million profit.
Spoornet: Freight and rail operator, which focuses on the transportation of freight,
containers and mainline passengers by rail. In 2004, this was the largest division of
Transnet. Its core business provides logistics solutions, particularly in the mining
and heavy and light manufacturing sectors. During 2004, this division reported a
R668 million loss.
South African Airways: Major commercial airline with extensive national and global
operations: 20 destinations in Africa and carrying passengers and freight to 40 cities
in more than 30 countries on six continents, During 2004, this division reported a
RB. 72 billion loss.
Metrorail: Operates commuter rail transport in most of the major cities in
South Africa.
Petronet: Owns and operates an extensive high-pressure fuel pipeline network
through which petroleum products and gas are transported. Petronet pumps and
manages the storage of petroleum products. The liquid field network extends from
KwaZulu-Natal to the Free State, Gauteng, North West and Mpumalanga. During
2004, this division reported a R239 million profit.
Other significant divisions:
Freight Dynamics: Freight road transport.
Propnet: Property management.
Transtel: Operator of Transnet's private telecommunications network.
Transwerk: Supplier and refurbisher of railway wagon and rolling stock.
Other significant subsidiaries:
Autopax: Passenger and road transport.
Protekon: Construction and project management.
South African Express Airways: Regional passenger airline.
Viamax: Logistics and fleet management (R94 million profit).
Marine Data Systems: Transport logistics.
Owner Driver Management: Transport logistics.
Sourcs~Transnet Annual Report 2004, pp. 37-9.
Diagnosing the Problems at Trensnet C49
transport businesses in Transnet.) Moreover, one of the main constraints to developing
8 coherent strategy was that Transnet was run by a group of managers, operating in
different silos. There was no executive committee (EXCO) comprising all the managers
in the delivery system, for example. There were two port divisions, and they did not
communicate effectively.
Ramos recounted an event that painted a vivid picture of the lack of coordination
among Transnet's business units. One day, she received a call from a client-a shipping
line. The client had phoned to say that he had made eight or nine calls to various people
in the Transnet system end, in his frustration, was calling on her to resolve a matter
he could not understand. Transnet had told the client that he owed many million rand
in fines but, he said, the only reason for the fines was that Transnet's own business
divisions were not communicating with each other. Ramos decided to make some follow-
up calls herself, and she could see from the responses that the client was absolutely right.
"What are we doing?" she asked herself. As she started to probe further, she realized that
each division invoiced the client differently. She reflected: "We never understood that
we are one business. So why don't we run the container from the port to City Deep as one
business? Why can't we offer the client just one business? Why are we losing the client
along the chain?" 10
The fragmentation was evident, not only in the way different systems operated, but
in a particular mentality that was deeply ingrained in the thinking of the managers and
the staff. The port terminals, the National Port Authority and rail were not seen as one
integrated whole. Maharaj, who joined Ramos as head of strategy in 2005, had this to say:
"We all operated as stand-alone business units without any discussions. This situation
was grossly inefficient. "11
There were four operations involved in the supply chain that transported goods
from the factory onto a ship to the customer somewhere else in the world: the rail,
which carried the goods; port operations, which handled the freight; the National Port
Authority, which brought the ship in and arranged when to take the ship out; and rail
engineering, which helped with the maintenance of the rail fleet. All of these had to work
together, but weren't.
Maharaj described examples of the poor coordination. "There was an instance
when freight rail sent a train down to the port without coordinating very closely with
the port operators and with the National Port Authority. Thus there was no clarity
on exactly what time the ship was arriving, and no-one was completely certain about
when the train needed to be there to meet the ship. Then there were instances w hen
the ship arrived and the train had not yet arrived at the port to receive the goods. And
then the ship would leave." Then "there was another instance, when the train arrived
in the port and there was no ship there, so the train waited. Since the train was waiting
for the ship to arrive and the port was small, no other trains could move in and out of
that port for two days. It gridlocked the system. A situation like this cost the economy
money, because goods were lying around in various trains and therefore nothing could
move. It actually gridlocked the port. And all of that happened, just because no one
made a single simple phone call to say "don't send the train down, because the ship
is going to arrive two days late, so hold the train". A simple phone call is all that was
needed."12
C50 Casa 6.1 Maria Ramos; Transforming Trensnet Strategy
Developing the Solution C51

All of this fragmentation and lack of coordination between different elements within ,
Transnet made the South African supply chain very uncompetitive: a far cry from the EXHIBIT2 Board Members end EXCO
government mandate Ramos had been asked to deliver. Transnet board members, 2005
She was convinced that it was important to see the rail and port services as an •Chairman Transnet: Mr F.T.M.Phaswana. Has a directorship in Anglo American
integrated chain. She began to hold meetings and workshops beyond the EXCO, in order Corporation of South Africa; deputy chairman and treasurer: Inyathelo [The SA
to catalyse thinking in this integrated fashion. She invited two clients to come and speak I
Institute for Advancement).
to management about their experiences of Transnet's service. "It was like some of the
fog in this ecosystem bad been cut away, and people could see what the outside world I • Dr I. Abedian: chief executive: Pan African Investment and Research Services.
looked like. People had no idea that the actions we took, or lack of action that happened, • Professor G.K. Everyingham: professor of accounting at UCT. He is also a director
impacted the client base so deeply." 13 I of the V&A Waterfront.
I I

• Ms N.B.P. Gcaba: partner at Spoor and Fisher Attorneys. She is also the
chairperson of the Transnet M-Cell Ltd Trust.
Developing the solution • Dr S.E. Jonah: company director: Anglo Gold Ashanti. Other directorships:
ne Friday, several months after her appointment, Ramos realized that she could Commonwealth African Investment Fund [Zimbabwe), Anglo American
Ospend another three years on the job fighting fires a day. She had a strong sense
20
that she needed to focus orl the three or four things that really mattered. The first thing
Corporation of SA; chairman Transnet Second Defined Benefit Fund.
•Mr P.G. Joubert: director of companies.
she set about remedying was the composition of the EXCO. Ramos discovered that she • Ms N.N.A. Matyumza: general manager: Eastern Region, Eskom Distribution.
had a team of people in the EXCO who had never sat around a table and talked about
who they were and where they came from. Moreover, some heads of divisions were • Mrs M.A. Mpses: businesswoman.
part of EXCO, while others who were responsible for revenues and relevant business • Mr S. Nicolau: businessman.
units were not. She told all of them: "I would rather hear about whom you are, where •Ms K.C. Ramon: chief executive officer: Johnnie Holdings.
you come from and what makes you tick. Let's get to know each other. Here are my • Mr C.F. Wells: chief financial officer: Transnet.
observations. Tell me if I have the right end of the stick or not?" 14
She needed to decide on a range of steps to diagnose the operational issues. "First, •Ms Z. Stephen: company secretary.
I had to deal with senior management. I moved quite a few people out-not because Transnet EXCO members, 2005
they were bad people, but because they didn't have the right skills. When you do a big •Mr Pradeep Maharaj : group executive: strategy and transformation.
turnaround, you need people with the right energies. You need adrenaline junkies. •Mr K. Pilela: CEO: National Ports Authority.
I moved some people between divisions, because I needed a fresh set of eyes in divisions.
I then put together an EXCO and got the different heads of divisions to be on that •Mr C. Wells: chief financial officer.
EXCO. " 15 Some of the most difficult decisions she made were about people: some of • Mr T. Morwe: CEO: South African Port Operations.
whom she had to ask to move on, because they were not suitable for their positions. • Mr L. van Niekerk: chief operating officer.
Ramos created a new position of chief operations officer (COO) for the business, • Mr L.R.R. Molotsane: acting CEO: Transwerk.
and hired Louis van Niekerk, who had extensive knowledge of a highly industri§:l
• Mr C. Moller: CEO: Petronet.
environment. He had been the CEO of ArcelorMittal Steel South Africa, so he had
knowledge both of a large operating environment and of Transnet's business as a client. • Mr V. Kahle: group executive: legal and risk.
"And that," said Ramos, "helped quite a lot in asking the right questions. You need • Mr S. Gama: CEO Spoornet.
people who can ask the right questions, particularly in organizational cultures where the • Ms B.S. Tshabalala: treasurer.
tendency was for people to hide things away."11i •Ms M. Ramos: group executive officer.
Ramos also hired a new chief financial officer (CFO), Chris Wells, who had been a
partner at Deloitte South Africa, a financial services company. She wanted someone • Mr B. Nomvele: chief information officer.
who clearly understood the issues. She said: "I won't second-guess. I will ask questions \.. Source: Transnet Annual Report 2005.
and then engage. I'm not interested in appointing people who are going to tell me how
good I am. I want to appoint people who will say, 'I hear you, but you are wrong'." 17
She realized that she needed a strong and trusted person to be head of strategy, so she
C52 C111 &.1 Marra Ramos: Transforming Transnet Strategy
appointed Maharaj in July 2005. Maharaj and Ramos had worked together for many years
during their days in government finance.
Designing the strategy
There were a number of challenges that Ramos had to deal with in crafting the change
strategy for Transnet. The particular challenge in dealing with the government was that
the .organi~tion needed alignment and integration with a new thrust in government
pohcy, which stressed the need for efficient and effective delivery of transport. The new
Transnet strategy would have to have the support of government. Both Ramos and
Maharaj held a number of meetings with government to clarify the organization's mandate.
How~ver, whe? R~os realized that Transnet needed to become a catalyst for
economic growth m this country, there was a very simple decision to be made. To
support the economy, Transnet's focus needed to be on moving freight. Thus, it became
clear that ~oving passengers was not Transnet's business. " If we say we are only going
to move freight and not passengers, then it was very easy to define which ones were not
core businesses. South African Airways, for example, is a national carrier but its main
~ocus, it~ ma!n functi~n, is moving passengers. It's not our business. So we will get rid of
it. We will dispose of it, and that was one of the earlier ones we disposed of, because it
no longer made sense to us. In the same way that running the commuter rail operations
does not make sense to us, so we exited operations of Metrorail. " 18
There was a need for Transnet to develop key port, rail and pipeline infrastructure
while maintaining financial strength and operating efficiency. It was also imperative
for. Tra?snet to provid.e appropriate capacity ahead of demand, and for the organization
to msp1re confidence m the country's economy. It was clear that there was a need to
integrate delivery structures within Transnet, so that as a supply chain it would be able
to plan, design and implement end-to-end strategies for key customers and customer
segments. Finally, there was clear evidence that Transnet needed to respond to the
country's freight logistics system and improve its efficiency significantly.
Remos and Maharaj were convinced of the positive impact that successful change
at Transnet would have on the economy of the country, and realized that many leaders
a~d man?gers at Tran~net missed the value inherent in Transnet's unique position and
simply did ~ot apprecrate the potential role of transport and logistics globally. ~haraj
thought to himself: "We are the only state-owned company in the world that owns and
operates all the port, rail and pipeline infrastructure in the country. Nowhere else in the
world does an entity of this nature exist! And today, country supply chains compete
with each othe~. " 1 ~ He reasoned that, when a single entity owned a substantial part of
the ~upply chem, it had to have a competitive advantage. Soon after his appointment, he
~eahze? .that "the really unique competitive advantage that Transnet provides the country
IS that 1t s all under one roof, one company: and therefore integrating that supply chain
would make South Africa more competitive."20
Addressing resistance
Maharaj and Ramos knew that there would be huge resistance to these changes from
labour, because of labour's reaction to previous attempts at restructuring Transnet.
Addressing Resistant & C53
The unions were totally opposed to any movement toward privatization and the sale of
non-core assets. Surprisingly, they found that there was even resistance from customers,
who asked: "If you have done something in a specific way over the last 20 to 30 years,
why change?"21
For Maharaj, what needed to be done to address any resistance was clear. "Given the
challenges that we faced , the morale, the culture that existed and the reality that this
company was in deep crisis, financially, operationally, we didn't have the luxury of
time to consult broadly and run a very comprehensive, inclusive process of developing
strategy," he explained.22 He and Ramos decided to develop a simple plan that could be
articulated clearly, understood at all levels, tracked and reported on. They then decided
to communicate this plan to all stakeholders. They thought that once a simple plan was
laid out, it would be something "that we could go back and report on a regular basis. We
could go to our stakeholders and say 'this is the progress, this is what is already done,
take it off the list'. Because that is what buys you goodwill, and that's what gets you the
support. "23
From 1 July until 20 August 2005, Maharaj worked closely with a very small internal
team to develop the strategy. They liaised closely with Ramos and the EXCO in the
process. Maharaj seconded three key experienced people in the core operating divisions
to work with him full-time on the strategy team: Mervin Chatty from Port Terminals, and
Deirdre Strydom and Dirk Niewoudt from Freight Rail. Nico Walters from Port Authority
also played a role in the strategy team from time to time. Maharaj relied on their
knowledge of their businesses to guide him in developing and finalizing a structure.24
They did not go through the normal process of crafting vision and mission statements.
This was not a time for any high-floating aspirations. They developed a four-point
turnaround plan with seven or eight projects under each point, where progress could be
tracked against each element of the strategic plan. (See Exhibit 3-The Four-point Plan.)
1 Redirect and Re-engineer the Business. This pillar is aimed at improving effi-
ciencies and effectiveness of the core business units through re-engineering pro-
cesses and realizing synergies between the various operating divisions. Within
this pillar, a far-reaching programme has been launched to improve efficiencies,
reduce costs and deliver a reliable service to all clients and increase market share.
2 Restructuring the Balance Sheet. This p illar seeks to rationalize the business
portfolio and achieve a better focus on the core business units. Non-core busi-
nesses will be transferred to government and others will be sold. The proceeds
will be used to found the R40 billion infrastructure investment and reduce bor-
rowing.
'I
3 Ensure Corporate Governance and Risk Management. This pillar is designed
to ensure the highest standards of corporate governance are adhered to and the
company's risk management is improved. A fraud prevention plan and ethics
'" programme have been launched. r ai...
..._~~~~~~~~~~~~~~~~~~~~~~~~~~~~~------,,,,~ ~
 Addressing Resistance C55
C54 CUe 6.1 Maria Ramos: Transforming Transnat Strategy

· Fund administration, and the Blue Train, as well as transferring SAA, Metrorail and
•ts 'thin T
~ 4 Develop Human Capital. This is focused on revitalizing our human resources
pension b .
0 loza Meyl out of Transnet, and moving other usmess um WI ransnet.
27

by transforming the culture and behaviour of employees. Transnet aims to be an Sh Itbwas only in January 2006 that the Transnet leadersh'ip mad e the declSl.on
05
· · t o ~ngage
employer of choice. The aim of this pillar is to increase talent management and 'th staff and labour In February the unions embarked on a rolhng strike
rnore fullYWI •
d with this strike Ramos and MabaraJ• wondere d w h ether
leadership development, transformation management as well as performance tbrough out the country . Face • . . .
and reward management. they bad gone about developing and implementing thetr strategy m the nght way; Had they
Strategic Intent done the right thing? Were there other alternatives that they could have explored.
Transnet Limited is a public company with the South African government running
as its sole shareholder. Both operating and controlling South Africa's major transport Notes
infrastructures, Transnet is also responsible for ensuring that the country's transport 1 GOSA TU Weekly, 24 February 2006.
industries operate according to world-class standards and that they form an integral
2 "Durban March Ends First Transnet Strike" Mail & Guardian, 1 February 2006.
part of the overall economy.
Transnet is not only vital to South Africa's development, but it also combines 3 GOSA TU Weekly, 24 February 2006.
forces with other businesses in order to expand transport operations across Africa 4 Interview with Maria Ramos, 19 June 2008.
and beyond. By doing so, Transnet assists in creating valuable business opportunities
5 Ibid.
that extend far beyond the shorelines and borders of the country.
Recognized today as the dominant player in the southern African transport and 6 Ibid.
logistics arena, Transnet aims to be cost-efficient as well as an efficient service 7 Ibid.
provider. By working closely with its clients, Transnet is building on existing
corridors and clusters and exploiting the synergy between port and rail to tailor e Interview with Pradeep Maharaj, B July 2008.
solutions according to its customers' needs. 0
Ibid.
Sourc11. avallable WfN11r1nsn11tcg nITumArgundStrg.asox.
10 Interview with Maria Ramos, 19 June 2008.
11 Interview with Pradeep Maharaj, 8 July 2008.
Before announcing the strategy, Ramos and Maharaj tested it with two critical 12 Ibid.
stakeholders-government and their customers-and gained their support. Maharaj
explained: "One of the things we did do as part of that strategy team is that we consulted 13 Interview with Maria Ramos, 19 June 2008.
and tested the approach and the strategy with customers. As part of the process of 14
Ibid.
finalising the plan in the end, it was left to a few people to make the calls , and make the 15
decisions on what that strategy ultimately would look like."25 Ibid.
The plan was then taken to the Transnet board for approval, then to the Minister 16
Ibid.
of Public Enterprises, Alec Erwin. "We had close interactions with private and public 17
Ibid.
enterprises as part of the development of that strategy. We engaged with governmeoJ.
18
continuously throughout the process so that, by the time it was finalized, we knew Ibid.
we bad their support. It was very critical, and we needed to know whether our 10 Interview with Pradeep Maharaj, 8 July 2008.
customers-as they were sceptical on whether we could deliver on it--could buy in. 20
Ibid.
We were able to test key clients and key customers and get their views into whet made
21
sense and what didn't make sense. They actually said 'it makes sense and is sound', and Ibid.
we got the buy-in. It was a very steep learning curve, but it's about having faith and trust 22
Ibid.
and the knowledge that people brought to the table. "26 23 Interview with Maria Ramos, 19 June 2008.
Conclusion 24 Interview with Pradeep Maharaj, 8 July 2008.
One of the key strategies for restructuring the balance sheet was to dispose of non-core ZS Ibid.
assets. As early as 2004-even before the strategic plan was devised- Transnet disposed ofa 26
Ibid.
number of non-core assets, including Fleet Call, Marine Data Systems, Virtual Care, Transtel,
27 Transnet Annual Report 2005.
Autopax and Transnet Housing. Now it proposed privatizing Freight Dynamics, the Transnet
 Redirecting and Re-Engineering The Bus iness C57

Case 6.2 f the business, including operations and maintenance. Significant achievements were
~aJized in each element of the plan.

Maria Ramos: Redirecting and re-engineering the business

Transforming Transnet T
he strategic intention of this pillar was to strengthen operational and financial
performance, and it focused Transnet's resources on re-engineering and redirecting
capital investment to the core businesses. The organization's re-engineering effort became
str:ategy fEpilogue) )cnown as Vulindlela (Zulu for "opening the way"). It mobilized people at all levels of the
organization to engender their support for the reengineering of the core business.
By 2007 Transnet had done away with the old semi-autonomous and fragmented
strUcture and replaced it with a single, integrated one, so that the organization now
\ In implementing the Four-point Pl .
executive of Transnet kn th anh ' Maria Ramos, group chief comprised:
• ew at s e had t fi • Transnet Freight Rail (formerly Spoornet).
a cost-effective freight and tran o ocus on developing
and competitive services and spobrtl' company, delivering efficient • Transnet Rail Engineering {formerly Transwerk).
Maharaj, group executive' for tr ena mg econom·
t
th
IC grow , Pradeep
• Transnet National Ports Authority (formerly the NPA).
' ' that the key to dealing with st:ffa e8J'tnd transformation, realized
about what th an abour was to ensure clarit • Transnet Port Terminals (formerly SAPO).
For Mahara1' "labour d'd e turnaround plan called for. y • Transnet Pipelines (formerly Petronet).4
, I not oppose the b t .
concern was largely on the nature of the su1 s anhve transformation ofTransnet Their The Vulindlela initiative had also managed to improve the efficiencies and
w'th I b . consu tation pro W h ·
I a our prior to them calling for a strike We had c~ss. e ad spent a lot of time effectiveness of the core operating divisions, particularly the port system and the freight
an agreement on the substantive issues "1 Th . c~rtam1y created the foundation for rail business. It had led to significant improvements in port-rail synergies, and improved
th.a nature of the consultative process .•:Th e ~am :o~nt of disagreement had been around operational efficiency in all Transnet operating divisions. With the new structure, and
with them earlier," he said. "Given ou e umons eheved that we should have consulted commitment to working in an integrated way, Transnet was then able to reorient its
we kn th r engagements and our fr
ew at government supported us full in sup~ort om government, business towards its customers.
went to the unions knowing that we had t ydti that process and m those engagements We Although integration had greatly improved by October 2008, Maharaj still believed
With this assurance ofgover sea ast support from government "2 ,
th . nment support k · . h · that "the level of integration is not yet at the point where we are satisfied. I think there
e reality that the Transnet leadership c Id ' a bey mstg t for Ramos and Maharaj was is still a long way to go to ensure that we are fully integrated in our thinking and our
a?d they therefore decided to ride out th~~tri;otB aulk at restructuring the organization, delivery of operations. We are making substantial strides to improve it".5
disposed of most of its non-core bu . he. y September 2006 Transnet had
2006 smesses. T est 'k h' h One of the strategies that Ramos and Maharaj used to sustain commitment to
. , ended three months later on 21 M T n e, w Ic began on 13 February integrated management implementation was to initiate a new incentive scheme for
umons regarding the principles that wo:~ ~;nsnet c~ncluded an agreement with the EXCO members. In terms of this scheme, 40 per cent of each EXCO member's bonus
assets. A Strategic Leadersh ' F g de the disposal ofTransnet's non-
h, h ip orum was establ' h d d, core was driven by what Transnet as a whole managed to achieve, and 60 per cent by what
ig -level consultation between the trad . ts e , an it became the centrepiece for each EXCO member achieved in their individual business units. Maharaj observed: "It
Once Ramos and Mahara1' h d k e umons and the Transnet EXCO. ~
a wor ed through th t 'k instantaneously created a dependence on us working together as an integrated team. It
on an aggressive human capital devel es r1 e, Transnet was able to focus was about taking simple steps, in a way that says that if you want to be rewarded and get
opment strategy and spend tim 0 l
on neg acted parts a bonus, you have to start working and taking joint and collective responsibility."6
---
This ~ase was ~paredb~;;,;;; - . - _ _ __
He stressed the importance of implementing both the structural, systemic changes and
~ase is not intended to d;[ assoc~ate, Barbara Nussbaum, with I ------ the soft changes, such as to the culture. Efforts were also made to cascade a different culture
Intended for classroom di:C~~=~rate effilect1Ve or ineffective handling or a:~dure;. !1r T~abo_Mosala. The of management into the organization, so that there was a greater commitment towards
Co . ion on y. ~ m1mstrat1Ve situation. It is
P}'.r1ght ©2009 Graduate S h I f . working more closely together. Maharaj felt: "Whilst you have the operating divisions, it's
of tlus publication ma b c oo o Busmess Administration Univ . about working more closely together that truly brings value."7 Over time, both the structural
~ohsont from Wits Bu~n!~ 0£:h~~ ce; in any formet-olectron,ic, ph~~~~P~!~he Wi~ware~srand. No par!
1 changes and the culture changes dovetailed to reinforce a different type of behaviour.
c ool, PO Box 96, Wits 2050 So ih x~~quest penn.ission, apply to: The Cas ,~rot erw!se-w!thout
' u ice, or o-ma1J i<l&e-c11ntr eOw' 1
~ -~-
- e cntre, Wits Business
I }f,Sl<,. li!
The major thrust for Transnet's turnaround had to do with improving the efficiency
CS& and effectiveness of its operations. Transnet made the decision that the businesses it had
C58 Case 6.2 Maria Ramos: Transforming Transnat Strategy (Epilogue I
Redi recting and Re-Engineering The Business C59

retained had to start operating at appropriate international benchmarks. One of the best
examples of improvements in integrated performance was in the handling of containers.
In 2004/2005 shipping lines began to impose a surcharge of US$100 at the port in
Durban for handling containers. The reason was that delay times and productivity did
not meet acceptable standards. These surcharges cost South Africa a total of over a
R1 billion over a three-year period. Transnet encouraged three of its operating
divisions-Transnet Port Terminals, Transnet National Ports Authority and Transnet
Freight Rail-to sit down with the key stakeholders in the industry and agree jointly
with the shipping lines, freight forwarders and logistics businesses on the required
productivity targets.
A steering committee was formed, co-chaired by Transnet and players from the
industry, which reported on a monthly basis on progress against those productivity
targets. As soon as Transnet was able to demonstrate a sustained improvement in
productivity levels in excess of those targets, it went back to the shipping lines and made
the case for the shipping lines to drop the surcharge. Maharaj explained: "These are the
kinds of imperatives that showed that we were able to change our game and shift gear, in
terms of productivity and efficiency levels. "8
In implementing the strategic plan, Transnet's leadership steadfastly pursued the
issues of operational efficiency and productivity. It understood that the clamour for
privatization of the ports would continue if Transnet did not operate efficiently. "If we
are going to retain that asset within this organisation, we have to address productivity
issues-because if we don't, we are hurting this country," said Maharaj.
Once the business was restructured and re-engineered, Transnet was then able to give
more attention to investing in the infrastructure and maintenance programmes.
Strategic balance sheet management
puring 2006 the process of disposing of non-core assets continued. SAA, for example,
as transferred to the Department of Public Enterprises on 21 March 2006, and sold for
;2 billion, and Victoria and Albert Waterfront Holdings was sold for R7.2 billion. This
transaction was probably one of the largest real estate deals and property empowerment
deals in the country. It brought together international investors (Dubai World's Isthitmar
and London and Regional), and local and black investors purchased 25 per cent of the
shares in the new company.
By 2007 the remaining non-core assets were sold to achieve a better focus on core
perating divisions. Completion of the disposal programme released resources-cash,
~me, management and personnel-to focus on the five core operating divisions. (See
Exhibit 1 for further details of the sale and transfer of non-core assets.)
There were significant improvements in financial performance. For example, the
net value of assets increased by 246 per cent in Transnet National Ports Authority
during the period from 2004 to 2007. The improvements in financial performance at
Transnet are testimony to the effectiveness of the implementation of the various strategic
interventions. According to the Transnet website,10 operating profit increased from
R4.74 billion in 2004 to RB.47 billion in 2007, and EBIT increased from 17 per cent to
40.7 per cent in the same period.
During the financial year March 2006 to March 2007 Transnet's "revenues had grown
by B per cent to R26.9 billion, fuelled by an increase in volumes moved and handled;
EXHIBIT 1 Sales of Transnet's non-care assets

Capital investment programme Asset Buyar Price

In a sector plagued by lack of investment in infrastructure, capital investment was a key Transnet Pension Fund 100 Metropolitan Life (including R20 million and R3 million respectively
par cent administration and Kagiso Trust Investments and
strategic element. Transnet adopted a corridor approach as the framework for infrastructure investment services Frfth Quadrant respectively)
investment. The purpose of this approach was to define key railway corridors and focus
on their linkages to ports. Integrating railway corridors and ports provided support for Equity Aviation Services Equity Aviation Services Ltd R70 million
promoting concentration in the freight system, enhancing the efficiency of the supply chain TransnetTelecom FSN Naotel {Pty) ltd-formerly R251 million (funded by issue of equity of
and ensuring alignment between rail and port planning and investment.9 Metro Assets known as the second network 15 per cent in Neatel)
operator
During 2005 the Minister of Public Enterprises announced a R40 billion inGastructure
plan for Transnet. This was intended to overcome the legacy of underinvestment in the VAE Perwav Pty Ltd VAEGmbH R30millian
port, rail and pipeline infrastructure of the country. Projects approved in 2005 included (35per centl
capital investment in widening and deepening the entrance channel of the port of V&A Waterfront Holdings London & Regional Al .Bbillion. This transaction was probably one
Durban; deepening and equipping the Cape Town container terminal and developing the {26 per centl Consortium of the largest real estate deals and property
port of Ngqura, near Port Elizabeth. empowerment deals in the country. Jt brought
together international investors (Dubai World's
In 2006 Transnet Projects was set up to implement major capital investment
lsthitmar and London and Regionell, and local and
projects-defined as those investments worth more than R300 million. For the first black investors who now hold 25 per cent oftlte
time in its history, Transnet invested close to R12 billion in capital during a single shares in the new company
year. Throughout, Transnet made efforts to ensure rigour on feasibility studies, as South African Airways Department of Public R2 billion Ino cash flow; transaction effected by
well as in the design and implementation of the projects. The decision to set up the Enterprises a share buy-be ck)
Transnet Projects unit to roll out the major investment projects also freed up divisional Source: Transnet Annual Repon 2007
management to concentrate on daily operations, especially efficiency improvements.
C&O Case 6.2 Maria Ramos: Transforming Transnat Strategy (Epilogue I Redirecting 11nd Re·Enginaenng The Business C61

operating profit was healthy (having risen by 15 per cent to Rl0.7 billion); and cash
EXHIBIT2 Transnet consolidated balance sheet
flows were solid (at R13.5 billion, a rise of more than 20 per cent). One of the biggest
achievements of the period was the complete turnaround of the balance sheet: our Asat 31 March 31 March
gearing levels have now reduced to 39 per cent, an improvement of 15 per cent, which 2008 2007
means that Transnet had developed significant borrowing capacity. The net worth (in rand million) Restated
of the business had in three years grown fourfold to more than R37 billion. Transnet ASSETS
met all of the financial targets that were agreed between us and our shareholder [the Nan-cumnt essets 84077 58277
govemment]."11 (See Exhibit 2 for more detail on the 2006/2007 balance sheet.) Property, plant and equipment 78114 53896
Investment properties 4514 3223
Intangible assets and goodwill 32i 207
Risk management and corporate governance Investments in associates and joint ventures 48 47
From her early days in Transnet, Ramos was confronted with allegations of corruption on Derivative financial assets 533 321
Long-term loans and advances 90 123
a weekly basis. She chose to take a zero-tolerance approach. The campaign against fraud Other investments end long-term financial assets 452 460
was dealt with by the enforcement of anti-corruption policies. She developed extensive Cumnt assets 14818 19069
risk management frameworks, known es the ERM [enterprise-wide risk management), Inventories 2319 t 798
and risk structures were established to reinforce the framework. A new post of chief risk Trade and other receivables 3839 3992
officer was created in June 2007, and was filled by Virginia Dunjwa. Derivative financial assets 412 5658
Other short·term investments 550 204
Cash end cash equivalents 6567 3 847
Develop human capital Assets classified es held·for·sale 1131 3 570
Once the disposal of non-core assets had been completed, Transnet had 48 578 Total assats 98195 77346
permanent employees and 8543 employees on fixed-term contracts.
EQUITY AND LIABILITIES
By 2007 Transnet was able to begin a human capital development strategy. The main Capital and reserves 51183 37150
elements of this strategy included: 12 Issued capital 12661 ill!!
• skills demand planning. Reserves 38522 24367
Equity attJibutable to the equity holder 51183 37 028
• recruitment end retention. Minority interests 122
• capacity-building and skills retention. Non-current liabilities 27862 23184
Post-retirement benefit obligations 2181 2422
• performance management. Long·term borrowings 16890 17535
• talent management. Derivative financial liabilities 453 240
Long-term provisions 1422 928
• culture. Deferred taxation lie bilitias 6916 2059
A key element of the skills planning of the human capital strategy was its commitment Current liebilities 19850 17012
to implementing best practice. For Ramos, it was "the only way to stay competitjve and Treda payables end accruals 7339 5 875
Short·term borrowings 8382 7 615
to challenge ourselves and to see that we're keeping up with best practice out there. I Currenttexetion liability 785 502
will often pick something up in Engineering News, or another journal, and I will say Derivative financial liabilities 113 165
to my colleagues, 'did you read this?' I do this quite deliberately. I think the world is Short·term provisions 2533 2376
such a competitive place, and though we're not a global company ourselves, we are by Bank overdraft 22 26
extension, because virtually all of our clients operate on a global stage, and so whether Liabilities directly associated with assets classified as held·for-sale &76 453
you are the train driver or the CEO of a business division, you want people to think like Total equity and liabilities 98895 77346
that, for people to have a view larger than their little view of the world."13
Sourcs-. Transnet Annual Report 2008.
The bulk of Transnet's clients were exporters or importers, and so the port
business remained a central focus. To keep up with international best practice, the
organization developed close relationships with colleagues in the best ports of the
world, such as Singapore, Korea and Hong Kong. These relationships facilitated constant
communication and learning about the technologies they were using. Skills-exchange
C62 Case 6.2 Maria Ramos: Transforming Transnat Strategy (Epilogue) Redirecting and Re-Englneenng The Business C63

5 Interview with Pradeep Maharaj, 8 July 2008.

programmes were developed, and initiatives were set in place to exchange information
about bow their ports were configured, what kind of cargo they were moving and how 6
Ibid.
their container terminals functioned. 14 1
"We now know what benchmarks are for pipelines-we set benchmarks, we measure Ibid.
8
what we are achieving what we set out to do," said Ramos. 15 Transnet also realized that, Ibid.
as it brought in new equipment, it needed to invest in training in South Africa. "To get 9 Transnet Annual Report 2007, p. 29.
that training, we needed to import best-practice training staff. And one of the best places 10
for best practice is Sri Lanka," she explained. 16 Transnet website.
11 Interview with Maria Ramos, 15 July 2007.
Reasons for Ramos's success 12 Transnet Annual Report 2007.
In August 2001 the country's most prestigious award for businesswomen was bestowed 13 Interview with Maria Ramos, 15 July 2007.
upon Maria Ramos, when she was director general of the National Treasury. In 1985, she 14
was elected by the World Economic Forum as a global leader of tomorrow. According to Ibid.
15
a Financial Mail article on South Africa's most influential businesswomen, "With steely Ibid.
nerves and unwavering focus, Ramos moved swiftly to introduce sweeping changes to 16 Ibid.
transform and restructure Transnet from a lumbering and heavily indebted loss-making
company into a profitable entity. She dared to tackle management productivity and
17 Sbareen Singh, 'Maria Ramos-No Job's Too Tough'. Financial Mail, 7 July 2006.
corporate governance issues despite fierce opposition from within and outside the group. 18 'Ramos World's 14th Most Powerful Businesswoman: Fortune', 15 October 2007, SA
As was to be expected in a highly politicized state-owned entity like Transnet, Ramos The Good News, available www.sagoodnews.eo.za/sa teaching the worldl ramos
endured a fair amount of backlash over her management style ... . Her actions, however, worlds 14th most powerful businesswoman fortune .html.
have delivered positive results. She reversed its losses into an R13 billion profit in the 19 Interview with Pradeep Maharaj, 8 July 2008.
March 2005 financial year, and the once-daily complaints by conglomerates and small
20
business alike about poor service and backlogs subsided." 17 In Fortune Magazine's Ibid.
annual survey in 2007, Ramos was ranked among the top businesswomen in the world,
in 14th position,18
What has contributed to her success? For Maharaj, "the joy of working with Maria
is that she has such a passion for what she does, and with her, you know exactly her
priorities. She puts this country and this company above anything else, and her absolute
drive to achieve that just inspires people around her. She is uncompromising on delivery
and excellence, and in that way is a very hard taskmaster. "10
He added: "Maria doesn't deal with personalities. She focuses on issues, and therefore
there is absolute respect for each other. You get the respect of being together and working
together-it doesn't diminish. Because it is all about what is the issue and how it cd:il
be resolved. It is also about respect, trust, it's about loyalty. We could work together as
a team because we share a common set of values and principles that guided us through
some very difficult times together. "20

Notes
1
Interview with Pradeep Maharaj, 8 July 2008.
2
Ibid.
3
Transnet Annual Report 2007
4
Ibid.

Case 07
Using strategy maps and
the Balanced Scorecard
effectivelv: 1'11e case of
Manpower Australia
Suresh Cuganesan and Guy Ford
Macquarie Graduate School of Management
Haider Khan
MGSM Case Studies in Management
Macquarie Graduate School of Management
Introduction
T he 2004 financial performance was v
then in the second year of her rol
Ravenue had increased by 10 per centewh"l
.
eMry enc?urag_mg for Varina Nissen, who wa
as anagmg Director for Manpower A ustraha. .
measure of performance return on sales ~ edc;;sts ~ere weU below target. The overall
and Director of Corporal~ Services ann~ a d een !~proved, Scott McLachlan, the CFO
budget targets. It's never happened' befo u~ceth coh~f1dently, "We have achieved the
. ,, Th e
remherete istory of Manpower A us tra1Ia.
corporate strategy developed by Varina and
Scorecard (BSCJ, had achieved the short-term fina~:· ~~·exe_cuted through the Balanced
turnaround in a relative short period of ti H a o Jechves for the company and a
and Scott, not least of which was how t me. th o;ever, future challenges awaited Varina
improvements. o use e SC to secure further performance
The recruitment industry ·n A tr l' h . (US$8.1 billion) in 2003, and grew by 13.0 per cent from 2002. During the last five years
more challenging. Having rea~hedu:el:t;a ea~m~ into 2005 continued to become
ve ma unty, profit margins were being eroded.
C64
The Australian Recruitment Employment Services Industry C65
Manpower's major competitors had also focused on improving productivity and were
often able to offer clients better prices. This had affected the company's core business of
temporary placements, which had been flat for the last couple of years. There were also
candidate shortages in certain segments of the market, while customers were demanding
total solutions for their human resource management needs, ranging from the existing
recruiting services to learning and development and perfonnance management/succession
planning activities. An opportunity existed for growth through innovation-developing
and marketing new products and services to target customers.
Under Verina's leadership, a new strategic vision of being a "Leader in Innovative
People Solutions" had been developed and communicated. Innovation and growth of
higher-margin business such as human resource services, while maintaining high service
delivery speed at lower costs in its core business of recruitment were emphasized.
To help communicate and implement her strategy, a Strategy Map and BSC for the
organization had been developed and implemented in 2004. According to Manpower's
senior management, the BSC at Manpower had been important in communicating the key
behaviours required for improved productivity and demonstrating the financial impacts
of doing so, with the improved financial performance in 2004 being seen as "proor' that
it worked.
However, given the changing business environment, Varina wanted to know whether
the value propositions were being delivered to targeted customers, and if so, were they
leading to improved customer and financial outcomes? Was the company progressing
fast enough in performing activities and services that were valued by targeted customers?
In addition, the CFO of Manpower's global operations was still concerned over the slow
pace of productivity gains in Manpower Australia as compared to Manpower's global
standards. Beating the productivity targets agreed with the parent company represented
another challenge for Manpower Australia, where Return on Revenue had to be increased
by 2 per cent and the expense to Gross Profit (GP) ratio decreased by 10 per cent.
Varina and Scott both felt that the BSC could help the business implement its strategy
more effectively and attain a higher level of performance than that already achieved.
However, they were also aware that the BSC was not being utilized as extensively as they
envisaged in some parts of the business and, in some cases, was being totally ignored in
managerial decision-making and tbere was a lack of consistent communication to teams
on effective progress on performance. Overall, they thought that the BSC needed to be
improved if it was to focus the entire organization on the critical leading indicators of
success for the business.
The Australian recruitment employment services industry
Market size
The Australian market for employment services was estimated at A$12.5 billion
the market had grown by over 60 per cent. One of the major drivers for this growth
was that companies were focusing more on investing and strengthening their core
competencies, and turning to strategic alliances with employment service providers to
C&& C11e 07 Usmg Strategy Maps and the Balanced Scorecard Effactively: Tha Case of Manpower Australia
Manpower Global C67

manage and operate non-core activities such as staff recruitment and related human
resource management activities. industry in Australia was highly fragmented with low barriers to entry and the non-
dominance of global players. Adecco Group SA had been the market leader for the last
General temporary jobs, growing by 107.9 per cent during 1999-2003(Exhibit1),
six years with a market share of 11.6 per cent. Manpower Services (Australia) Pty Ltd
constituted the largest sector in employment services industry with 37.7 per cent
had the second-largest market share of 6.0 per cent while Skilled Engineering, a strong
(A$4.7 bi.llio~) of .the. total revenue ~ix. Temporary employment provided flexibility
performer in temporary placement, was third with a market share of 5.8 per cent
for organizations m limes of economic uncertainty as well as flexibility on the side of
(Exhibit 2). There were also a number of niche service providers that focused on higher-
employees. Although executive employment market remained flat during 2003, there
margin areas such as executive search specifically.
was consistent growth in this sector due to increased pressure to improve corporate
performance and the growth of global firms. In Australia, the demand for talent and
experience had increased at most levels in organizations, particularly in IT and financial Market growth forecasts
services-related jobs. The recruiting (employment services) market was forecast to grow 61.7 per cent (2003-08)
to reach a value of A$20.3 billion (US$13.2 billion) by 2008. The major drivers for future
Competitor dynamics growth were the positive economic outlook, existing low unemployment levels (which, at
5.6 per cent, were the lowest in 14 years) and high confidence levels positively affecting
Industry statistics revealed that there were approximately 2750 organizations in the
investments in human resources. While general temporary jobs were projected to continue
employment services (recruiting) industry in 2002/2003. The employment services
to be the largest sector in the Australian employment services market with a value of
A$7.6 billion and 37.5 per cent of total industry revenues, the other forecasted growth sector
EXHIBIT t Market sectors 1999-2003 was executive search, with a forecast of 61 per cent growth {2003-08).
In addition, companies were looking to outsource more of the human-resource
AS million
management function. Alongside the provision of "core" recruiting and staff services,
1999 2003 opportunities existed for participants in the employment services industry to provide
Executive search 579.5 1,191.2 core human-resource management functions such as employee records maintenance,
General permanent jobs 2.429.l 2,883.9 payroll services, and health/wealth benefits services, together with learning and
General temporary jobs 2.273.2 4,727.1
Outplacement consultancy 497.5 877.7
development and performance and succession planning advice. Overall, opportunities
Specialist agencies 2,038.7 existed for recruitment firms to become more proactive in offering solutions to their
2,858.9
Source: Euromonitor International clients across the entirety of the human-resource management spectrum.

Manpower global
EXHIBIT 2 Share of market 2003

Adecco Group SA
M anpower Inc., established in 1948 in Milwaukee, Wisconsin, United States, is
a world leader in the employment services industry, offering customers a
continuum of services to meet their needs throughout the employment and business
11.6
Manpower Services !Australia) Pty Ltd cycle. A Fortune 500 company, it specialized in permanent, temporary and contract
Skilled Engineering limited 6.0
5.8 recruitment; employee assessment; training; career transition and organizational
Hudson Global Re soure es
4.6 consulting services. Manpower's global network of 4300 offices in 74 countries and
Chandler Macleod Group Pty Limited
Heys Personnel Services (A ustralia) Pty Limited
3.1 territories enabled the company to meet the needs of its 440 000 customers per year.
Kelly Services Australia 3.0 These ranged from small and medium-sized enterprises across all industry sectors to
2.5
Spherion Group some of the world's largest multinational corporations. During 2003 , the company's
Julia Ross 1.7
1.6
21 400 staff employees and 1.6 million temporary workers worldwide supplied
Candle Australia Limited
1.6 780 millions of hours of work. Manpower Inc. claimed to be able to help any
Drake
Integrated Group 1.5 company-no matter where they were in their business evolution-to raise productivity
Michael Page 1.5 through improved strategy, quality, efficiency and cost reduction, thereby enabling
0.7 clients to concentrate more on their core business activities.
Source: Euromonitor International
Manpower Inc had showed impressive financial performance worldwide during
financial year 2004. Revenues from Services increased 22.5 per cent to US$14.9 billion,
CBS
Ca1107 Using Stn1t1gv Maps and the Balanced Scorecard Effectlvefy. The Case of Manpower Australia
Manpower Australia C69

Gross Pro~t ina:eased 30.5 per cent to US$ 2.B billions and Net Earnings per
r
Share-Diluted ~n~reesed 53.3 per cent to US$ 2.59 in 2004. Its global vision, strategies •We share one global identity and act as one company while recognizing the
and values {Exh1b1t 3} represented a framework for direction and priorities in makin diversity of national cultures and working environments
decisions, developing opportunities and building relationships for Manpower's peo:le •We reward team behaviour
and customers around the world.
Innovation - we dare to innovate and be pioneers
,
EXHl81T3 Manpower global: vision, strategies and values • We thrive on our entrepreneurial spirit and speed of response
Vision • We take risks, knowing that we will not always succeed
To b~ the best worldwide provider of higher-value staffing services end centre for
I
• We are willing to challenge each other and not accept the status quo I
quality employment opportunities. • We lead by example
'\.
Strategies
• Revenue - Rigorously focus on industries, geographies end customers that have
the strongest long-term growth opportunities for staffing services and solutions.
Manpower Australia
• E!fi~e~cy-.Continuously improve profit margins and returns through
anpower has been operating in Australia and New Zealand es a human resources

1 •
disciplined mtemal processes and increased productivity.
Acquisitions - lden~fy and pursue opportunities for strategic acquisitions that
have the best potential to catalyse and enrich the core temporary staffing business.
• • Technology -Aggressively explore and implement the transformational
oppor~nities of i~f~rmation technology and ecommerce to continuously develop
defensible compehllve advantage in all aspects of the company's activities.
• Organization and culture - Capitalize on our entrepreneurial corporate culture
to make the m~s~ of our internal talent and develop meaningful career paths for 'I
employees, str1vmg toward "best practices" in everything we do throughout the
global organization.
Values
Manpower global core values are based on three principles pertaining to people
knowledge and innovation. '
People - we care about people and the role of work in their lives
• We respect all our people as individuals, enabling and trusting them to meet the
needs of colleagues, customers and the community '
• We are committed to developing professional service according to our high
quality and ethical standards
• We recognize everyone's contribution to our success
•We help people develop their careers through planning, work experience
coaching and training ' ~
Knowledge - we learn and grow by sharing knowledge and resources
• '!'e actively listen to our people and customers and act upon this information to
improve our relationships and services
•We pursue the adoption of the best practices worldwide
M solution provider for over three decades. It was first established as a franchised
operation in 1965 but was later purchased by Manpower Inc. in 1996. There are seventy
two (72) offices in Australia/NZ with 34 000 temporary workers. During 2003 over
65 000 permanent and temporary jobs were filled in Australia/NZ by Manpower. In
Australia, Manpower operates under the brand names of Manpower, Right Management
Consultants, Manpower Executive, Elan and Manpower City. The company's current
organization structure is shown in Exhibit 4.
The company hes four divisions-Recruitment & Staffing Solutions (RSS}, Major
Client Service (MCS}, Corporate Services and Strategic Services. R&SS, the retail ann of
the company operates through a network of 56 branches and was generally organized
by regions whereas MCS was generally structured into teams that serviced the needs of
high-volume clients such as major information technology companies. The core business
of R&SS and MCS is the fulfilment of both temporary jobs (Temps) and perrnarient jobs
(Perms). Across both business units, the Manpower consultant was responsible for
servicing client needs through the sourcing of the right candidate.
EXHIBIT 4 Manpower organizational chart
I I
Managing Director
I I
l
Recruitment and Major Client
Staffing Solutions Services
MD Office
Corporate Services Strategic Services
Executive Officer
C70 C.se 07 Using Strategy Maps ind the Bal1nced Scorecard Effectively- Thu Case of Manpower Australia
In general. the MCS business was considered to be at the lower-margin end of the
spectrum of Manpower's offerings, while executive permanent recruitment and HR
services tended to be of higher margin. In recognition of this, a significant effort had been
augment the existing portfolio of clients with volume business with HR services as well
as compete in retail and, in particular, expand its executive placement business.
The strategy
V arina Nissen joined Manpower Australia and New Zealand as Managing Director in
2003. According to Varina and Scott, when Varina joined Manpower, the company
was facing a number of significant challenges:
• Manpower Australia had experienced flat growth for the past two years against
Manpower global standard of year-on-year growth.
• There had been little successful new product development.
• The company had been underperforming against the Manpower global standard for
the measure of Gross Profit/Total Salary Cost.
• The company was challenged by competitor discounting.
• Culture and processes did not support innovation nor bad the capability of its rapid
commercialization.
All key areas of the business were thus challenged to create value and improve the
company's financial performance, however there was no explicit strategy in place to
give them direction and focus. In the absence of an Australian specific strategy, the
newly appointed Managing Director decided to develop a corporate strategy based on the
corporate vision, "To be recognized as the Australasian Leader in delivering innovative
people solutions". Three strategic themes were identified:
1 Focus on clients and candidates.
2 The expansion of service offerings to provide people solutions throughout the HR
value chain.
3 Supply capability to grow communities and sectors/industries.
To make these strategic themes operational, Manpower required significant
marketplace repositioning, cultural change, operational redirection and an overall
improvement in all major aspects of the business. Five strategic initiatives were proposed
to address these challenges;
• Grow market share in growth industries and sectors.
• Contribute to the employment growth in communities.
• Meet industry benchmarks.
• Reposition the Manpower brand as "the authority on work".
• Proactively manage risk.
In Australia, the markets conditions for recruiting the industry were volatile.
According to Scott McLachlan, the CFO of Manpower, "The recruiting industry in
Australia is highly competitive and extremely fragmented. The market leader has only
The Strategy Map and Balanced Scorecard C71
10-11 per cent of total market share and there are around :moo agencies in the country.
There are all types of competitors-across the board price focus and also competitors in
key categories and niche providers. The market has shifted from being volume and price
driven to being profitable growth driven. It is a low return, low cost of entry market and
therefore the purchasing power is started to shift. The successful company is one that is
both a low cost provider and delivers products that are better than the competitors. Also,
70 per cent of cost is related to people, therefore the best GP return per consultant is
important to achieve".
Initially the focus was mainly about developing and clarifying Manpower Australia's
vision and the strategy. However, Varina was also concerned about the organization's
agility in aligning itself with the rapidly changing business environment and the strategy
that had been developed. She knew that the mindset and behaviours of the Manpower
consultant, being the customer- and candidate-facing resource, was the key to achieving
this agility. She raised her concerns with other members of her team and said in one of
the meetings, "Recruiting is a commoditized industry with competitive margins at retail
and margin squeeze in volume accounts. Therefore, in order to perform, our front-line
staff, whether consultant or support staff must be able to understand and implement the
company's strategy. This could also be where we have our single-most potential point of
failure-in the field. Our people need to understand from the company's strategy, what
they can deliver to our customers and candidates, and how to price it, with effective
operations and sales tools".
To help communicate and drive strategic priorities Varina developed a strategy map
and a BSC at Manpower.
The strategy map and Balanced Scorecard
fter developing and finalizing strategic initiatives, the next challenge was to
A implement the strategy and measure the impact on business performance. Varina
and her team chose the BSC as the strategy implementation tool. According to both
Varina and Scott, the BSC was selected by Manpower because:
• Manpower's vision and strategy needed to be translated into actions, with a
common language, particularly a common, fact-based approach to measurement.
• Key changes were required in the measurement systems which would impact
customer relationships, core competencies and organizational capabilities.
• There was a need for a measurement and management framework that could link
long·term financial success to current customers, internal processes, employees and
systems performance.
• BSC used measurements to inform employees about the drivers of current and
future success.
• With BSC it was easier to channel collective energy, enthusiasm, knowledge and
abilities in the pursuit and achievement of long-term common goals.
For Varina, "The balanced scorecard is an easy to adopt methodology and is value
focused. It clarifies the cause and effect linkages between employee, customers and
financials. It's a modern tool that helps analyse business effectively". Scott was likewise
 happy with the selection of the BSC as the company's strategic measurement system and strategy map was the integration and alignment of all levels of her management team
said "The scorecard will monitor how we are going in our journey". The CFO added, and the overall organization. Varina said, "The strategy map was developed to unite the
"Previously, the management was more focused on short-term gains. With balanced leadership team by linking the divisions and business units through higher corporate
scorecard, the management team started looking across at least a year's horizon and the goals like ROS, Expense/GP etc".
operational team started focusing on quarterly horizons." Having developed the strategy map, the R&SS scorecard {Exhibit 6) was developed
The management team decided to implement the BSC first in the R&SS division. It and implemented in 2004. The scorecard was build from top down using four steps.
was envisaged that once successes were created, the programme could then be rolled Firstly, financial outcomes were set. Secondly, key customer outcomes that created
out efficiently and effectively to the entire organization. R&SS was selected because related financial outcomes were identified. The third step involved identification of
the company wanted to leverage its branch network to focus on growth sectors and internal processes relating to customers and productivity outcomes and finally, the
occupations through the implementation of various strategic initiatives, and it was felt infrastructure needed to achieve all of the above was identified. Initially , effort was
that the BSC framework could help this process.
To achieve clarity around Manpower's strategy, a strategy map (Exhibit 5) was first
developed during various strategy sessions with the executive management. The strategy EXHIBIT 6 Recruiting and Staffing Solution IRSS) (Themes, Objectives and Measures)
map was used to describe the corporate strategy and elaborate how the value would be
created through the execution of strategy. Themes Objectives M111ures
One of the Manpower's directors highlighted how Varina supported the strategy Financial Perspective
mapping process and elaborated, "The major reason for adopting the strategy map was Growth • Provide return on capital • YTD Return on sales % Rev
its cause and effect linkage and it was Varina who focused the team towards the cause • Improve profitability • Sales revenue
and effect relationship. She repeatedly conveyed during various strategy meetings how • Gross profit
the employee engagement and customer measures drove financial results". The first • Operating unit profit
version of the strategy map was developed by Varina prior to discussion with senior • YTOGPas%Rev
management, most of who agreed to its cause and effect linkages. A key feature of the • GP growth YoY
Productivity • Improve productivity • Debtors over 29 days
EXHIBIT5 Strategy map 2003-04 • DSOdays
• Cost containment • SG&A Growth YoY
• SG&Aas%ofGP
Increase ROS
• YTD GP/Total Personnel Cost
Customer Perspective
Candidate delivery • Speed of response • Job fill rate contract
• Job fill rate perm
• Job fill rate temp
• Job Vee days contract
• Job Vee days perm
• Job Va c days temp
Internal Business Perspective
Develop New
Business Increase customer • Increase the retail client base es e %of GP • Client retention-lapsed
value
Lower Coat baw Increase Retail Ac hi eve operational • Lower the cost base of the business • Pay Bill error rate
llent ea••
excellence
Safety • Safety • Lost time injury frequency
rate (LTIFRJ rolling average
Leeming and Growth Perspective
Climate for action • Retain key staff • Staff retention
C72 Casa 07 Using Stratagv Maps and the Balanced Scorecard Effectively~ The Case of Manpower Australia The Strategy Map and Balanced Scorecard C73

happy with the selection of the BSC as the company's strategic measurement system and strategy map was the integration and alignment of all levels of her management team
said "The scorecard will monitor how we are going in our journey". The CFO added, and the overall organization. Varina said, "The strategy map was developed to unite the
"Previously, the management was more focused on shorHerm gains. With balanced leadership team by linking the divisions and business units through higher corporate
scorecard, the management team started looking across at least a year's horizon and the goals like ROS, Expense/GP etc".
operational team started focusing on quarterly horizons." Having developed the strategy map, the R&SS scorecard {Exhibit 6) was developed
The management team decided to implement the BSC first in the R&SS division. It and implemented in 2004. The scorecard was build from top down using four steps.
was envisaged that once successes were created, the programme could then be rolled Firstly, financial outcomes were set. Secondly, key customer outcomes that created
out efficiently and effectively to the entire organization. R&SS was selected because related financial outcomes were identified. The third step involved identification of
the company wanted to leverage its branch network to focus on growth sectors and internal processes relating to customers and productivity outcomes and finally, the
occupations through the implementation of various strategic initiatives, and it was felt infrastructure needed to achieve all of the above was identified. Initially, effort was
that the BSC framework could help this process.
To achieve clarity around Manpower's strategy, a strategy map {Exhibit 5) was first
developed during various strategy sessions with the executive management. The strategy EXHIBrT& Recruiting and Staffing Salutian IRSS) !Themes, Objectives end Measures)
map was used to describe the corporate strategy and elaborate how the value would be
created through the execution of strategy. Thamn Objectives Measures
One of the Manpower's directors highlighted bow Varina supported the strategy Financial Perspective
mapping process and elaborated, "The major reason for adopting the strategy map was Growth • Provide return on capital • YTD Return on sales %Rev
its cause and effect linkage and it was Varina who focused the team towards the cause • Improve profitability • Sales revenue
and effect relationship. She repeatedly conveyed during various strategy meetings how • Gross profit
the employee engagement and customer measures drove financial results". The first • Operating unit profit
version of the strategy map was developed by Varina prior to discussion with senior • YTD GP as % Rev
management, most of who agreed to its cause and effect linkages. A key feature of the • GP growth YoY

Productivity • Improve productivity • Debtors over 29 days

• DSD days
EXHIBIT 5 Strategy mep 2003-04 • Cost containment • SG&A Growth YoV
• SG&A as %ofGP
• YTD GP/Total Personnel Cost
Customer Parspactiva
Candidate delivery • Speed of response • Job fill rate contra ct
• Job fill rate perm
• Job fill rate temp
• Job Vee days contract
• Job Vac days perm
• Job Vee days temp
Internal Buslnass Perspective
Increase customer • Increase the retail er.ant base es a % of GP • Client retention-lapsed
value
Increase Retell Achieve operational • Lower the cost base of the business • Pav Bill error rate
Hen! eese
excellence
Safety • Safety • Lost time injury frequency
rate ILTIFRI rolling average
Leaming and Growth Perspective
Climate for action • Retain kev staff • Staff retention
 "••• u1 using Strategy Maps and the Balanced Scorecard Effectivatv: Th C fM
• e ese o anpower Australia The Strategy Map and Balanced Scorecard C75

not directed towards developing new measur ti

but rather focus was on leveraging the exi ti es. or
ti
processes as shown · trat
. . m s egy map Customer perspective
"Initially the focus was on capturing whats ng alm ormdatio~. Varma emphasized that,
was rea y avrulable" The customer perspective articulates the customer and market-based strategy that will
Th e R&SS scorecard consisted of four ers . . deliver superior future financial returns. This perspective usually includes identification
objectives, and 21 measures The fo p p.echves, seven strategic themes, nine
. ur perspectives of the BSC were· of the customer and market segments, with common metrics comprising outcome
1 Financial. · measures and attributes of the specific value proposition offered that would drive the
2 Customer. outcomes sought after by the business. Common outcome measures usually included
3 Internal Processes. customer satisfaction, customer retention, customer acquisition, customer profitability
and market and account share in targeted segments. Measures of the value proposition
4 Learning and Growth. typically focused upon product/service attributes, the customer relationship and/or
brand image and reputation.
Financial perspective The customer perspective of the R&SS scorecard bed one strategic theme, one
objective and six measures. The focus on speed in candidate delivery clearly indicated
Financial measures indicate whether a com an • . the company's emphasis on productivity, which was considered one of the major
execution are contributing to bott l' . p y s strategy, implementation and
stage of its life cycle as the recruit~:-i~°;~~r~v~ment. Manpow~r was in the "sustain"
requirements for efficient branch operations. The themes, objectives and measures for
companies in the sustain stage use m a reached maturity. Most of the customer perspective are shown in Exhibit 8.
operating profit and gross margins Measures rehlatded to accounting income, such as
th ti · anpower a chosen both growth d d Internal business process perspective
emes or maximizing income (Exhibit 71 . an pro uctivity
The financial perspective of R&SS scorecard h d In the internal business perspective, critical processes are identified at which the
four objectives and two strategic theme ROS ~ a total of eleven measures, under organization must excel at to achieve its financial and customer objectives. Internal
?riving the business towards operation:i effici:~! e ;~erall financial objective was processes accomplish two vital components of an organization's strategy: (1) they
mcorporated to improve asset util' t' th h y. us debtor measures were produce and deliver the value proposition for customers, and (2) they directly impact the
the measures on the selling, general iza mn roug improvement . th h
and ad . . . m e cas cycle and productivity theme in the financial perspective. The organization's internal processes can
reduction. The productivity focus hi hi' ht~~trat10n expenses focused on cost he grouped into four clusters: operations management processes, innovation processes,
highly competitive market conditiongs I~th e e ~ompany's strategy to deal with the customer management processes and regulatory and social processes.
. were aimed at capturin th
metrics w1ti squeezing margins • wh i·1e th e various
. growth Manpower had focused mainly on three clusters of internal processes. Manpower's
b . g e per onnance ofManpow . d' .
usmess, share of revenue and profit. er m expan mg its scale of corporate scorecard had three strategic themes, three objectives and three measures under
the internal business process perspective. The customer and candidate management
processes were focused on client retention and ensuring the longevity of the customer
EXHIBIT7 Rnancial perspective base. The operational excellence theme was geared to reducing the cost structure by
reducing invoicing and other errors/disputes that impacted prompt client payments.
Themes Objectives Safety was given priority under the regulatory and social processes of the company, with
Measures
Growth
• Provide return on capital
the Lost Time Injury Frequency Rate (LTFIR) metric focused on candidate's occupational
• YTD Return on sales
• Improve profitability
• Sales revenue growth
• Gross profit
• Operating unit profit EXHIBITS Customer perspective
• YTD GP as %Rev
Themes Objectives Measures
• GP growth YoY
Productivity Candidate dehvery • Speed of response • Job fill rate contract
• Improve productivity
• Debtors over 29 days • Job fill rate perm
• DSOdays • Job fill rate temp
• Cost containment
• SG&A Growth • Job Vac days contract
• SG&Aas %ofGP
'
• Job Vac days perm
• GP/Total Personnel Cost • Job Vee davs temp
 The Implementation Process C77
C76 C.ae 011Jsi1tl1 Strategy Maps and the Balanced Scorecard Effei:tively·· The ca se of Manpower Austn1ha
.

EXHIBIT 11 Survey results on role mBSC developrnent

EXHIBITS Internal business process perspective
Role in BSC s1fatagic objective development
Thames Objectives Measures %Response
Increase customer valve • Increase the retail client • Client retention - lapsed Rola idantitiad
39
base as a % of GP Not a part of strategic objective formulation 22
Only responsible for metrics in my business area 11
Achieve operational excellence • Lower the cost base of the • Pav Bill error rate
I adopted the obie ctives suggested 11
business Involved in initial conversations &workshops 6
Safety • Safety • lost time injury frequency rate Reviewed ob1ectives with my team 6
(LTIFR) rolling average Senior management developed it alongwith IT 6
Cbenge scorecard to suit business needs 100

EXHIBIT 10 Learning and growth perspective

and strategic initiatives progress were reported in the monthly intranet communication to
Thames Objectives Measures
all staff.
A BSC evaluation interview-survey conducted at Manpower revealed that the
Cl'lllate for action • Retain key staff • Staff retention
BSC formulation process had been relatively top-down, with most of the responses
indicating that they had not been directly involved in the formulation of BSC objectives
(Exhibit 11). For most of the survey respondents, their journey started after receiving
health and safety issues, risk management and
themes, objectives and measures for the . t ~o:t r~lated to .mjury compensation. The instructions from Varina or her senior rnanagement team to develop the scorecard, with
in Exhibit 9. m erna usmess process perspective are shown the majority of these adopting the strategic objectives and metrics that were prescribed.
A series of road shows and education workshops were held throughout Manpower
and its branches to communicate the rationale for the BSC and how it was to be
Learning and growth perspective used, with a number of these led by Varina. To ensure adoption and take-up of the
The objectives in the learning and rowth
enable objectives in the other thr g p~rspechve
.
provide the infrastructure to BSC, periodic BSC reviews were made a part of the management reviews early in the
ee perspectives to beach' d Th' implementation phase. These reviews monitored the progress of the BSC and its impact
on the longer-term enablers of the b . d. ieve . is perspective focuses
usmess an its readines t · l on the business. In addition, the BSC reporting and analysis was to be facilitated through
strategy. Enablers are grouped into h m . 1 s o imp ement the chosen
and competencies (with common outu an capita readiness focused on employee skills technology and Manpower's intranet. According to Varina, "It was important to signal
come measures comp · · 1
. .r~smg emp oyee retention,
our revitalisation of our Manpower company, that everyone should have a modern
productivity and satisfaction), information s
alignment and values. ystem capab1hhes, and overall cultural looking tool-not an excel spread sheet but a tool through which they could analyse
the data and reach a fact-based conclusion". As many measures were already in the
The learning and growth perspective in the R&SS company's management information system , personnel responsible for maintaining this
objective and one measure Them . i: scorecard had one theme, one
was arguably an outcome measure for em lo e • . a1111~g ey sta f. Staff retention
· am 1ocus was on ret · · k f were also given responsibility to feed the data manually into the BSC reporting tool.
measure for the learning and growth p Yt. es satlsfact10n. The theme, objective and Within R&SS in particular, a scoreboard form (Exhibit 12) was developed to ensure that
perspec ive are shown in Exhibit 10. the BSC was reviewed at the branch level on a timely basis and actions were taken by
the branch managers in five areas: sales, staffing, skills, systems and safety-to achieve
The implementation process strategic targets.
The BSC measures were also linked to compensation. Quarterly bonuses were
units and cascaded down to regions ~nd b~a:~~e de~el~ped for the other business
aving developed the R&SS scorecard BSC
H
Business Review meeting led by Varma . and compris'es withm
h RSS.
· The monthly
introduced that were linked to the achievement of the achieving financial numbers,
with the BSC aimed at enabling learning about which lead indicators drove financial
undertook to assess the development f BSC th mg. er semor management team, results. Varina encouraged the team, "It's okay to be away from your numbers. This is an
linking of initiatives with strategy ~ t s: e selection of right measures and the opportunity for understanding and learning. Learn from the deviations and understand
meeting. In addition the in't' l . • aln o re~1ew the progress to Scorecard at each what to do in the future to meet the numbers". In addition, the company also developed
' i ia imp ementat10n and roll f h twenty seven incentive plans that were linked with the other non-financial measures
made the responsibility of the General M out o t e BSC at Manpower was
anager of Human Resources, and the Scorecard
C78 Caaa 07 Using Strategy Maps and the Balanced Scorecard Effectively· The Ce fM
• se D anpower Austrahe
Problems end Challenges C79

EXHIBIT 12 Scoreboard form

EXHIBIT 13 Survey results: benefits of BSC

Customer.._lliliMilillllillflillililllli:.11~
Benefits of DSC
Temp /ob fill ra1fl(
ev<:le llme % Response
Temp job fill rate/
Benefits Identified
LTIFR
CVCletlme Fill rate of internal jobs Helped in understanding of business 22
GP/ branch penionnel Temp job fill rate/
Cost letrme Gives focus and insight on key issues 19
Helped in developing management teem 14
From this period To neJCt p9riod Nothing will happen if BSC ta ken out 11
Target period
Consistency of communication by providing a common language B
Gives a good snapshot of business 5
Ftomwhat To what Improved decision making 3
Action points: Tar
Helped improved business results 3
Drives behaviour 3
Helps m changing culture 3
Doesn't drive business decision-making 3
Greeter vis1b11ity 3
Mechanism for rewarding people 3
Ftomwhat Drives business 3
To what Tar et
Action points: HID
Staffing

on the BSC. While there was a common perception that to make these plans effective
Frorn what To what they needed to be simplified and rationalized, linking incentives with the BSC measures
Action points: Tar et
Skills suggested that Manpower's leadership strongly believed in the BSC. One of the directors
claimed, "HR incentive plans at Manpower are in place for sustainable performance and
they are aligned with the balanced scorecard objectives and measures."
In mid-2004 responsibility for the BSC was handed over to the Directors of the
From what
Action points;
Tow
Tar et individual business units to drive to lower levels of their respective areas. The BSC
System Evaluation Survey indicated that significant benefits had been achieved through the
BSC implementation at Manpower {Exhibit 13) in addition to the improvement in the
company's financial performance. Specifically, 85 per cent ofresponses to an interview
survey pointed out that the BSC had provided a better understanding of business, more
From what
To what focus on key issues and learning and development of management team. However,
Action points:
Safety the perception of the BSC as a strategic management system was still low among the
participants, with 11 per cent of responses indicating that Manpower would not be
different without the BSC and 3 per cent indicating that it did not drive business
decision-making.
Team name
Date agreed Problems and challenges
Next review date
The Balanced Scorecard
lthough the initial implementation of the BSC had resulted in productivity gains
A for Manpower, Varina and Scott didn't want to stop there. They were focused on
leveraging this success by refining the BSC so that innovative and growth objectives could
be better achieved. However, one problem was that there appeared to be a blockage in
the business using the information embedded in the BSC to identify and better manage the
CBO Case 117 Usin11 Strategy Maps and the Balanced Scorecard Effectively: The Case of Manpower Australia Problems end Challenges C81

The major candidate issues were:

. ~~~~~~~~~---:D:i-re-ct~r-e-po-rts--::B=s=c~u-s-ag-e~~~~~~~~~~ • Candidate shortage .
• Decreasing candidate loyalty and stability.
Usage Identified o/o Response
Use it extensively for business analysis
• Poor candidate care.
17
BSC don't have any new info to review 17 There was a severe shortage of candidates especially in certain skill categories. A Regional
Only interested in summary level data on monthly basis 14 Operations Manager of Manpower within R&SS raised the candidate-related issues. She
Weekly financial reports are more relevant and useful 14 said: "Sourcing candidates with the right skill set is a big issue. In addition to this shortage,
BSC information lagging - not useful 7
Drive behaviour es it impacts incentives 11 candidate loyalty is another issue. Whether we are preferred supplier or not- it is a
7
Its pert of their job candidate-driven market and the candidate will move even for an extra 50cents per hour."
7
Measures not relaventto business 7 II In relation to competition, the market had already matured with rivalry intensifying
Not interested and a number of niche competitors emerging targeting higher margin business. In this
3 'I
Don't have eccess to BSC
3 scenario the main issues and challenges that Manpower currently faced from this highly
Accuracy of BSC questionable 3 competitive market were:
100
.. • Offering low prices .
• Growth of niche agencies.
critical lead indicators that would lead to success. Information from the BSC evaluation • Developing brands.
sun:ey foun_d low usage of the BSC (Exhibit 14), especially by teams working under the
senmr to middle management. When the leadership team was questioned regarding Another R&SS Regional Operations Manager explained the market conditions as
the extent of th~ir d.irect reports usage of the BSC, 65 per cent of them reported low or follows: "It's a very competitive market. Pricing has become"an issue as we choose to be
~o usag~ by their direct reports. They attributed this low take up to the quality of the profitable and the competition chooses to get the business at any cost." Similarly, the
rnfo~mat1on presented on the scorecard. The measures were limited to past performance General Manager of one of the business units was worried about the increasing number of
laggr~g, not relevant a~d at tim~s inaccurate. Only 17 per cent of responses claimed tha~ niche agencies, commenting: "As the market entry barriers are low there is a huge growth
the direct reports used 1t for business analysis purposes, of consultants, usually a one person or two person company. This increasing competition
has meant that clients preferred to maintain more suppliers on their preferred list."
Business challenges Internally, Manpower's systems and processes were identified as an area that needed
improvement. Key issues were identified as being:
The external bu~iness .environment was also becoming increasingly challenging for
~he compa~y. D1scuss1ons amongst Manpower's senior and middle managers revealed • Lack of standardization/consistency in branches and between teams.
~ssues relatmg to the external environment of clients, candidates and competitors, while • Old and slow processes.
mternal factors related to systems/processes, employees and culture. • Inefficient candidate-handling processes.
The major issues and challenges related to clients were identified as comprising:
• Too many applications and no End-to-End solution.
• Pressure for low price. ~
One of the R&SS Regional Operations Managers termed processes as one of the greatest
• Required speedy service. challenges, "Our processes are very long. They are not fully integrated and therefore we
• Lack of understanding of customer needs. double handle a lot of work". Furthermore, the lack of integration was seen as having
• High level of service expectations. competitive impacts, with one of the members of the senior management team explaining:
• Increasing customer bargaining power. "Our technology needs continuous upgrading. We don't have an end to end recruiting
system. We've got various brilliant applications but at times we lose speed as they are
The customers.' focus was on price, speed and quality. However, there was a need for not totally integrated. We need to focus on our databases and make them more aligned
better understandmg at Manpower for the customer needs and requirements. One of th towards customers and consultants needs and requirements. They should be made more
Gene~al Managers, explained, "There ere different industrial sectors and each sector is e users friendly and precise. For example, one should be quickly able to search for Job specs
~t a different stage of life cycle-therefore their demands and needs are different Ther or other requirements. We have got legacy systems and there is a cost of changing it."
~ n~lone fits all solution. We need to be more focused and analyse each of the s~ctors ;n The nature of the industry also posed significant challenges in relation to the
eta1 to successfully execute our strategy". management of human capital. While the consultant was important, being the
CB2 Case 07 Using Strategv Maps and the Balanced Scorecard Effecti11elv: The Case of Manpower Australia

candidate- and client-facing resource, hiring and retaining skilled and effective
consultants was difficult. Scott, who was also Director Corporate services, claimed, "For
the company there is a continuous battle in finding the right consultant, the client and
candidate facing resources. The industry has a large attrition rate that we need to manage.
Case 08
We are continuously bridging the gaps, if any, in the leadership and management skills at
business unit level." The current issues with the people side of the business were many
but the most important were:
Southwest Airlines:
• Finding the right consultant. Culture, values and
• Low staff retention.
• Slow career growth. operating practices
Finally. in implementing the new strategic direction, the whole organization was Arthur A. Thomps on
going through a change management process. Many within the organization considered it The University of Alabama
important to inculcate the right culture to support these initiatives. Challenges identified
related to developing a high performance culture, were: John E. Gamble
The University of South Alabama
• Changing the bureaucratic corporate culture.
• Shift required from customer service to sales culture.
The issues relating to the cultural readiness of Manpower to pursue the new strategic
initiatives were summarized by one member of the senior management team, "We need
to focus on staff advocacy and engagement for achieving our targets. There is a service
w hen the September 11 terrorist attacks triggered close to~ 20 .p~r c~nt falloff.in
airline traffic in the fourth quarter of 2001 , the commerc10l
· · mod a-companies
the United States went into a crisis
air~me mdustry m -
· b egan borrowmg money to. cover
culture. Our people do selling but not as a selling culture. A selling culture is that 22 if cash drains of $3 to $8 million daily, cutting flights, laying off employees, defem~g or
you have ten candidates you will place all of them, but in a service culture you will only cancellin the delivery of new aircraft on order, speculating on how much to c.u t ares
focus on what is demanded by the customer and not what you can sell. We want to move to induceg assengers to fly and on how long traffic might stay depressed, figurmg ~ut
what it w:uld take to avoid bankruptcy, and scrambling to institute a ~a.st of security
to that culture of selling".

What next?
The biggest challenge now for Varina and her team was to use the available information
to evaluate the implementation and achievement of current strategic objectives and the
initiatives, to help focus the business on the lead indicators of success, and refine the
current strategic thinking if required to adapt to the emerging conditions and issues.
Now, Varina has appointed you as a consultant to guide her team in the next ph~e of the
BSC project and asked you to come up with your analysis and recommendation for the
following issues:
1 Evaluate the process of developing and implementing the current BSC. What were
the strengths and weaknesses?
2 How would you redesign the BSC to ensure that Manpower can measure the success
of the strategy "to be recognized as the Australasian Leader in delivering innovative
people solutions" and specifically the growth through innovation and productivity
themes? What measures and initiatives should Manpower incorporate in its
scorecard?
3 What role could the BSC play in helping to manage the emerging business chal-
lenges identified? What measures/information would help in developing responses
or refining the strategic initiatives to meet these challenges?
measures. Roughl Y100 000 of the industry's approximately 500 000 'th airlme employees h
1 'd ff Even after the federal government came through w1 emergency cas
were a1 o · · d $
grants of over $1 billion, the major US carriers lost a combme 7.8 i ion mb' ll ' · 2001 of
,
which $3.3 billion came in the fourth quarter. . .
At Southwest Airlines, the crisis was dealt with far differently-no flights were cut
and no employees were laid off. Because management's philosophy, for the past two .
decades, had been to manage Southwest in good times so tha~ both the com~~y and its
em lo ees could prosper through bad times, Southwest was m a strong position whe~
the~nJustry got hammered in the aftermath of Septe~ber 11 . It had the lowest operatmg
costs of any US airline, it had $1 billion in cash. and it had the ~trongest balance sh~~t
d credit rating of any us airline (allowing management to qmckly borrow an addih.onal
;~.l billion and give the company a buffer to pay all its bills and abso~b any cash drams).
Des ite all the costs associated with implementing a raft of new security ?1~asures and
the ~ownturn in passenger traffic, Southwest reported a profit of $63.5. m1lhon for the
fourth quarter of 2001 and a profi~ of ~511 . 1 ~illion for the full year-it was the only
us airline to operate in the black m mther period.
Copyright 2003 by Arthur A. Thomp; ; :d John E. Gamble. All rights reserved.

C83
C84 Casa OB Southwest Airlines: Culture, Values and Operating Practices Company Background C85

Unlike its rivals, Southwest continued to operate profitably throughout 2002 even . · k d t b 1 lied into instituting practices at Southwest that were
think hke maver1c s an no e u d. R 11" K " "It
though passenger traffic nationwide remained below levels prior to September 11. . . o f h ow th ey were done at other airlines. Accor mg. to o m mg,
1 ely imitative ·
During 2002, Southwest proceeded to add almost 40 new daily flights and was able to arg · d 1•t · ht We all understood that this was our opportumty
boost its market share by about 2 per cent. Southwest was profitable in 2002. Its eight :~e:~~:~:;pt~o~~u~i!::a;. ~~~ phiiosophy was, and still is, we do whatever we
biggest US rivals, however, posted losses of more than $11 billion in 2002, with both ' bdone. " 4
have to do to get the JO
US Airways and United Airlines filing for bankruptcy.
Southwest's struggle to gain a market foothold . .
th t. 'tiated its first flights with a schedule that soon mcluded six
Company background In June 1971 Sou wes im n·o and 12 round-trips between Houston and
round-trips between Dallas and San A~to t fly the Golden Triangle, well below the $27
1

I n late 1966 Rollin King, a San Antonio, Texas, entrepreneur who owned a small
commuter air service, marched into Herb Kelleher's law office with a plan to start a
Dallas. The introductory $20 one-way ares. o
and $28 fares charged b~tva~l ~~a~t:~1 ~ ~:~~:;~::
1
. . 1 small numbers of passengers-
1
:so
people. southwest's financial
low-cost/low-fare airline that would shuttle passengers between San Antonio, Dallas, and 18
1
Houston. Over the years, King had heard many Texas businesspeople complain about the some days the total for a g b ght fuel for several months on
length of time that it took to drive between the three cities and the expense of flying tho resources were stretch~d s~~~~:t;a~~ec~:i:a:~w~:short of ground equipment, and
1
airlines currently serving them. His business concept for the airline was simple: attract Lamar Muse's persona ere : d"t' n Money for parts and tools was so
f h t •th d was used and m worn con l io . l
passengers by flying convenient schedules, get passengers to their destination on time, make most o w a 1 a th hone with acquaintances at riva
sure they have a good experience, and charge fares competitive with travel by automobile. tight that, on o~casion, comp~n~ pe~onnel g~ ~:bor:~w what was needed. Nonetheless,
Though sceptical that King's business idea was viable, Kelleher dug into the possibilities airlines operatmg ~t the term~na d a~. :angeany personnel displayed can-do attitudes
morale and enthusiasm remame ig ' comp '] bl
during the next few weeks and concluded that a new airline was feasible; he agreed to
handle the necessary legal work and also to invest $10 000 of his own funds in the venture. and adeptness at getting b~ ?~ ~hatedve~ resourc:o~:;a:::~:ers~· Southwest decided it
To try to gain market VlSlbihty an rum. up
In 1967 Kelleher filed papers to incorporate the new airline and submitted an had to do more than just run ads in the medta:
application to the Texas Aeronautics Commission for the new company to begin serving
"d d to have flight hostesses dress in colourful hot pants and
Dallas, Houston, and San Antonio.2 But rival airlines in Texas pulled every string they • Management d ec1 e th t ' fi t roup
hite knee-high boots with high heels. Recruiting ads for So~ ~es s rs g
could to block the new airline from commencing operations, precipitating a contentious w .. ·an Ra uel Welch: You can have a 1ob if you measure
four-year parade of legal and regulatory proceedings. Herb Kelleher led the fight on the
company's behalf, eventually prevailing in June 1971 after winning two appeals to the
~~~?~=:~~~~::~d~~;~:~an~s re~ponded, and those selected for interviews ~~e
asked to come dressed in hot pants to show off their legs-the company wan e ,
Texas Supreme Court and a favourable ruling from the US Supreme Court. Kelleher
. l l d beauties with sparkling personalities. Over 30 of Southwest s
recalled, "The constant proceedings had gradually come to enrage me. There was no to h ire ong- egge . d f who were
first graduating class of 40 flight attendants cons1ste o young.women ~ . .
merit to our competitors' legal assertions. They were simply trying to use their superior
cheerleaders and majorettes in high school and thus had experience per ormmg m
economic power to squeeze us dry so we would collapse before we ever got into business.
I was bound and determined to show that Southwest Airlines was going to survive and front of people while skimpily dressed.
was going into operation."3 A second attention-getting action was to give passengers free alco?olic beve~~ges
In January 1971 Lamar Muse was brought in as CEO to get operations under wa~ • durin da time flights. Most passengers on these flights wer~ busme.s s trave ers:
g y t' th' k"ng was that many passengers did not dnnk durmg the daytime
Muse was an aggressive and self-confident airline veteran who knew the business well
and who had the entrepreneurial skills to tackle the challenges of building the airline
Manageme~hs
and that wit mosmt n11g
· hts being less than an hour's duration it would be cheaper to
from scratch and then competing head-on with the major carriers. Through private . 1y give
simp . the dr1'nks away rather than collect the money. · th
investors and an initial public offering of stock in June 1971, Muse raised $7 million fr b · g based at Dallas Love Field, Southwest began usmg e tag
in new capital to purchase planes and equipment and provide cash for start-up. Boeing • Taking a cueh o~ Sem b 0 dy Else Up There Who Loves You''. The routes between
line "Now T ere s ome T · l S thwest' s
agreed to supply three new 737s from its inventory, discounting its price from $5 million d San Antonio became known as the Love rrnng e. ou
Houston, Da11 as, an p t' ts were
to $4 million and financing 90 per cent of the $12 million deal. r d t as Love Birds drinks became Love o 10ns, peanu
planes were re1erre 0 ' d · k t · ted on
Because the airline industry was in the throes of a slump in the early 1970s, Muse was called Love Bites, drink coupons were Love Stamps, an tic es -:Vere prm .
able to recruit a talented senior staff that included a number of veteran executives from h . Th " love" campaign set the tone for Southwests approach to its
Love M ac mes. e h · ble fun and
other carriers. He particularly sought out people who were innovative, wouldn't shirk t d company efforts to make flying Sout west an enioya ' '
cus omers an h t ublic it chose LUV as
from doing things differently or unconventionally, and were motivated by the challenge differentiating experience. {Later, when t e company wen p •
of building an airline from scratch. Muse wanted his executive team to be willing to its stock-trading symbol.)
CB6 Casa 08 Southwest Alr/11111s: Culture, Values end Op11re11110 Practices
Company Background CB7

• In order to add more flights without buying more planes, the head of Southwest's . 'stin that company employees use the $13 fare.
ground operations came up with a plan for ground crews to off-load passengers and and corporate controllers b~gan. l~:~ u gthe story of Southwest's offer, proclaiming
baggage, refuel the plane, clean the cabin, restock the galley, on-load passengers The local and national media pie . P le in which the upstart Southwest
and baggage, do the necessary preflight checks and paperwork, and push away the battle to be a David·versus-Goh~th s:gg ch larger and more well-established
from the gate in 10 minutes. The 10-minute turn became one of Southwest's did not stand much of a chan~e agamst e muo Southwest's side.
Braniff; grassroots sentiment m Texas swung t
signatures during the 1970s and 1980s. {In later years, as passenger volume grew
and many flights were filled to capacity, the turnaround time gradually expanded Southwest reported its first-ever annual profit in 1973.
to 25 minutes-because it took more time to unload and load 125 passengers, as
compared to a half-full plane with just 60-65 passengers. Even so, the 25-minute More legal and regulatory hurdles£ d 't lf mbroiled in another round of legal
average turnaround times at Southwest in 2002 were still shorter than the During the rest of the 1970s Southwest oun 1 ~e efu 1 to move its flights from Dallas
40-60-minute turnarounds typical at other major airlines.) · 1 d Southwest s re sa
and regulatory battles. One mvo ve t t the newly opened Dallas-Fort
• In late November 1971 Lamar Muse came up with the idea of offering a $10 fare to . t from downtown, ou o 1
Love Field, located 10 mmu es . . tes from downtown Dallas. Loca
passengers on the Friday-night Houston-Dallas flight. Even with no advertising, Worth (DFW) Regional Airport, which was 30 ?1mu c es from Southwest's flights in
. b they were countmg on 10
officials were furious ecaus.e h debt on the bonds issued to finance the airpo~t s
the 112-seat flight sold out. This led Muse to realize that Southwest was serving • ,

two quite distinct types of travellers in the Golden Triangle market: (1) business and out of DFW to help service t e th t 't not required to move because it
• "tion was a i was .
travellers who were more time-sensitive than price-sensitive and wanted construction. South wests posi d d t d so by the Texas Aeronautics
weekday flights at times suitable for conducting business and (2) price-sensitive h d it been or ere o o • h
had not agreed to do so, nor a ' h d uarters were located at Love Field. T e
leisure
5
travellers who wanted lower fares and had more flexibility about when to Commission-moreover, the comp~ny s ~? ! could remain at Love Field.
fly. He came up with a two-tier on-peak and off-peak pricing structure in which courts eventually ruled Southwest. s ~p~r~.~~s retested at Southwest's application to
all seats on weekday flights departing before 7 pm were priced at $26 and all seats A second battle ensued when nva au 1 thp . test was based on arguments that
on other flights were priced at $13. Passenger traffic increased significantly-and ll
begin serving severa1sma er c1 ie
·r s in Texas; e1r pro .
d h t S thwest's entry would result m cost y
1
systemwide on-peak and off-peak pricing soon became standard across the whole l d well served an t a ou fl d
airline industry. these markets were a rea y . l c would allow more people to y an
h t tered that its ow iares d'
overcapacity. Soul wes coun ·1 d d 1'ts views about low fares expan mg
• In 1972 the company decided to move its flights in Houston from the newly A · s uthwest prevai e an
grow the market. gam, o b £ Southwest initiated service, 123 000
opened Houston Intercontinental Airport (where it was losing money and where the market proved accurate. In the year .e ohre R' G nde Valley to Houston, Dallas, or
it took 45 minutes to get downtown) to the abandoned Houston Hobby Airport, H I' Airport m t e io ra
passengers flew from ar mgen . S th t's initial flights, 325 000 passengers
located much closer to downtown Houston. Although Southwest was the only San Antonio; in the 11 months followmg ou wes
carrier to fly into Houston Hobby, the results were spectacular-business travellers flew to the same three cities. . l d li'berately engaging in tactics to
'ff d T as Internahona were e .
who flew to Houston frequently from Dallas and San Antonio found the Houston Believing that ,Bram an ex . d the US government to investigate
t' Southwest convmce
Hobby location far more convenient than the Intercontinental Airport location, and harass Southwests opera ions, . h ' f . ls In February 1975, Braniff and Texas
t r s by its c le r1va .
passenger traffic doubled almost immediately. d
what it considered pre atory ac ic d. ~ conspiring to put Southwest out o f
• In early 1973 in an attempt to fill empty seats on its San Antonio-Dallas fligh~, International were indicted by a federal ~an 17 t ~he two airlines pleaded "no contest"
Southwest cut its regular $26 fare to $13 for all seats, all days, and all times. When business-a violation of the Sherrn8"? Antitrust c . d were fined a modest $100 000 each.
Braniff International, at that time one of Southwest's major rivals, announced to the charges, signed cease-and-desist agreemelnt~s, anA t ·in 1978 Southwest applied to the
d th A· ]' Deregu a 10n c •
$13 fares of its own, Southwest retaliated with a two-page ad, run in the Dallas When Congress passe e ir me 1 A . f Agency) to fly between Houston and
newspapers, headlining "Nobody is going to shoot Southwest Airlines out of Civil Aeronautics Board (now the Federa v;a ion d by local government officials and
the sky for a lousy $13", and containing copy saying Braniff was trying to run New Orleans. The application was vehe~~nt y ~p~~=~ for passenger traffic to be siphoned
Southwest out of business. The ad announced that Southwest would not only airlines operating out of DFW because o I' e.;~ ~e aid of Fort Worth congressman Jim
match Branifrs $13 fare but also give passengers the choice of buying a regular- away from that ai~port. The opponents so i~10~ Re resentatives, who took the matter to
priced ticket for $26 and receiving a complimentary fifth of Chivas Regal scotch, Wright, the majority leader of the us.Ho~s h or lobbying and manoeuvring ensued.
Crown Royal Canadian whiskey, or Smirnoff vodka {or, for non-drinkers, a leather the floor of the House of RepresentahvesWa ~a~t Amendment of 1979: no airline may
ice bucket). Over 75 per cent of Southwest's Dallas-Houston passengers opted for What emerged came to be known as the. r~ D llas Love Field to any city in any state
the $26 fare, although the percentage dropped as the two-month promotion wore on provide non-stop or through-plane ~erv1ce om h a d ent which was still in effect
except for locations in states bordermg Texas. T e amen m '
C88 Che OI Southwest Airlines Culture, Values and Operating Practices

Company Background CB9

at the start of 2003, meant that Southwest could not advertise, publish schedules or fares,
or check baggage for travel from DalJas Love Field to any city it served outside Texas,
Louisiana, Arkansas, Oklahoma, and New Mexico. , EXHIBIT 1 Milestones et Southwest Airlines, 1983-2002

1983 Three additional Boeing 737s are purchased; Southwest flies over 9.5 million
Battles to survive and the warrior mentality 11
passengers. h us . r f;
The legal, regulatory, and competitive battles that Southwest fought in its early years 1984 Southwest is ranked first in customer satisfaction among t e atr mes or
produced a strong esprit de corps among Southwest personnel and a drive to survive the fourth straight year.
and prosper despite the odds. With newspaper and TV stories regularly reporting
1985 Service begins to St. Louis and Chicago Midway. airports ..so.uthwe~~::~se:lt
Southwest's difficulties, employees were fully aware that the airline's existence was the Ronald McDonald House as its primary charity-the he-m ':"as
constantly on the line. Had the company been forced to move from Love Field, it would of an effort by a Southwest pilot who lost a daughter to leukemia and who
most likely have gone under, an outcome that employees, Southwest's rivals, and local believed that Ronald McDonald Houses were a worthy way to demonstrate
government officials understood weU. According to Southwest's president, Colleen Southwest's community spirit.
Barrett, the obstacles thrown in Southwest's path by competitors and local officials were
1986 Southwest flies over 13 million passengers. .
instrumental in building Herb Kelleher's passion for Southwest Airlines and ingraining a
combative, can-do spirit into the corporate culture: 1988 Southwest becomes the first US airline to win the Triple Crown ~est on-hme
record, fewest reports of mishandled baggage, and fewest complaints per
They would put twelve to fifteen lawyers on a case and on our side there was Herb. They 100 000 passengers) for a single month.
almost wore him to the ground. But the more arrogant they were, the more determined 11
Herb got that this airline was going to go into the air-and stay there. 1990 Revenues reach $1 bi'll1'on·• Southwest is the only major US airline to record
The warrior mentality, the very fight to survive, is truly what created our culture. 6 both an operating profit and a net profit.
1992 Southwest wins its first annual Triple Crown f~r best on-time record, best
The start of the Herb Kelleher era ha a e handling, and fewest customer complaints; for the second year .
When Lamar Muse resigned in 1978, Southwest's board wanted Herb Kelleher to take ru:i:g, Southwest is the only major US airline to record both an operatmg
over as chairman and CEO. But KeUeher enjoyed practising law and, while he agreed profit and a net profit.
to become chairman of the board, he insisted that someone else be CEO. Southwest's Southwest begins operations on the East Coast and wins its second a~n~al
board appointed Howard Putnam, a group vice president of marketing services at United 1993 Triple Crown; revenues excee d $2 billion ' and profits exceed
. S$100
. l'mdhon.
t
Airlines, as Southwest's president and CEO in July 1978. Putnam asked Kelleher to For the third consecutive year, Southwest is the only ma1or U air me o
11
become more involved in Southwest's day-to-day operations, and over the next three record both an operating profit and a net profit. . .. .
years Kelleher got to know many of the company's personnel and observe them in action. 1994 Southwest leads the industry by introducing tic~etless tra.vel ~n four c1~10s,
Putnam announced his resignation in the fall of 1981 to become president and chief Southwest wins its third Triple Crown and acquires Morns Air, based m
operating officer at Braniff International. This time, Southwest's board succeeded in Salt Lake City. .
persuading Kelleher to take on the additional duties of CEO and president.
1995 Ticketless travel becomes available systemwide; Southwest wms fourth
When Herb Kelleher took over in 1981, Southwest had 27 planes, $270 million in consecutive Triple Crown.
revenues, 2100 employees, and flights to 14 cities. Over the next two decades, Southwest
Airlines prospered, racking up many industry firsts and expanding geographicalJy (see 1996 Service to Florida begins; Southwest wins fifth consecutive Triple Crown;
S uthwest and its employees contribute almos t $740 000 to.help supp~rt
Exhibit 1). Going into 2003, Southwest was the fourth largest US commercial airline in
terms of passengers flown and the sixth largest in terms of revenues. It had revenues R~nald
McDonald Houses, including $34 000 in. ~ash do~ations
from t e
in excess of $5 billion annually and 35,000 employees, and it operated 370 jets to company an d $3 02 500 in free air tra vel for fam1hes staymg at Ronald
59 airports in 58 cities in 30 states. Southwest had been profitable every year since McDonald Houses in cities served by Southwest.
1973-in an industry noted for its vulnerability to economic cycles and feast-or-famine 1997 Serv1ce
. b egms . to Southwest's 5oth city; over 50 million people fly
profitability. During 1990-1994-when the airline industry had five straight money- Southwest. . .
losing years, laid off 120,000 employees, and lost a cumulative $13 billion-Southwest 1998 Southwest is. namedbY nrortune as the best company to work form America.
earned a profit every quarter of every year.
1999 Service is added to three more cities.
 ClO Case 08 Southwest Airlines: Culture, Values and Operating Practices Company Background C91

The number of passengers on Southwest flights exceeds 60 million, and Passenger revenue per mile 11.77 T2.09 12.95 12.51 12.78
revenues surpass the $5 billion mark; the company records its 28th consecutive Operating revenue per seat mile 8.02 8.51 9.43 8.96 8.76
year of profitability and ninth consecutive year of increased profits; Southwest Operating expenses per seat mile 7.41 7.54 7.73 7.48 7.32
becomes the fourth largest US airline in terms of passengers carried. Number of employees at year-end 33,705 31,580 29,274 27,653 25,844
Size of fleet at year-end 375 355 344 312 280
2001 Southwest is profitable for the 30th consecutive year and the only US airline
•Revenue passenger miles divided by evallable seat miles.
to report a profit for 2001; a record 64.5 million passengers fly Southwest. Includes leased aircraft
2002 Southwest is ranked second among companies across all industry groups, and Sourctr. 2001 lOK report and company press releases.
first in the airline industry in Fortune's 2002 list of America's Most Admired
[I Companies.
\..
EXHIBIT 3 Commercial airline revenues, scheduled revenue passenger miles, and overell load factor for major
US airline carriers, 1995-2002
Exhibit 2 provides a five-year summary of Southwest's financial and operating
performance. Exhibits 3 and 4 provide industrywide data on airline travel for the Year Total Revenues Scheduled Revenue Operating Profit Load Factor (%)
1995-2002 period. Passenger Miles*
1995 $73.5 billion 509.6 billion S4.92 billion 67.3
1996 78.5 534.7 5.27 69.B
EXHIBIT 2 Summary of Southwest Airlines' financial end operating performance, 1998-2002 On US dollar 1997 83.5 570.0 7.52 70.8
thousands except per share amounts) 7.47 71.3
1998 84.6 583.0
1999 89.6 616.8 6.00 71.4
Financial data 2002 2001 2000 1999 1998 5.50 72.8
2000 98.1 651.B
Operating revenues 5,521,771 5,555,174 5,649,560 4,735,587 4,163,980 2001 85.4 606.7 (10.2) 70.3
0 perating expenses 5,104,433 4,924,052 4,628,415 3,954,0TT 3,480,369 2002 75.4 585.0 (9.6) 72.0
"Scheduled revenue passenger m'las 1s the total number of miles flown by all passengars on all scheduled flights.
Operating income 417,338 631,122 1,021,145 781,576 683,611 Load factor is the total numbar of passengars boarded as a percentage of total seats available.
Other expenses (income), net 24,656 (196,537) 3,781 7,965 (21,501) Sourcv. Airline Quarterly Financial Review, Mejors, Department of Transportation, Office of Aviation Analysis, Fourth Quarters
Income before income taxes 392,682 827,659 1,0l7,364 773,611 705,112 1995-2002.
Provision for income taxes 151,713 316.512 392,140 299,233 271,681

Net income 240,969 511,147 625,224 474,378 433,431

EXHIBIT 4 Operating revenues of the major US commercial airlines, 1996-2002 (in millions of dollars)
Net in come per share, basic S0.31 $0.67 S0.84 S0.63 $0.58
Net income per share, diluted $0.30 $0.63 S0.79 $0.59 S0.55 2002 2001 2000 1999 1998 1997 1996
Cash dividends per share $0.0180 $0.0180 so 0147 $0.0143 $0.0126
Total assets at period·end 8,953,750 8,997,141 6,669,572 American 15,870.6 15,638.8 18,117.1 16,085.5 16,298 8 15,855.8 15,125.7
5,653,703 4,715,996
Cash and cash equivalents at end of year 1,815,352 2,279,861 522,995 United' 13,915.6 16,087.4 19,331 .3 17,966.7 17,517.5 17,335.2 16,316.7
418,819 378,5T1
Current assets at end of year 2,231,960 2,520,2T9 831,536 Delta 12,410.4 13,211.2 15,320.9 14,901.4 14,629.8 14,203.9 13,317.7
632,595 574,155
Current liabilities at end of year 1,433,828 2,239,185 1,298,403 Northwest 9,151 .6 9,591 .8 10,956.6 9,868.1 8,706.7 9,983.7 9,751 .4
962,056 850,653
Long-term obligations et end of year 1,552,781 1,327,158 760,992 USAirwaysb 6,914.9 8,253.4 9,181.2 8,460.4 8,555.7 8,501.5 7,704.1
871,717 623,309
Stockholders' equity at end of year 4,421,617 4,014,053 Continental 7,407.9 8,199.7 9,449.2 8,381.5 7,907.7 7,089.9 6,264.4
3,451,320 2,835,788 2,397,918
Southwest 5,521.8 5,555.2 5,649.6 4.735.6 4,164.0 3,817.0 3,407.4
Operating data TWA• 2,632.8 3,584.6 lJOB.7 3,259.1 3,330.3 3,554.4
Revenue passengers carried 63,045,988 64,446,773 America West 2,021.0 2.305.5 2,309.3 2.164.0 1,983.0 1,887.1 1,751 .8
63,678,261 57,500,213 52,586,400
Revenue passenger miles (OOOs~ 45,391,903 44,493,916 42,215,162 Alaska 1,832.4 1,763.1 1,762.6 1,695.6 1,581.3 1,457.4 1,306.6
36,479,322 31,419,110
Available seat miles (OOOs) 68,886,546 65,295,290 59,909,965 52,855,467 47,543,515 •filed for Chapter 11 bankruptcy protsetion in December 2002.
Load fai;tor* 65.9% 68.1 % 70.5% 69.0% ~Fi led for Chapter 11 bankruptcy protecdon in August 2002.
66.1%
Average passenger haul {miles) 720 690 663 634 597 'Acquired by American Airlines In 2001; date for 2002 included in figures for Amari can A rlines.
Trips flown 947,331 940,426 903,754 846,823 806,822 Sourctr. Airline Quarterly financial Review, Majors, Oepartmant of Transportation, Office of Avi ~tion Analysis, Fourth Quarters
I Average passenger fare $84.72 $83.46 $8587 $79 35 $76.26 1995--2001 and Second Quarter 2002.
 C92 Case DB Southwest Airlines: Culture, Values and Operatmg Practices
Herb Kelleher
H erb Kelleher majored in philosophy at Wesleyan University in Middletown,
Connecticut, graduating with honours. He earned his law degree at New York
University, again graduating with honours and also serving as a member of the law
review. After graduation, he clerked for a New Jersey Supreme Court justice for two
years and then joined a law firm in Newark. Upon marrying a woman from Texas
and becoming enamoured with Texas, he moved to San Antonio, where he became a
successful lawyer and came to represent Rollin King's small aviation company.
When Herb Kelleher took on the role of Southwest's CEO in 1981, he made a point
of visiting with maintenance personnel to check on how well the planes were running
and of talking with the flight attendants. Kelleher did not do much managing from his
office, preferring instead to be out among the troops as much as he could. His style
was to listen, observe, and offer encouragement. Kelleher attended most graduation
ceremonies of flight attendants from "Southwest University", and he often appeared
to help load bags on "Black Wednesday", the busy travel day before Thanksgiving. He
knew the names of thousands of Southwest employees, who held him in the highest
regard. When he attended a Southwest employee function, he was swarmed like a
celebrity.
Kelleher had an affinity for bold-print Hawaiian shirts, owned a tricked-out
motorcycle, and made no secret of his love for drinking Wild Turkey whiskey and
smoking. He loved to make jokes and engage in pranks and corporate antics, prompti ng
some people to refer to him as the "clown prince" of the airline industry. He once
appeared at a company gathering dressed in an Elvis costume and had arm-wrestled
a South Carolina company executive at a public event in Dallas for rights to use "Just
Plane Smart" as an advertising slogan. 7 Kelleher was well known inside and outside the
company for his combativeness, particularly when it came to beating back competitors.
On one occasion he reportedly told a group of veteran employees, "If someone says
they're going to smack us in the face-knock them out, stomp them out, boot them in
the ditch, cover them over, and move on to the next thing. That's the Southwest spirit at
work."" On another occasion he said, "I love battles. I think it's part of the Irish in me. It's
like what Patton said, "War is hell and I love it so." That's how I feel. I've never gotten
tired of fighting. "9
While Southwest was deliberately combative and flamboyant in some aspects of ifs
operations, when it came to the financial side of the business Kelleher insisted on fi scal
conservatism, a strong balance sheet, comparatively low levels of debt, and zealous
attention to bottom-line profitability. While believing strongly in being prepared for
adversity, Kelleher had an aversion to formal strategic plans, saying, "Reality is chaotic;
I' plann~ng is ordered and logical. The meticulous nit-picking that goes on in most strategic
plannmg processes creates a mental straitjacket that becomes disabling in an industry
where things change radically from one day to the next." Kelleher wanted Southwest
managers to think ahead, have contingency plans, and be ready to act when it appeared
that the future held significant risks or when new conditions suddenly appeared and
demanded prompt responses.
Southwest Airlines' Strategy C93
Kelleher was a strong believer in the principle that employees-not customers-come
first:
You have to treat your employees like your customers. When you treat them right, then
they will treat your outside customers right. That has been a very powelful competitive
weapon for us. You 've got to take the time to listen to people's ideas. If you just tell some-
body no, that's an act of power and, in my opinion, an abuse of power. You don't want to
constrain people in their thinking. 10
Another indication of the importance that Kelleher placed on employees was the
message he penned in 1990 and had prominently displayed in the lobby of Southwest's
headquarters in Dallas:
The people of Southwest Airlines are "the creators " of what we have become-and of
what we will be.
Our people transformed an idea into a legend. That legend will continue to grow only
so Jong as it is nourished-by our people's indomitable spirit, boundless energy, immense
goodwill, and burning desire to excel.
Our thanks-and our Jove-to the people of Southwest Airlines for creating a marvel-
lous family and a wondrous airline.
Southwest airlines' strategy
rom day one Southwest had p_ursued a low-cost/low-pr.ice/no-frills strategy.
F Its signature low fares made air travel affordable to a wide segment of the
US population-giving substance to its tag line "The Freedom to Fly". Southwest
was a shrewd practitioner of the concept of price elasticity, proving in one market after
another that the revenue gains from increased ticket sales and the volume of passenger
traffic would more than compensate for the revenue erosion from reduced fares. When
Southwest entered the Florida market with an introductory $17 fare from Tampa to Fort
Lauderdale, the number of annual passengers flying the Tampa-Fort Lauderdale route
jumped 50 per cent, to more than 330 000. In Manchester, New Hampshire, passenger
counts went from 1.1 million in 1997, the year prior to Southwest's entry, to 3 .5 million
in 2000 and average one-way fares dropped from just over $300 to $129. Success in
stimulating higher passenger traffic at airports across the United States via low fares
and frequent flights had been dubbed the "Southwest effect" by personnel at the
US Department of Transportation.
The company designed its routes to stress flying between pairs of cities ranging
anywhere from 150 to as much as 700 miles apart where there was high traffic potential
and Southwest could offer a sizable number of flights . As a general rule, Southwest did
not initiate service to an airport unless it envisioned the potential for originating at least
eight flights a day there. Southwest's point-to-point route system, as opposed to the
hub-and-spoke route systems of its rivals, minimized connections, delays, and total trip
time-its emphasis on non-stop flights between about 350 pairs of cities allowed about
77 per cent of Southwest's passengers to fly non-stop to their destination. Southwest's
average aircraft trip in 2002 was 540 miles long and lasted approximately 1.5 hours.
CB4 ease 08 Southwest Airlines; Culture, Values end Operating Practices
Southwest Airlines' Strategy C95

Exhibit 5 shows the cities and airports Southwest served in late 2002. Southwest was the models, Southwest acquired its new aircraft at favourable prices. See Exhibit 6 for
dominant carrier at four airports (Baltimore/Washington, Las Vegas, Kansas City, and statistics on Southwest's aircraft fleet.
Chicago Midway) and the leading carrier in intra-state air travel in California, Texas, and
Florida.
EXHIBIT & Southwest's aircraft fleet as of fall 2DOZ

Type of Aircraft Number Seats Comments

Boeing 737-200 27 122
Daily Departures Numbar of Gates Non-stop Cities Served Boemg 737-300 194 137 Southwest was Boeing's launch customer for this model.
Phoenix 181 21 Boeing 737-500 25 122 Southwest was Boeing's launch customer for this model.
38
Las Vegas 171 19 Boeing 737-700 124 137 Southwest was Boeing's Jeune h customer for this model.
42
Houston (Hobby) 141 Average age of aircraft fleet-close to 9 years
15 24
Baltimore/Washington 139 17 Average aircraft trip length-540 miles; average duration-96 minutes
33
Chicago (Midwavl 130 Average aircraft utilization in 2002-7.2 flights per day and about 12 hours of flight time
14 29
Dallas (Love Field I 130 14 Rest size-1990: 106; 1995: 224; 2000: 344; 2002: 370
13
Oakland 123 Firm orders for new aircraft-2003: 21; 2004: 23; 2005: 24; 2006: 22; 2007: 25
13 19
Los Angeles 118 12 19
Nashville 86 10 28 I
Sen Diego BO 9 14
Other airports served by Southwest Airlines • Southwest encouraged customers to make reservations and purchase tickets at the
Albany El Paso
company's website, thus bypassing the need to pay commissions to travel agents
Lubbock Raleigh-Durham
Albuquerque Fort Lauderdale Manchester, NH Aenoffahoe
for handling the ticketing process and reducing the number of personnel needed
Amarillo Harlingen/South Padre Island Midland/Odessa Sacramento to staff Southwest's nine reservation centres. Selling a ticket on its website cost
Austin Hartford/Springfield New Orleans St Louis Southwest roughly $1, versus $6-$8 for a ticket booked through a travel agent and
Birmingham Houston (Hobby end Bush Norfolk Salt Lake City $3-$4 for a ticket booked through its own internal reservation system. In January
lntercontinentell
Boise Indianapolis
2001, Southwest cut the commissions paid to travel agents to 8 per cent of the
Oklahoma City Sen Antonio
Buffalo Long Island/Islip Omaha San Jose
price of an electronic ticket and 5 per cent of the price of a paper ticket (down from
Burbank Jackson, MS Ontario, Canada Seattle 10 per cent paid on both), with a commission cap of $60 for a round-trip ticket
Cleveland Jacksonville Orange County, CA Spokane [either electronic or paper)- management estimated that the move would save the
Columbus, OH Kansas City Orlando Tampa company $40 million in 2001. In 2000 about 30 per cent of Southwest's revenue
Corpus Christi little Rock Portland, OA Tucson
Detroit (Metro)
came from ticket sales through travel agents (versus 40 per cent in 1998) , and by
Louisville Providence Tulsa
year-end 2002 over 50 per cent of ticket sales were occurring at the company's
West Palm Beach
Sourcf!'. Southwest Airlines.
website. Ticketless travel accounted for more than 85 per cent of all sales in 2002,
\.. .0
which significantly reduced paperwork and back-office processing.
• The company tried to steer clear of congested airports, stressing instead serving
airports relatively near major metropolitan areas and in medium-sized cities.
Southwest's drive to achieve low operating costs This helped produce better-than-average on-time performance and reduce the
• Southwest management fully understood that low fares necessitated zealous fuel costs associated with planes sitting in line on crowded taxiways or circling
pursuit of low operating costs. The company had over the years instituted a number airports waiting for clearance to land; plus, it allowed the company to avoid
of practices to keep its costs below those of rival carriers. paying the higher landing fees and terminal gate costs at high-traffic airports such
as Atlanta's Hartsfield International, Chicago's O'Hare, Denver International , and
• The company operated only one type of aircraft-Boeing 737s- to minimize the Dallas-Fort Worth (DFW), where landing-slots were controlled and rationed to
size of spare parts inventories, simplify the training of maintenance and repair those airlines willing to pay the high fees. In several cases, Southwest was able
personnel, improve the proficiency and speed with which maintenance routines to compete on the perimeters of several big metropolitan areas by flying into
could be done, and simplify the task of scheduling planes for particular flights. nearby airports with less congested air space. For example, Southwest drew some
Furthermore, as the launch customer for Boeing's 737-300, 737-500, and 737-700 Boston-area passengers away from Boston's Logan International by initiating
C96 Cue OB Southwest Airlines· Culture, Values and Operating Practices
service into nearby Providence, Rhode Island, and Manchester, New Hampshire:
similarly. it initiated flights into Islip, Long Island, which siphoned some
passengers away from New York's LaGuardia and Kennedy International airports.
Southwest's preference for less congested airports also helped minimize total
travel time for passengers-driving to the airport, parking, ticketing, boarding,
and flight time.
• Southwest's point-to-point scheduling of flights was more cost-efficient than
the hub-and-spoke systems used by rival airlines. Hub-and-spoke systems
involved passengers on many different flights coming in from spoke locations
(or perhaps another hub) to a central hub airport within a short span of time and
then connecting with an outgoing flight to their destination-a spoke location
or another hub. Most flights arrived and departed a hub across a two-hour
window, creating big peak-valley swings in airport personnel workloads and gate
utilization-airport personnel and gate areas were very busy when hub operations
were in full swing and then were underutilized in the interval awaiting the
next round of inbound/outbound flights. In contrast, Southwest's point-to-point
routes permitted scheduling aircraft so as to minimize the time aircraft were at
the gate-currently approximately 25 minutes-thereby reducing the number of
aircraft and gate facilities that would otherwise be required. Furthermore, with
a relatively even flow of incoming/outgoing flights and gate traffic, Southwest
could staff its terminal operations to handle a fairly steady workload across a day,
whereas hub-and-spoke operators had to staff their operations to serve peak-period
requirements.
• To economize on the amount of time it took terminal personnel to check passengers
in and to simplify the whole task of making reservations, Southwest dispensed with
the practice of assigning each passenger a reserved seat. Instead, for many years,
passengers were given colour-coded plastic cards with numbers on them when they
checked in at the boarding gate. Passengers then boarded in groups of 30, according
to the colour and number on their card, sitting in whatever seat was open when
they got on the plane-a procedure described by some as a "cattle call". Passengers
who were particular about where they sat had to arrive at the gate early to get a
low number on their boarding cards and then had to push up to the front when it
was their group's turn to board. In 2002 Southwest streamlined the system fur her
by simply printing a big, bold A, B, or Con the boarding pass when the passenger
checked in at the ticket counter; passengers then boarded in groups according to the
letter on their boarding pass.
• Southwest flight attendants were responsible for cleaning up trash left by deplaning
passengers and otherwise getting the plane presentable for passengers to board for
the next flight. (Other carriers had cleaning crews come on board to perform this
function.)
• Southwest did not have a first-class section on any of its planes and had no fancy
clubs for its frequent flyers to relax in at terminals. No meals were served on flights,
even long ones; passengers were offered beverages and snacks- in 2002, Southwest
Southwest Airlines' Strategy C97
provided passengers with 162.4 million packages of peanuts, 51.3 mi~li~n
packages of other snacks, 9.9 million alcoholic beverages, ~d 4.4.5 m1lhon .cans
of non-alcoholic beverages. Serving no meals made reprovis10ning planes simple
and quick.
• Southwest offered passengers no baggage transfer services to other carriers-
passengers with checked baggage who were connecting to other carriers to reach
their destination were responsible for picking up their luggage at Southwest's
baggage claim and then getting it to the check-in facilities of the connecting :arrier.
(Southwest booked tickets involving its own flights only; customers connecting to
flights on other carriers had to book their connecting tickets through either travel
agents or the connecting airline.)
• In mid-2001 Southwest implemented use of new software that significantly
decreased the time required to generate optimal crew schedules and help improve
on-time performance.
• Starting in 2001 Southwest began converting from cloth to leather seats: the team of
Southwest employees who investigated the economics of the conversion concluded
that an all-leather interior would be durable and easy to maintain, thus more than
justifying the high initial costs.
Southwest's operating costs as a percentage of its revenues were consistently the lo.west
in the industry (see Exhibit 7). Exhibit 8 shows a detailed breakdown of Southwest s
operating costs for the period 1995-2002.
Southwest's focus on customers and customer satisfaction
Southwest went ell out to make sure passengers had a positive, fun flying experience.
Gate personnel were cheery and witty, sometimes entertaining those in the gate area
with trivia questions or contests such as "Who has the biggest hole in his or her sock?"
Casually dressed flight attendants greeted passengers coming onto planes and offered
friendly advice to customers looking for open seats. Flight attendants were encouraged
to let their personalities show, to joke with passengers, and even to play gags. On some
flights, attendants played harmonicas and sang announcements to passeng~rs on takeoff
and landing. On one flight while passengers were boarding, an att~ndant with bu?ny ears
popped out of an overhead bin exclaiming "Surprise!" The entertainment repert01res
varied from flight crew to flight crew.
While Southwest had built up quite a reputation presenting a happy face to
passengers and displaying a fun-loving attitude, the compa?y had on oc~asion
encouraged some of its not-so-pleasant customers to patronize other earners. One
woman who flew Southwest frequently became known as "Pen Pal" because she wrote
Herb Kelleher, who quickly penned a short note: 1 Dear Mrs Crabapple, We will miss
in a complaint after almost every flight; her comp ~aints were eventually bum~ed ~p to
you. Love Herb".11 Kelleher made a point of sending congratulator~ notes to those
employees customers singled out in complimentary letters: :omplam.t lette~s were seen
as learning opportunities for employees and reasons to consider making ad1ustments.
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EXHIBIT 1 Comparative operating cost statistics, major US airlines, 1995-second quarter endrng 30 June 2002 (in cents per average seat milel "'~
'.!:':
:!.
Year Food :;·
Salasrest Aircraft Commission Landing Advertising Other Operating Total Rent and
Benefits Fuel and
"'
!'!
Fees and Maintenance Operating Leasing n
c:
Oil Expenses ;::;-
Expenses Fees c:
...
American 1995 0.41 3.7 1.01 0.8 0.15 !O
0.15 3.23 9.45 0.73 <:
2000 0.44 4.18 1.48 0.6 0.17 0.13 3.49 10.49 0.74
...;:
2001 0.44 4.55 1.57 m
0.47 0.19 0.13 4.53 11.89 0.78
2002· 0.4 4.97 1.33 0.35 0.22 0.11 3.75
...uo
:;I
11.12 0.87 0.
Alaska 1995 0.31 2.6 1.07 0.55 0.15 0.12 Q
3.1 7.89 1.17 'g
2000 0.29 3.53 1.76 0.38 CD
0.18 0.38 3.72 10.25 1.08 ...~
2001 0.31 3 81 1.45 0.35 0.25 0.21 3.78 10.17 :;·
1.07 GCJ
2002* 0.32 3.83 1.21 0.3 0.21 0.1 3.98 9.95 1.02 ~
Continental 1995 0.22 2.45 1.11 0.74 0.18 0.16 3.82 m
8.67 1.2 n
2000 0.28 3.3 1.62 0.54 0.18 0.07 a.
4.21 10.2 1.23 n
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2001 0.27 3.44 1.39 0.37 0.21 0.02 4.52 uo
10.23 1.32
2002• 0.26 3.52 1.1 0.28 0.25 0 5.18 10.57 1.42
Delta 1995 0.26 3.25 1.11 0.85 0.2 0.13 3.06 8.86 0.81
2000 0.27 3.73 1.27 0.42 0.16 0.08 3.51 9.43 0.72
2001 0.28 4.1 1.2 0.36 0.16 0.11 3.81 10.02 0.76
2002• 0.25 4.37 1.1 0.28 0.18 0.1 4.03 10.3 0.81
America West 1995 0.19 2.08 0.96 0.64 0.16 0.19 3.07 7.29 1.3
2000 0.12 2.21 1.54 0.32 0.13 0.09 4.17 8.57 1.58
2001 0.1 2.42 1.35 0.28 0.15 0.06 4.5 8.86 1.72
2002* 0.06 2.36 1.09 0.19 0.16 0.08 4.67 8.61 1.56

Year Food Salesrest Aircraft Commission Landing Advertising Other Operating Total Rent and
Benefits Fuel and Fees and Maintenance Operating l.aasing
Oil Expenses Expenses Fees
Northwest 1995 0.28 3.47 1.24 0.93 0.27 0.16 2.8 9.15 D.7
2000 0.29 3.65 1.8 0.61 0.24 0.13 3.24 9.96 0.67
2001 0.27 4.15 1.73 0.45 0.27 0.11 3.55 10.52 0.7
2002• 0.24 4.18 1.4 0.36 0.27 0.1 3.6 10.15 0.77
Southwest 1995 0.02 2.56 1.01 0.39 0.23 D.27 2.61 7.09 0.7\
2000 0.03 2.99 1.38 0.3 0.22 0.26 2.55 7.72 0.55
2001 0.03 3.01 1.29 0.18 0.22 0.24 2.51 7.48 0.54
2002· 0.03 3.02 1.17 0.1 0.24 0.22 2.58 7.36 0.55
United 1995 0.37 3.34 1.06 0.93 0.21 0.13 2.84 8.89 0.94
2000 0.38 4.16 1.43 0.59 0.2 0.2 3.64 10.6 0.88
2001 0.37 4.73 1.5 0.43 0.22 0.13 4.64 12.02 D.9
2002• 0.35 4.87 1.21 0.32 0.22 0.11 4.'l7 11.35 1.07
US Airways 1995 D.25 4.93 1.04 D.9 D.19 0.11 4.18 11.61 1.16
2000 0.28 5.35 1.12 0.51 02 0.08 5.73 13.88 1.11
2001 0.28 5.62 1.56 0.39 0.2 0.08 6 14.13 1.31
2002* 0.21 5.93 1.2 D.25 0.23 0.06 6.57 14.45 1.3
•eased on data for first six months of 2002 only.
Nate: The big increases in the "other operating and maintenance expenses· category for 2001 and 2002 at several arrtines !most notably Unrtad and US A1rwayi) reflect spacial charges for
en
the grounding and early retirement of aircraft and for employee severance expenses that were incurred in the aftermath of the September I I, 2001, terronst attacks. 0
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C100 Case OB Southwest Airlines: Culture, Values and Operating Pre ctices
Southwast Airlines' Stratagy C101

EXHIBIT B Trends in Southwest Airlines' operating expenses per average seat mile, 1995-2002
EXHIBIT 9 Four sample Southwest ads
Expense Category 2002. 2001 2000 1999 1998 1997 1996 1995 - --i@
·.:::c---- -
Salanes, wages, and benefits 2.56 2.5t 2.4t 2.39 2.35 2.26 2 22 2.t7 Aftu len'41dolilierd1on
Emplovee retirement plans .33 .33 .40 .36 .35 .30 .23 .23 tt ik JJJ~c•l c:.accutiTC Jc:n:J.,
Fuel and oil t.tl 1.t8 1.34 .93 .82 1.tt t.19 t.01
Maintenance materials end repairs .57 .61 .63 .70 .64
Mil cxl cn• i~ ru:i•ullaCiou
.58 .62 .60
Agency commissions .08 .ts .27 .30 .33 .35 .35
,nth D'.n lr!•J dn111rfml'nt,
Aircraft rentals .34
.'}] .29 .33 .38 .43 .45 .47 .47 we him AlTinid a!
Landing fees and other rentals .50 .48 .44 .46
Depreciation
.45 .46 .46 .44 4n official corpo1'Q te rr:aponac
.52 .49 .47 .47 .47 .44
Other expenses 1.48 1.49 1.44
.45 .43 to NOT!lrcrrn Airlin".1' dni111
1.49 1.48 1.45 1.51 1.38
Total 7.41 7.54 7.73 7.48 (o be n umber 0 .111:?
7.32 7.40 7.50 7.07
Notv. Figures in this exhib't differ slightly from these for Southwest in Exhi.\Jit 7 due to an assortment or differences in Southwest's 111 C U11{11111i-r S.tiafaction.
internal accounting for its expensas and the Department of Transportation's expense category definitions and reporting far all
commercial amines. """"
,.L iar, liar. P.itnM on firr~
Saumr. Campany annuat reports and 10-K reports.

Colleen Barrett, Southwest's president, had articulated the company's policy some years
earlier:
-·· ---=~=·==-.:::=:-- _,,
No Employee will ever be punished for using good judgement and good old common sense
when trying to accommodate a Customer-no matter what our rules are. Let's starl leaning
towards our Customers again-not away from them. Let's starl encouroging our line employ-
ees to be a little more flexible and to take that extro minute to accommodate special needs. CAN YOU NAME
Let's start encouroging our Supervisors to give our Customers the benefit of the doubt. 12
THEAIRUNE
Southwest was convinced that conveying the Southwest spirit to customers was the key to
competitive advantage; as one Southwest manager put it, "Our fares can be matched; our WITH Low FARES
airplanes and routes can be copied. But we pride ourselves on our customer service."13
ON EVERY SEAT
Marketing and promotion OF EVERY fUGHT.
Southwest was continually on the lookout for novel ways to tell its story, make its
distinctive persona come alive, and strike a chord in the minds of air travellers. Many
EVERYWHERE
of its ads and billboards were deliberately unconventional and attention-getting so as to
create and reinforce the company's maverick, fun-loving, and combative image. Others
IT fUES?
promoted the company's performance as "The Low-Fare Airline" or "The All-Time
On-Time Airline"; still others highlighted its Triple Crown awards. Exhibit 9 provides
four sample ads. One of the company's billboard campaigns touted the frequency of the
company's flights with such phrases as "Austin Auften", "Phoenix Phrequently", and
"L.A. A.S.A.P". Each holiday season since 1985, Southwest had run a "Christmas card"
ad on TV featuring children and their families from the Ronald McDonald Houses and
Southwest employees.
C102 Case 08 Southwest Airlines: Culture, Values and Operating Practices Southwest's People Management &103

EXHIBIT to Southwest's new look of its own, believing its lower fares would attract more passengers. When Midway
Airlines ceased operations in November 1990, Southwest moved in overnight and
quickly instituted flights to Chicago's Midway Airport. When American Airlines
closed its hubs in Nashville and San Jose, Southwest immediately increased the
number of its flights into and out of both locations. During the first half of 2002 , as
air traffic showed s ome signs of picking up , Southwest was a first-mover in adding
flights on routes where rivals had cut their offerings following the September 11,
2001, terrorist attacks.
• An attractive frequent flier programme. Southwest's Rapid Rewards members
received a free round-trip ticket, good for travel anywhere on Southwest's system
for up to one year, after purchasing and flying eight round-trips. There were no
restrictions on the number of free Rapid Rewards seats on a particular flight and
very few blackout dates around holidays. Southwest was considered to have the
most generous frequent flier programme in the industry, winning awards for best
award redemption, best bonus promotion, and best customer service among all
an:rom tim.e to time Southwest ran special fare promotions. To celebrate its 30th frequent flier programmes.
iversary m 2001, Southwest announced s e . 1$3
from 35 cities for travel between June 25 and ~~ti:be ~6~~e-w~ far~s to 30 destinations • Adding longer non-stop flights to the route system. Although over 85 per cent
partners partici ated in the . . r ' out west s car rental and hotel of Southwest's flights involved actual in-air flight times of less than 90 minutes,
p promotion, offermg $30-a-day rentals $30-off dis t the company was judiciously adding non-stop flights to more distant
ancl $30-a-day hotel rooms t . • coun s,
decorations in gate areas a. so~e 1ocahons. The 30-year celebration also included destinations at those airports where its classic low fares could generate sufficient
•prize giveaways and employee 1 . .
so that customers could share in the "Sou~hwest S .. " s p aym~ games m the gate areas pa&.senger traffic to achieve high enough load factors and revenues to be
in 2002, Southwest featured . . pmt . Along with most other airlines profitable. Most of the flights that the company added in 2002 were longer than
and fill up oth . a sanes of special fare promotions to stimulate ticket sales 750 miles.
erw1se empty seats.
In 2002 Southwest began chan · th 1 k f. • Putting strong emphasis on safety, high-quality maintenance, and reliable
gold/orange/red scheme to a muc;1;; h e ood ~ .1~ planes, updating its somewhat drab operations. In the 31 years it had been flying, Southwest had never had a plane
scheme (see Exhibit 10). s er an ng ter canyon blue/red/gold/ orange crash. Southwest had one of the most extens ive and thorough maintenance
programmes in the commercial airline industry. The company's state-of-the-art
flight dispatch s ystem helped minimize weather and operational delays.
Other strategy elements
According to Southwest management, the company's strategy of low-cost, no-frills flights
Southwest's strategy included several other components:
and reliable, friendly service delivered "more value for less money" to customers rather

•:1r~;:~;;:u;; ~~~~n:~~~~t~~s~:~~~~:t~:~f/r:~~~~1a:ostttraightf~;'ar~
perused at the comp ' b . d
0 10
P ns cou easily ber
of any
than "less value for less money". Kelleher said, "Everybody values a very good service
provided at a very reasonable price. "14
more lenient than th::~ ~f7t: ~~=js~n the company's restrictions on tickets were
• Gradual expansion into new geog11 h · k Southwest's people management
two new cities to its route schedul:p JC mar. els. So~thwest generally added one or
daily flights to th ·r I . . annually, preferrmg to saturate the market for Practices and culture
e c1 rns airports it currently served befor t .
selecting new cities, Southwest looked for . . e en ermg new markets. In Whereas the litany at many companies was that customers come first , at Southwest
amounts of both business and leisure t ffi c1i'.,. pairs that coul~ generate substantial the operative principle was that "employees come first and customers come second".
flights were a 1· . ra c. anagement behaved that lots of The importance placed on employees reflected management's belief that delivering
the ability to ~:i~~ ~nfa:~rb;isg1~te~fsthtravellers looking for convenient flight times and superior service required employees who not only were passionate about their jobs but
1 ey unexpectedly ran late
• Add'mg fl'ights m · areas where rivals were cutt' b k also knew the company was genuinely concerned for their well-being and committed
. ' to providing them with job security. Southwes t's thesis was simple: keep employees
flights to cities that Southwest serv d S h mg ac service. When rivals cut back
e ' out west often moved in with more flights happy-then thay will keep customers happy.
C104 Case DB Southwest Airlines: Culture, Values end Operating Practices
What Southwest management thought about the importance of Southwest's people and
their role is reflected in the following excerpt from the company's 2000 annual report:
Our "J?eople are warm, caring and compassionate, and wiWng to do whatever it takes
to brmg the Free~om to Fly to their fellow Americans. They take pride in doing well for
themselves by domg good for others. They have built a unique and powerful culture that
demonstrates ~hat the ~nly way to accomplish our mission to make air travel affordable
for others, ~hile ensunng ample profitability, job security, and plentiful Profitsharing for
ourselves, is to keep our costs low and Customer Service quality high.
. At Southwest, ou~ ~eople are our greatest assets, which is why we devote so much
time and energy to hmng great People with winning attitudes. Because we are well
known as an excellent place to work with great career opportunities and a secure future,
lots ?f People wa~t to work for Southwest ... Once hired, we provide a nurturing and sup-
portwe work en~~onm.ent that gives our Employees the freedom to be creative, have fun,
~~d make a pos1t1ve difference. Although we offer competitive compensation packages,
~ts our. Emp!oyees' sense of ownership, pride in team accomplishments, and enhanced
/Ob sat1sfact1on that keep our Culture and Southwest Spirit alive and why we continue to
produce winning seasons.
The company changed the personnel department's name to the People Department in
1989.
Recruiting, screening, and hiring
Southwest hired employees for attitude and trained them for skills. Kelleher explained:
We can train people to d~ things where skills are concerned. But there is one capability
we do.not have an~ that is to change a person's attitude. So we prefer an unskilled per-
son with a good attitude ... [to] a highly skilled person with a bad attitude.15
Man~gement ?elieved that delivering superior service came from having employees who
genuinely behaved that customers were important and that treating them warmly and
courteously was the right thing to do, not from training employees to act like customers
are important. The belief at Southwest was that superior, hospitable service and a
funloving spirit flowed from the heart and soul of employees who themselves were
funloving and spirited, who liked their jobs and the company they worked for, and who
were also confident and empowered to do their jobs as they saw fit (rather than beirig
governed by strict rules and procedures).
. S~u.thwest recruited employees by means of newspaper ads, career fairs, and Internet
Job hstmgs; a number of candidates applied because of Southwest's Fortune listings as
on~ of the ~est companies to work for in America and because they were impressed by
their experiences as a customer on Southwest flights. Recruitment ads were designed to
~apture the attention of people thought to possess Southwest's "personality profile". For
mstance, one ad showed Herb Kelleher impersonating Elvis Presley and read as follows:
~ark In A Place Where Elvis Has Been Spotted. The qualifications? It helps to be outgo-
mg. Maybe even a bit off center. And be prepared to stay for a while. After all, we have
the l?w~st employee turnover rate in the industry. If this sounds good to you, just phone
our JOblme or send your resume. Attention Elvis. 16
All job applications were processed through the People Department.
Southwest's People Management C105
Screening candidates
In hiring for jobs that involved personal contact with passengers, the company looked
for people-oriented applicants who were extroverted and had a good sense of humour. It
tried to identify candidates with a knack for reading people's emotions and responding
in a genuinely caring, empathetic manner. Southwest wanted employees to deliver the
kind of service that showed they truly enjoyed meeting people, being around passengers,
and doing their job, as opposed to delivering the kind of service that came across
as being forced or taught. According to Kelleher, "We are interested in people who
externalize, who focus on other people, who are motivated to help other people. We are
not interested in navel gazers." 17 Southwest was drawn to candidates who, in addition to
having a "whistle while you work" attitude, appeared likely to exercise initiative, work
harmoniously with fellow employees, and be community spirited.
Southwest did not use personality tests to screen candidates, nor did it ask candidates
what they would or should do in certain hypothetical situations. Rather, the hiring
staff at Southwest analysed each job category to determine the specific behaviours,
knowledge, and motivations that job holders needed and then tried to find candidates
with the desired traits-a process called targeted selection. A trait common to all job
categories was teamwork; a trait deemed critical for pilots and flight attendants was
judgement. In exploring an applicant's aptitude for teamwork, interviewers often asked
applicants to tell them about a time in a prior job when they went out of their way to
help a co-worker or to explain how they had handled conflict with a co-worker. Another
frequent question was "What was your most embarrassing moment?" Southwest believed
that having applicants talk about their past behaviours provided good clues about their
future behaviours.
To test for unselfishness, Southwest interviewing teams typically gave a group of
potential employees ample time to prepare five-minute presentations about themselves;
during the presentations, which took place in an informal conversational setting,
interviewers watched the audience to see who was absorbed in polishing their own
presentations and who was listening attentively, enjoying the stories being told, and
applauding the efforts of the presenters. Those who were emotionally engaged in hearing
the presenters and giving encouragement were deemed more apt to be team players
than those who were focused on looking good themselves. All applicants for flight
attendant positions were put through such a presentation exercise before an interview
panel consisting of customers, experienced flight attendants, and members of the
People Department. Flight attendant candidates who got through the group presentation
interviews then had to complete a three-on-one interview conducted by a recruiter, a
supervisor from the hiring section of the People Department, and a Southwest flight
attendant; following this interview, the three-person panel tried to reach a consensus on
whether to recommend or drop the candidate.
In 2002 the company reviewed 243 657 resumes and hired 5042 new employees.
Training
Apart from the Federal Aviation Administration's mandated training for certain
employees, training activities at Southwest were designed and conducted by Southwest's
C106 Case 08 Southwest Airhnes: Culture, Values and Operating Practices
University for People, a part of the company's People Department. The curriculum
included courses for new recruits, employees, and leadership training programmes for
both new and experienced managers. Leadership courses emphasized a management
style b~sed on coaching and encouraging, rather than supervising or enforcing rules and
regulations. All employees who came into contact with customers, including pilots,
received customer care training. There were also courses on safety, communications,
stress management, career development, performance appraisal, decision making, and
employee relations. From time to time supervisors and executives attended courses on
corporate culture that were intended to help instil, ingrain, and nurture such cultural
themes as teamwork, trust, harmony, and diversity.
Depending on the influx of new employees, orientation courses were conducted two
~o five tim~s a week for between 20 and 100 new recruits. The orientation programme
mclude·d· videos on Southwest's history, an overview of the airline industry and the
compehhve challenges that Southwest faced, and an introduction to Southwest's culture
and management practices. One of the programme's highlights was a video called the
Southwest Shuffle, which featured hundreds of Southwest employees rapping about
the fun they had on their jobs. Orientation programmes at the Dallas headquarters
typically included exercises designed to demonstrate the role of creativity and teamwork
'.1°d a scaven~er ~unt in which new hires were given a time line with specific dates
m Southwest s history and were asked to fill in the missing details by viewing the
me?1orabilia decorating the corridors and getting information from people working in
various offices. Much of the indoctrination of new employees into the company's culture
was done by co-workers and the employee's supervisor. Southwest made active use of a
one-year probationary employment period to help ensure that new employees fit in with
its culture and adequately embraced the company's cultural values.
One of Southwest's supervisory training programmes involved three teams; one
member of each team was blindfolded and asked to throw a ball into a bucket. Unknown
to the throwers, the other members on one team could say nothing about where the
bu~ke~. was, memb~rs of the second team were instructed to say only "Good job" or "Keep
trymg • and the thud group was allowed to give its thrower detailed information about
where the bucket was. Not surprisingly, the third group's thrower had the most success-
an out~ome that was i~tend.ed to demonstrate the value of good coaching on the palit of
supervisors and good hstemng on the part of supervisees.
Promotion
Approximately 80 to 90 per cent of Southwest's supervisory positions were filled
internally, reflecting management's belief that people who had "been there and done
that" would be the ones most likely to appreciate and understand the demands that
pe~ple under the~ were experiencing-and also most likely to enjoy the respect of
thei.r .peers and higher-level managers. Employees could either apply for supervisory
positions or be recommended by their present supervisor. New appointees for low-
level man~gement positions attended a three-day "Leading with Integrity" class aimed
at developmg leadership and communication skills. Employees being considered for
~anagerial positions of large operations (Up and Coming Leaders) received training
m every department of the company over a six-month period in which they continued
Southwest's People Management C1D7
to perform their current job. At the end of the six-month period, candidates were
provided with 360-degree feedback from department heads, peers, and subordinates;
representatives of the People Department analysed the feedback in deciding on the
specific assignment of each candidate. 18
Compensation
Southwest's pay scales were at levels close to the industry average and its benefit
packages were good relative to other airlines. According to a 1997-98 survey,
Southwest's pilots earned, on average, about 10 p er cent above the industry average;
however, they flew an average of 85 hours per month versus an industry average of
ao.2 hours.
Southwest introduced a profit-sharing plan far senior employees in 1973, the
first such plan in the airline industry. By the mid-1990s the plan bad been extended
to cover most Southwest employees. As of 2001 Southwest had 12 different stock
option programmes for various employee groups, a 401(k) employee savings plan
that included company-matching contributions, and a profit-sharing plan that
covered virtually all employees and consisted of a money purchase defined contribution
plan and an employee stock purchase plan. Company contributions to employee
410[k) and profit-sharing plans totalled $167.1 million in 1998, $192.0 million in
1999, $241.5 million in 2000, $214.6 million in 2001 , and $155.6 million in 2002. In
recent years, these payments had represented 8to12 per cent of base pay. Employees
participating in stock purchases via payroll deduction bought 1 million shares in 2000;
1 million shares in 2001; and 1.4 million shares in 2002-at prices equal to 90 per cent of
the market value at each payroll period. Southwest employees owned about 10 per cent
of Southwest's outstanding shares and held options to buy some 138 million additional
shares over the next 10 years.
Employee relations
About 80 per cent of Southwest's 35 000 employees belonged to a union, making
it one of the most highly unionized US airlines. The Teamsters Union represented
Southwest's airline mechanics, stock clerks, and aircraft cleaners; the Transport Workers
Union (TWU) represented flight attendants; Local 555 of the TWU represented baggage
handlers, ground crews, and provisioning employees; and the International Association
of Machinists represented the customer service and reservation employees. There was
one in-house union-the Southwest Airline Pilots Association, which represented pilots.
Despite having sometimes spirited disagreements over particular issues, Southwest's
relationships with the unions representing its employee groups were for the most part
harmonious and non-adversarial-the company had experienced only one brief strike by
machinists in the early 1980s.
Management encouraged union members and negotiators to research their pressing
issues and to conduct employee surveys before each contract negotiation. Southwest's
contracts with the unions representing its employees were relatively free of restrictive
work rules and narrow job classifications that might impede worker productivity. All
of the contracts allowed any qualified employee to perform any function- thus, pilots,
C108 c8111 OB Southwest Airlines: Culture, Values and Operating Practices
ticket agents, and gate personnel could help load and unload baggage when needed
and flight attendants could pick up trash and make flight cabins more presentable for
passengers boarding the next flight.
In 2000-2001 the company had contentious negotiations with Local 555 of the TWU
(representing about 5300 Southwest employees) over a new wage and benefits package;
the previous contract had become open for renegotiation in December 1999, and a
tentative agreement reached at the end of 2000 was rejected by 64 per cent of the union
members who voted. A memo from Kelleher to TWU representatives said, "The cost and
structure of the TWU 555 negotiating committee's proposal would seriously undermine
the competitive strength of Southwest Airlines; endanger our ability to grow; threaten
the value of our employees' profit-sharing; require us to contract out work in order to
remain competitive; and threaten our 29-year history of job security for our employees."
In a union newsletter in early 2001, the president of the TWU said, "We asked for a
decent living wage and benefits to support our families, and were told of how unworthy
and how greedy we were." The ongoing dispute resulted in informational picket lines in
March 2001 at several Southwest locations, the first picketing since 1980. Later in 2001,
with the help of the National Mediation Board, Southwest and the TWU reached an
agreement covering Southwest's ramp, operations, and provisioning employees.
Prior to September 11, 2001 Southwest's pilots were somewhat restive about their
base pay relative to pilots at other US airlines. The maximum pay for Southwest's
3700-plus pilots (before profit-sharing bonuses) was $148 000, versus maximums of
$290 000 for United's pilots; $262 000 for Delta's pilots; $206 000 for American's pilots;
and $199 000 for Continental's pilots. 19 Moreover, some veteran Southwest employees
were grumbling about staff shortages in certain locations (to hold down labour costs)
and cracks in the company's close-knit family culture due to the influx of so many new
employees over the past several years. A number of employees who had accepted lower
pay because of Southwest's underdog status were said to feel entitled to "big airline" pay
now that Southwest had emerged as a major US carrier.w
The no-lay-off policy
Southwest Airlines had never laid off or furloughed any of its employees since the
company began operations in 1971. The company's no~lay£off policy was seen as i~tegral
both to how the company treated its employees and to management efforts to sustain and
nurture the culture. According to Kelleher,
Nothing kills your company's culture like lay~offs. Nobody has ever been furloughed
here, and that is unprecedented in the airline industry. It's been a huge strength of ours.
It's certainly helped negotiate our union contracts ... We could have furloughed at vari-
ous times and been more profitable, but I always thought that was shortsighted. You want
to show your people you value them and you 're not going to hurt them just to get a little
more money in the short term. Not furloughing people breeds loyalty. It breeds a sense of
security. It breeds a sense of trust.21
Southwest had built up considerable goodwill with its unions over the years by avoiding
lay-offs.
Southwest's People Management C109
Management style
At Southwest, management strived to do things in a manner that would make
Southwest employees proud of the company and its workforce practices. Managers
were expected to spend at least one-third of their time out of the office, walking around
the facilities under their supervision, observing firsthand what was going on, listening
to employees and being responsive to their concerns. A former director of people
development at Southwest told of a conversation he had with one of Southwest's
terminal managers:
While I was out in the field visiting one of our stations, one of our managers mentioned to
me that he wanted to put up a suggestion box. I responded by saying, "Sure-why don't
you put up a suggestion box right here on this wall and then admit you are a failure as
a manager?" Our theory is, if you have to put up a box so people can write down their
ideas and toss them in, it means you are not doing what you are supposed to be doing.
You are supposed to be setting your people up to be winners. To do that, you should be
there listening to them and available to them in person, not via a suggestion box. For
the most part, I think we have a very good sense of this at Southwest. I think that most
people employed here know that they can call any one of our vice presidents on the tele-
phone and get heard, almost immediately.
The suggestion box gives managers an out; it relinquishes their responsibility to be
accessible to their people, and that's when we have gotten in trouble at Southwest-when
we can no longer be responsive to our flight attendants or customer service agents, when
they can't gain access to somebody who can give them resources and answers. 22
Company executives were very approachable, insisting on being called by their first
names. At new employee orientations, people were told, "We do not call the company
chairman Mr. Kelleher; we call him Herb." Managers and executives had an open-door
policy, actively listening to employee concerns, opinions, and suggestions for reducing
costs and improving efficiency.
Employee-led initiatives were common. Southwest's pilots had been instrumental
in developing new protocols for takeoffs and landings that conserved fuel. Another
Frontline employee had suggested not putting the company logos on trash bags, saving
an estimated $250 000 annually. Rather than buy 800 computers for a new reservations
centre in Albuquerque, company employees determined that they could buy the parts
and assemble the PCs themselves for half the price of a new PC, saving the company
$1 million. It was Southwest clerks who came up with the idea of doing away with paper
tickets and shifting to a-tickets.
There were only four layers of management between a Frontline supervisor and the
CEO. Southwest's employees enjoyed substantial authority and decision-making power.
According to Kelleher:
We've tried to create an environment where people are able to, in effect, bypass even the
fairly lean structures that we have so that they don 't have to convene a meeting of the
sages in order to get something done. In many cases, they can just go ahead and do it on
their own. They can take individual responsibility for it and know they will not be cruci-
fied if it doesn't work out. Our leanness requires people to be comfortable in making their
own decisions and undertaking their own efforts.z3
C110 Case 08 Southwest Airlines: Culture, Values and Operating Practices
From time to time, there were candid meetings of frontline employees and managers
where operating problems and issues between or among workers and departments were
acknowledged, ~penly discussed, and resolved. 24 Informal problem avoidance and rapid
problem resoluhon were seen as managerial virtues.
Southwest's core values
Two core values-LUV and fun-permeated the work environment at Southwest. LUV
was m~c;:h more th.an the company's ticker symbol or a recurring theme in Southwest's
adverhsmg campaigns. Over the years, LUV grew into Southwest's code word for
treating individ~als-fel.low em.ployees and customers-with dignity and respect
and demonstratmg a carmg, lovmg attitude. The word LUV and red hearts commonly
appeared on banners and posters at company facilities, as reminders of the compassion
~hat was expected toward customers and other employees. Practising the Golden Rule,
mt~rnally and externally, ~as expected ~fall employees. Employees who had to struggle
to hve up to these expectations were sub1ected to considerable peer pressure and usually
we~e. asked to seek employment elsewhere if they did not soon leave of their own
volition.
Fun at .southwest meant exactly what the word implies. Fun occurred throughout the
co~p.any m the for?1 of the generally entertaining behaviour of employees in performing
their Jobs, the ongomg pranks and jokes, and frequent company-sponsored parties and
cele~rations. On holidays, employees were encouraged to dress in costumes. There were
cha~1ty ~enefit games, chili cook-offs, Halloween parties, new Ronald McDonald House
dedications, and other special events of one kind or another at one location or another
alm~st every week. According to one manager, "We're kind of a big family here, and
family members have fun together."
The culture committee
Sou~w.~st forme~ a C~lture Committee in 1990 to promote "Positively Outrageous
Service and devise tributes, contests, and celebrations intended to nurture and
perpetuate the "Southwest Spirit". The committee, chaired by Colleen Barrett, was
com~osed of up to 100 employees representing a cross-section of departments and
locations; membe~s. served a ~wo-year term. Members, chosen for their zeal in exhibil ing
the S?uthwest Spmt and their commitment to Southwest's mission and values,
functioned as cultural ambassadors, missionaries, and storytellers. The committee had
four all-day meetings annually; ad hoc subcommittees, formed throughout the year, met
more frequently. Over the years, the committee had sponsored and supported hundreds
of ~~ys to promo~e and ingrain the Southwest Spirit, with members showing up al a
fac1hty to serve pizza .or i.ce crea~ to' employees or to remodel and decorate an employee
break ~oom. Kelleher mdtcated, We re not big on committees at Southwest, but of the
committees we do have, the Culture Committee is the most important. "l~
Efforts to nurture the Southwest culture
~part from the Culture Committee, Southwest reinforced its core values and culture
via such efforts as a CoHearts mentoring programme; a Day in the Field programme, in
Southwest's People Management C111
which employees spent time working in another area of the company's operations; a
Helping Hands programme, in which volunteers from around the system travelled to
work two weekend shifts at other Southwest facilities that were temporarily shorthanded
or experiencing heavy workloads; and periodic Culture Exchange meetings to celebrate
the Southwest Spirit and .c ompany milestones. Almost every event at Southwest was
videotaped, which provided footage for creating such multipurpose videos as Keepin' the
Spirit Alive that could be used in training courses and shown at company events all over
the system. Many of the committee's activities revolved around promoting the use of red
hearts and the word LUV to embody the spirit of Southwest employees caring about each
other and Southwest's customers. The concepts of LUV and fun were spotlighted in all
of the company's training manuals and videos. There was an annual "Heroes of the Heart
Award".
Southwest's monthly newsletter, LUV Lines, often spotlighted the experiences and
deeds of particular employees, reprinted letters of praise from customers, and reported
company celebrations of milestones. A quarterly news video, "As the Plane Turns", was
sent to all facilities to keep employees up-to-date on company happenings, provide clips
of special events, and share messages from customers, employees, and executives. The
company had published a book for employees describing "outrageous" acts of service.
Sometimes important information was circulated to employees in "fun" packages such as
Cracker Jack boxes.
Southwest executives believed that the company's growth was primarily a function
of the rate at which it could hire and train people to fit into its culture and mirror the
Southwest Spirit. With about 150 cities annually petitioning Southwest to initiate service
to their airports, management believed that the company's growth was not constrained by
a lack of market opportunities to expand into other geographic locations. About 15 000 of
Southwest's 35 000 employees had been hired since 1995.
Employee productivity
Management was convinced that the company's strategy, culture, esprit de corps, and
people management practices fostered high labour productivity and contributed to
Southwest's low Jabour costs compared to other airlines (see again Exhibit 7). When
a Southwest flight pulled up to the gate, ground crews, gate personnel, and flight
attendants hustled to perform all the tasks requisite to tum the plane around quickly-
employees took pride in doing their part to achieve good on-time performance.
Southwest's average turnaround times were about two-thirds the industry average. One
study found that Southwest had an average of 2.2 station personnel per 1000 passengers
in 1994 versus an industry average of about 4 .2.26 According to the Air Transport
Association, labour costs were the airlines' biggest cost component, accounting for
38 per cent of operating costs in 2002; the average airline employee had an estimated cost
of $75 200 in 2002, including pension, payroll taxes, health care, and insurance benefits.
In 2000, Southwest's labour productivity compared favourably with the average of its
eight biggest US rivals:
Passengers enplaned per employee 2145 1119
Employees per plane 83.4 121.7
&112 Case 08 Southwest Airlines: Culture, Values end Operating Practices
Southwest's People Management C113

Awards, recognition and operating performance comparisons

EXHIBIT 11 On-time flights, mishandled baggage, oversales, and passenger compla ints for major US airlines,
Southwest's strategy and approaches to conducting its business had resulted in 1998-2002
numerous awards over the years. Southwest ranked number one in customer satisfaction
among US major airlines every year from 1991 though 2000. In Fortune magazine Percentage of Scheduled Flights Arriving within 15 Minutes of the Schaduled Time
surveys, Southwest had been ranked as the most admired airline in the world every year Carrier Jan.-Sapl 2002 2001 2000 1999 1998
since 1997. In 1998, Fortune named Southwest number 1 in its listing of the 100 best Alaska Airlines 75 8 69.0 68.l 71.0 72.0
companies to work for in America; Southwest was ranked number 4 in 1999, number America West 78.5 74.8 65.5 69.5 68.5
2 in 2000, and number 4 in 2001-the company elected not to go through the screening American 78.9 75.9 72.9 73.5 80.1
Continental 78.7 80.7 78.1 76.6 77.3
process for the awards given out in early 2002. Southwest's website had won top awards Delta 77.5 78.0 75.3 78.0 79.6
from both Business Week and PC Magazine. In 2001 Business Ethics included Southwest Northwest 79.7 79.7 77.4 79.9 70.6
Airlines on its "100 Best Corporate Citizens" list. Southwest 82.3 Bt.7 75.2 80.0 80.8
Exhibit 11 provides comparative statistics on Southwest's performance versus that of TWA• 80.8 76.9 80.9 78.3
other major commercial airlines during the 1998-2002 period, United 75.5 73.5 61.4 74.4 73.8
USAiiways 78.4 78.2 72.3 71 .4 78.9
Mishandled Baggage Reports par 1000 Passengars
Southwest's new leadership team Alaska Airlines 2.68 3.00 3.48 5.75 7.27
n June 2001 Southwest Airlines, responding to anxious investor concerns about America West 3.47 4.22 6.62 4.52 3.88
I the company's leadership succession plans, began an orderly transfer of power and
responsibilities from its longtime CEO and co-founder, Herb Kelleher, age 70, to two of
American
Continenta I
4.32
3..06
4.60
4.29
5.50
5.35
5.21
4.42
4.40
4.06
Delta 3.61 4.11 4.49 4.39 4.27
his most trusted proteges. James F. Parker, 54 , Southwest's general counsel, was elevated Northwest 4.79 4.19 5.24 4.81 6.63
to CEO. Colleen Barrett, 56, Southwest's executive vice president of customers and self. Southwest 3.54 4.77 5.00 4.22 4.53
described keeper of Southwest's pep-rally corporate culture, became president and chief TWA" 6.35 6.06 5.38 5.39
operating officer. Kelleher stayed on as chairman of Southwest's board of directors and United 3.69 5.07 6.57 7.01 7.79
US Airways 3.01 3.86 4.76 5.08 4.09
the head of the board 's executive committee and continued to be in charge of strategy,
expansion to new cities and aircraft scheduling, and governmental and industry affairs; Involuntary Denied Boardings per 1DODO Passengers Due to Oversold Flights
his contract called for him to remain in those roles through December 2003 at an annual Alaska Airlines 1.24 1.36 1.53 0.99 1.49
salary of $450 000, plus bonuses and stock options. Many observers and long-time America West 0.21 0.38 T.27 1.38 l.12
American 0.22 0.36 0.44 0.42 0.42
employees did not expect Kelleher to ever fully remove himself from management of the Continental 0.93 1.51 1.44 0.28 0.13
company as long as his health held up-Kelleher had undergone treatment for prostate Delta 0.87 0.77 0.34 1.98 1.24
cancer in 1999. Northwest 0 53 0.45 0.43 0.20 0.33
Southwest 1.06 1.50 1.84 1.40 1.84
TWA* 1.83 2.76 0.88 1.69
James Parker United 0.65 0.92 1.64 0.69 0.59
Southwest's new CEO, James Parker, had an association with Herb Kelleher going USAirweys 0.26 0.34 0.67 0.57 0.23
back 23 years to the time when they were colleagues at Kelleher's old law firm . Parker Complaints par 100 ODD Passengers Boardad
moved over to Southwest from the law firm in February 1986. Parker's profile inside the Alaska Airlines 1.02 1.27 2.04 1.64 0.54
company as Southwest's vice president and general counsel had been relatively low, America West 1.88 3.72 7.51 3.72 2.11
but he was Southwest's chief labour negotiator and much of the credit for Southwest's American 1.41 2.51 3.54 3.49 1.14
good relations with employee unions belonged to him. Prior to his appointment as Continental 1.46 2.23 2.84 2.62 1.02
Delta 1.51 2.16 2.01 1.81 0.79
CEO, Parker had been a member of the company's executive planning committee; his
Northwest 1.60 1.97 2.61 2.92 2.21
experiences ranged from properties and facilities to technical services team to the Southwest 0.37 0.38 0.47 0.40 0.25
company's alliances with vendors and partners. Parker and Kelleher were said to think TWA• 2.54 3.47 3.44 1.29
much alike, and Parker was regarded as having a good sense of humour, although he United 1.90 3.24 5.3 2.65 1.28
did not have as colourful and flamboyant a personality as Kelleher. Parker was seen as US Airways 1.24 1.87 2.59 3.13 0.84
an honest, straight-arrow kind of person who had a strong grasp of Southwest's culture •Aequired by American Airlines in 2001: TWA data fer 2002included In American Airlines statistics.
Source: Office of Aviation Enforcement and Proceedings, Air Travel Consumer Repolt, mulnple issues.
 C114 Case 08 Southwest Airlines: Culture, Values and Operating Practices
and market niche and who could be nice or tough, depending on the situation. When his
appointment was announced, Parker said:
There is going to be no change of course insofar as Southwest is concerned. We have a
I very experienced leadership team. We've all worked together for a long time. There will
I
bo evolutionary changes in Southwest, just as there have always been in our history.
We're going to stay true to our business model of being a low-cost, low-fare airline. 27
I
1
Colleen Barrett
Barrett began working with Kelleher as his legal secretary in 1967 and had been with
Southwest since 1978. As executive vice president of customers, Barrett had a high
profile among Southwest employees and spent most of her time on culture building,
morale building, and customer service, She and Kelleher were regarded as Southwest's
guiding lights, and some analysts said she was essentially functioning as the company's
chief operating officer prior to her formal appointment. Much of the credit for the
company's strong record of customer service and its strong culture belonged to Barrett,
Barrett had been the driving force behind lining the hallways at Southwest's
headquarters with photos of company events and trying to create a family atmosphere
at the company. Believing it was important to make employees feel cared about and
important, Barrett had put together a network of contacts across the company to help
her stay in touch with what was happening with employees and their families. When
network members learned about events that were worthy of acknowledgement, word
quickly got to Barrett- the information went into a database and an appropriate greeting
card or gift was sent. Barrett had a remarkable ability to give individualized gifts that
connected her to the recipient. 28
Barrett was the first woman appointed as president and chief operating office of a
major US airline. In October 2001 Fortune included Colleen Barrett on its list of the
50 most powerful women in American business (she was ranked number 20) .
Crisis conditions strike the airline industry: The aftermath of
September 11
n the days and weeks following the terrorist attacks on the World Trade Center and the
1 1
I Pentagon on September 11, 2001, the commercial air travel system in the United States
was suddenly and unexpectedly in shambles. The unprecedented three-day shutdown of
I
I flights, the sudden erosion of passenger traffic, and strict new security measures threw
major airlines into a financial crunch of huge proportions and triggered a struggle to
revamp flight schedules and respond to sharply lower passenger travel. During the three
days that flights were suspended by the Federal Aviation Administration, airlines burned
through an estimated $220 million a day in cash to cover ongoing expenses.
On the first day of trading after the terrorist attacks, investor worries about almost
empty flights, higher costs from added security measures, and a clouded financial
future for the whole airline industry caused airline stock prices to plunge. With about
$26.1 billion in debt as of 2001; billions more in capital lease obligations for planes that
Crisis Conditions Stnke the Airline Industry· The Aftermath of September 11 C115
had been leased rather than purchased; and ongoing costs for labour, termin al facilities
and maintenance, US commercial airlines typically had to fill close to 65 per cent of th~
available seats in order to reach breakeven. For the four weeks immediately following
the attacks, load factors at most airlines were in the 40-60 per cent range. Most airlines
responded by cutting the number of flights by about 20 per cent, grounding the unneeded
planes, and laying off etnployees.
Many airline executives expressed concerns about an impending liquidity crunch,
rapid burns of cash on hand, and the potential for a number of carriers to end up in
bankruptcy without some kind of relief from the federal government. Industry analysts
speculated that losses for US airlines in the wake of the terrorist attacks could reach
$7 billion in 2001 and that slack demand for air travel could last well into 2002. Congress
responded by passing a $15 billion aid package that (1) provided $5 billion in cash grants
to help airlines cover losses and negative cash flows stemming from traffic declines and
(2) allowed airlines to apply for $10 billion in Joan guarantees to holster their balance
sheets and provide needed liquidity.
During the last three months of 2001 airlines scrambled to revise their flight schedules
to better match the reduced traffic patterns. Delta, American , and TWA cut 40 per cent
of their international flights out of New York's Kennedy International, suspending all
service to a number of destinations until March 2002. Late-night domestic flights and
domestic flights on weak performing routes bore the brunt of the flight cutbacks. Some
routes served by full-size jets were converted to commuter jet service. United Airlines
announced that it would cease operating its Shuttle by United service on the West
Coast, which overlapped with Southwest in such markets as Las Vegas, Oakland , and
Los Angeles. US Airways announced that it would close down its low-fare MetroJet
subsidiary, which operated on the East Coast and overlapped w ith Southwest's service
in Providence and Baltimore (one of Southwest's fastest•growing locations). US Airways
also announced that it would eliminate 51 of its 75 mainline jet flights from Baltimore,
including all non~stop flights to Florida. Delta Airlines announced that it would cut the
operations of its low-fare operation, Delta Express, by 50 per cent; Delta Express served
three locations also served by Southwest-Orlan do, Tampa, and Hartford. In Orlando,
Delta Express said it would cut back from 49 daily flights to 21 (Southwest operated
52 daily non-stop flights out of Orlando to 24 cities).
Southwest's situation
Southwest, however, continued to fly its full schedule of 2772 flights even though its
load factors for the four weeks ending 14 October 2 001 were 38.5 per cent, 52.4 per cent,
62.5 per cent, and 67 .0 per cent-for the period 1 July 2001 until the attacks, Southwest's
load factor was 74.6 per cent. The company initiated n ew service to Norfo lk, Virginia,
on 7 October, as planned. Southwest's primary responses involved a temporary freeze
on hiring until January 2002, deferring non-essential capital spending and non-essential
operating costs, and negotiating a revised delivery schedule for the 132 Boeing 737 jets it
had on order.
In January 2002 Southwest Airlines reported its 29th consecutive year of profitability,
with annual net income of $511.1 million ($0.63 per diluted share), compared to
C116 Casa 08 Southwest Airlines: Culture, Values and Operating Practices
2000 net income [excluding the cumulative effect of a change in accounting principle)
of $625.2 million {$0.79 per diluted share)-a decline of 16 per cent. Southwest's 2001
net income included e special pretax gain of $235 million from a federal grant received
pursuant to the Air Transportation Safety and System Stabilization Act and special
pretax charges of $46 million arising from the terrorist attacks on September 11, 2001.
Excluding the special gain, special charges, and related profit-sharing and income tax
effects, the company's 2001 net income was $412.9 million, or $0.51 per diluted share.
Then in early 2002 Southwest announced that it would begin expanding its flight
schedule during the February-June 2002 period; the new schedule included the addition of
21 new daily non-stop flights, many of which were on long-distance routes that Southwest
had not previously served with non-stop flights. Later in 2002 Southwest announced the
addition of 10 more new long-distance, non-stop flights. Many of the newly added flights
were round-trip flights between points in the Northeast and Florida and Texas and between
two of Southwest's most important airports, Baltimore/Washington and Chicago Midway,
and points west-Las Vegas, Phoenix, Oakland, Seattle, and Los Angeles.
Chicago Midway was targeted by Southwest as a particularly lucrative place for
expanded flights. Southwest's share of flight departures from Chicago [both O'Hare and
Midway) was much higher in April 2002 than in April 2001:
Chicago- Tampa
Southwest 20%
United 50
American 30
Chicago-Seattle
Southwest 0 9
United 60
American 34
Chicago-Phoenix
Southwest 9 17
United 27
American 27
Note Peruntages mcluda all H'ohts fro11 bollll O'Hare and Mic!wav; Southwest fl ghts auwere into and out of M.dway.
Jim Parker, Southwest's CEO and vice chairman, said, "We are approaching growth
opportunities conservatively, but we know our customers have been anxious for this new
non-stop service. Although the airline is still in the recovery process, we cannot forget
the wishes of our customers to continue to bring low fares and affordable travel to more
people with more convenient flights." Parker indicated that Southwest's employees bad
been working feverishly on initiatives to make the airport experience more convenient in
the new environment of heightened security.
Introductory fares for the flights on the new routes were in the range of $89- $99 each
way. The fares were well below the fares on comparable flights of rival airlines. On the
high-traffic Chicago-Los Angeles route, an unrestricted, fly-anytime fare or a last-minute
fare (no advance purchase) on United and American ran $2480. To try to rebuild traffic
Crisis Conditions Strike the Airline Industry: The Aftermath of September 11 C117
during 2002, Southwest had fare sales in January, March, April, July, August, October,
end December; it had also instituted some special vacation fares to resort destinations
like Las Vegas and California's Disneyland. But es 2002 drew to an end, passenger traffic
on Southwest's flights (see Exhibit 2} and on those of rival airlines remained below pre-
September 11 levels. In December 2002, Southwest announced another round of fare
sales for January-April 2003.
Southwest's financially troubled rivals
The financial picture et rival airlines was grim. Every passenger airline in the United
States except Southwest lost money in 2002. US Airways filed for Chapter 11 bankruptcy
in August 2002; it was trying to persuade its unions to agree to deeper wage and salary
cuts in order to qualify for a $900 million federal loan and to secure $500 million
in interim financing from the Retirement Systems of Alabama, which had recently
purchased a 37 .5 per cent ownership stake. US Airways management had indicated that
the company was abandoning its growth strategy and would focus instead on providing
regional service with smaller jets primarily on the East Coast and in the Caribbean.
United Airlines filed for Chapter 11 bankruptcy in December 2002 and was in dire
straits. United's costs per available seat mile in the third quarter of 2002 were $0.11,
the highest in the industry, and its labour costs were $0.046, the second highest in the
industry. While management had called on its union and non-union employees to agree
to wage and salary cuts totalling $9 billion over six years, the unions so far had pledged
27% to give up only $5.2 billion over five years-United's employees owned 55 per cent of the
38 company's stock; however, under the bankruptcy laws, the union agreements could be
27 declared null and void (United management was expected to take such a step if necessary
to establish financial solvency). Federal officials had turned down United's request for a
51
$1.8 billion loan, indicating the company's business plan for getting the company back
29 on solid financial footing was unsound and contained unreasonably optimistic revenue
projections. A number of observers had predicted that if United did not get its financial
house in order by April 2003 , the company would have to be liquidated because it
22 would run out of cash-the company had lost nearly $4 billion in the past two years,
25
was in default on a $920 million loan, and was bleeding millions in cash every day. Most
industry observers believed that, in order to survive, United would have to scale back
its operations significantly-since September 11, it had already cut its daily flights by
25 per cent and laid off about 20 000 employees.
American Airlines, with the highest labour costs in the industry ($0.0462 per
available seat mile), was negotiating work rule changes with its unions to try to
boost labour productivity and had requested all employees to forgo any pay raise in
2003-manegement was trying to achieve $3- $4 billion in annual cost savings to bring
American's costs more in line with those of Southwest and other lower-cost airlines.
American's pilots were among the best paid in the industry and flew an average of
700 hours per year, well under the federal limit of 1000 hours annually; they worked
an average of 14 days a month. In 2002, American spent about $2.5 billion to pay for
the salaries and benefits of its 10 000 pilots; the company's total payroll for its 109 000
employees was about $8.4 billion. Productivity improvements of 20 per cent would save
American about $500 million annually.
C118 Ca111 08 Southwest Airlines: Culture, Values and Operating Practices
Crisis Conditions Strike the Airline Industry. The Aftermath of September 11 C119

Notes 20
J. H. Gittell, "CrosswFunctional Coordination and Human Resource Systems:
1 Evidence from the Airline Industry", doctoral dissertation, Massachusetts Institute of
Kevin and Jackie Freiberg, NUTS! Southwest Airlines' Crazy Recipe for Business and
Technology, cited in Hallowell, "Southwest Airlines: A Case Study", p . 527.
Personal Success (New York: Broadway Books, 1998), p.15.
27
2
Ibid., pp. 16-18. Quoted in the Seattle Times, 20 March 2001 , p. C3.
28
3 Freiberg and Freiberg, NUTS!, p. 163,
Katrina Brooker, "The Chairman of the Board Looks Back", Fortune, 28 May 2001,
p. 66.
4
Freiberg and Freiberg, NUTS!, p. 41.
5
Ibid., p. 31.
11
Ibid., pp. 26-27.
7
Ibid., pp. 246-47.
8
Quoted in the Dallas Morning News, 20 March 2001.
0
Quoted in Katrina Brooks, "The Chairman of the Board Looks Back", Fortune, 28 May
2001, p. 64.
10
Ibid., p. 72.
11
Freiberg and Freiberg, NUTS!, pp. 269-70.
12
Ibid., p. 288.
13
Brenda Paik Sunoo, "How Fun Flies at Southwest Airlines", Personnel Journal 74,
no. 6 (June 1995), p. 70.
14
Statement made in a 1993 Harvard Business School video and quoted in Roger
Hallowell, "Southwest Airlines: A Case Study Linking Employee Needs Satisfaction
and Organizational Capabilities to Competitive Advantage", Human Resource
Management 35, no, 4(Winter1996), p. 517.
15
Quoted in James Campbell Quick, "Crafting an Organizational Structure: Herb's Hand
at Southwest Airlines", Organizational Dynamics 21, no. 2 (Autumn 1992), p. 51.
rn Southwest Airlines; and Sunoo, "How Fun Flies at Southwest Airlines", pp. 64-65.
17
Quick, "Crafting an Organizational Structure", p. 52.
18
Sunoo, "How Fun Flies at Southwest Airlines", p. 72.
10
Shawn Tully, "From Bad to Worse", Fortune, 15 October 2001, p. 124.
20
Melanie Trottman, "Amid Crippled Rivals, Southwest Tries to Spread Its Wings", The
Wall Street Journal, 11 October 2001, p. A10.
21
Brooks, "The Chairman of the Board Looks Back", p. 72.
22
Freiberg and Freiberg, NUTS!, p. 273.
23
Ibid., p. 76.
24
Hallowell, "Southwest Airlines: A Case Study", p. 524.
25
Freiberg and Freiberg, NUTS!, p. 165.
 Introduction C121

Case 09 EXHIBIT 1 Photos from Harley· Davidson's open road tour and its VRSC V·Rod

t.larley-Davidson
John E. Gamble
University of South Alabama
Roger Schafer
University of South Alabama

Harley-Davidson's management had much to be proud of as the company wrapped up its

Open Road Tour centennial celebration, which began in July 2002 in Atlanta, Georgia,
and ended on the 2003 Memorial Day Weekend in Harley's hometown of Milwaukee,
Wisconsin. The 14-month Open Road Tour was a tremendous success, drawing large
crowds of Harley owners in each of its five stops in North America and additional stops
in Australia, Japan, Spain, and Germany. Each stop along the tour included exhibits of
historic motorcycles, performances by dozens of bands as diverse as Lynyrd Skynyrd,
Earl Scruggs, and Nickelback, and brought hundreds of thousands of Harley enthusiasts
together to celebrate the company's products. The Ride Home finale brought 700 000
biker-guests from four points in the United States to Milwaukee for a four-day party that
included concerts, factory tours, and a parade of 10 000 motorcycles through downtown
Milwaukee. The company also used the Open Road Tour as a platform for its support
of the Muscular Dystrophy Association (MDA), raising $7 million for the MDA during
the 14-month tour. Photos from the Open Road Tour and Harley's new V-Rod model are
presented in Exhibit 1.
Harley-Davidson's centennial year was also a year to remember for the company's
being named to Fortune's annual list "The 100 Best Companies to Work For" and judged
third in automotive quality behind Rolls-Royce and Mercedes-Benz by Harris Interactive,
a worldwide market research and consulting firm best known for the Harris Poll.
Consumer loyalty to Harley-Davidson motorcycles was unmatched by almost any other
company. As a Canadian Harley dealer explained, "You know you've got strong brand Suurr:tr. Harley· Davidson website.

loyalty when your customers tattoo your logo on their arm. " 1 The company's revenues
had grown at a compound annual rate of 16.6 per cent since 1994 to reach $4.6 billion
in 2003-marking its 18th consecutive year of record revenues and earnings. In 2003,
the company sold more than 290 000 motorcycles, giving it a commanding share of the
market for motorcycles in the 651+ cubic centimetres (cc) category in the United States
and the leading share of the market in the Asia/Pacific region. The consistent growth
had allowed Harley-Davidson's share price to appreciate by more than 15 000 per cent
since the company's initial public offering in 1986. In January 2004, the company's CEO,
--- - --
Copyright (Cl 200 4 by John E. Gamble and Roger Schafer. All rights reserved.
C120
Jeffrey Blaustein, commented on the centennial year and the company's prospects for
growth as it entered its second century:
We had a phenomenal year full of memorable once-in-a-lifetime experiences surround-
ing our 100th Anniversary. As we begin our 101st year, we expect to grow the business
further with our proven ability to deliver a continuous stream of exciting new motor-
cycles, related products, and services. We have set a new goal for the company to be able
to satisfy a yearly demand of 400 000 Harley· Davidson motorcycles in 2007. By offering
innovative products and services, and by driving productivity gains in all facets of our
business, we are confident that we can deliver an earnings growth rate in the midteens
for the foreseeable future. 2
C122 Casa 09 Harley-Davidson
Company History C123

However, not everyone was as bullish on Harley-Davidson's future, with analysts ,

pointing out that the company's plans for growth were too dependent on ageing baby ....
boomers. The company had achieved its record growth during the 1990s and early 2000s
primarily through the appeal its image held for baby boomers in the United States. Some
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observers wondered how much longer boomers would choose to spend recreational
I

; ~12 ~-
time touring the country by motorcycle and attending motorcycle rallies. The company

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I
had yet to develop a motorcycle that appealed in large numbers to motorcycle riders in
their 20s or cyclists in Europe, both of whom preferred performance-oriented bikes over "'~~(")

cruisers or touring motorcycles. Another concern of analysts watching the company

was Harley-Davidson's short-term oversupply of certain models brought about by the
14-month production run for its 100th anniversary models. The effect of the extended I...
production period shortened the waiting list for most models from over a year to a
few months and left some models on showroom floors for immediate purchase. The
combined effects of a market focus on a narrow demographic group, the difficulty
experienced in gaining market share in Europe, and short-term forecasting problems led
to a sell-off of Harley-Davidson shares going into 2004. Exhibit 2 presents a summary
Ii...
II 11

of Harley·Davidson's financial and operating performance for 1994-2003, Its market

performance for 1994 through January 2004 is presented in Exhibit 3.
-I II 11

Company history
I... §gl 11
H arley-Davidson's history began in Milwaukee, Wisconsin, in 1903 when 20-year-old
Arthur Davidson convinced his father to build a small shed in their backyard where
Arthur and 21-year-old William Harley could try their hand at building a motorcycle.
Various types of motorized bicycles had been built since 1885, but the 1901 development
of a motorcycle with an integrated engine by a French company inspired Davidson and
Harley to develop their own motorcycle. The two next-door neighbours built a two-
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11 I

horsepower engine that they fit onto a modified bicycle frame, At first the motorcycle
could not pull itself and a rider up a steep hill, but after some additional tinkering, the first 11
Harley-Davidson motorcycle could run as fast as 25 miles per hour. Milwaukee residents
were amazed as Harley and Davidson rode the motorcycle down local streets, and by
the end of the year the partners were able to produce and sell three of their motorcycles. =1 . .
Walter Davidson joined his brother and William Harley during the year to help as~mble ~~ 11

and race the company's motorcycles. In 1905, a Harley-Davidson motorcycle won a 15-mile
race in Chicago with a time of 19:02, and by 1907 the company had developed quite a
reputation in motorcycle racing with numerous wins in Milwaukee-area races. In 1907, 11
another Davidson brother, William, joined the company and the company began adding
dealers. Harley-Davidson's dealers helped the company sell 150 motorcycles in 1907.
In 1909 Harley-Davidson developed a more powerful seven-horsepower motorcycle
engine to keep its edge in racing, an innovation that turned out to define the look of
the company's motorcycles for the next century. Twin cylinders joined at a 45-degree
angle became a trademark Harley-Davidson engine design characteristic and created a
distinctive "potato-potato-potato" sound. Harley designed his V-twin engine with two
pistons connected to a single crankpin, whereas later designs used crankpins for each
piston. The single-crankpin design had been called an inferior design because it caused
the pistons to come into firing positions at uneven intervals, which produced an uneven
 C')
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~ 2003 2002 2001 2000 1999 1998 1997 1996 1995 1994 <
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Ill
Cumulative effect of <
accounting changes, net
a:
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of tax
Net income (loss) $760,928 $580,217 $437,746 $347,713 $267.201 $213.SOO $174,070 s 166,028 s 112.480 $104,727
Weighted average common shares:
Basic 302,271 302,297 302.506 302,691 304,748 304,454 151,650 150,683 149,972 150,440
Diluted 304,470 305,158 306,248 307,470 309,714 309,406 153,948 152.925 151,900 153.365
Earnings per common share from continuing operations:
Basic S2.52 $1.92 s 1.45 s 1.15 S0.88 $0.70 $1.15 S0.95 SD.74 $0.64
Diluted 2.50 1.90 1.43 1.13 D.86 D.69 1.13 0.94 D.73 0.63
Dividends paid 0.195 0.135 0.115 0.098 0.088 0.078 0.135 O.llO 0.090 0.070
Basic $2.52 $1.92 S 1.45 s 1.15 S0.88 S0.70 $1.15 $0.95 S0.74 $0.64
Diluted 2.50 l.90 1.43 1.13 0.86 0.69 1.13 0.94 0.73 D.63
Dividends paid 0.195 D.135 0.115 0.098 0.088 0.078 0.135 0.110 0.090 0.070
Balance sheet data
Working capital $1,773,354 $1,076,534 $949,154 $799,521 $430,840 $376,448 $342,333 $362,031 $288,783 $189,358
Current finance receivables, 1,001,990 855,771 656,421 530,859 440,951 360,341 293,329 183.808 169,615
net
Long-term finance 735,859 589,809 379,335 234.(191 354,888 319,427 249,346 154,264 43,829
receivables, net
Total assets 4,923,088 3,861,217 3,118,495 2,436,404 2,112,077 1,920,209 1,598,901 1,299,985 980,670 676,663
Shon-term finance debt 324,305 382,579 217,051 89,509 181,163 146,742 90,638 8,065
Long-term finance debt 670,000 380,000 380,000 355,000 280,000 280.000 280,000 250,000 164,330
Total debt $994,305 $762.579 $597,051 $444,509 $461,163 $426,742 $391,572 $285,767 $185,228 $10,452
Shareholders' equity $2.957,692 $2.232,915 $1,756,283 $1,405,655 Sl,161,080 Sl,029,911 $826.688 $662,720 $494,569 $433,232
Sourer. H1rfey·Davidson Inc. 2003, 2002. and 1998 lO·Kreports.

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 C126 Casa 09 Harley-Davidson
image, including the art deco eagle design painted on its gas tanks, three-tone paint,
and the "Knucklehead" engine rocker boxes. Harley-Davidson's 1936 EL model, or
"Knucklehead", became its first highly styled motorcycle and formed the foundation
of style elements that remained present in the highly demanded 2004 Softail Fat Boy.
The company suspended production of civilian motorcycles in 1941 to produce. almost
90 000 motorcycles for the US military during World War II.
The recreational motorcycle market grew dramatically after World War II, as ex-Gis
purchased motorcycles and led enthusiasm for riding. Harley-Davidson introduced new
models for enthusiasts, including the Hydra-Glide in 1949, the K-model in 1952, the
Sportster in 1957, and the Duo-Glide in 1958. The combination of racing success (Harley-
Davidson riders won 18 of 24 races and set six new racing records in 1950 alone) and
innovative new Harley-Davidson models led to rival company Indian's demise in 1953.
Harley-Davidson would remain the sole US manufacturer of motorcycles until 1998,
when the Indian brand was revived.
Harley-Davidson continued to win races throughout the 1960s, but its reputation began to
erode soon after its acquisition by American Machine and Foundry Company {AMF) in 1969.
i'
I Harley-Davidson under AMF was known for its leaking engines, unreliable performance, and
poor customer service. At one point during AMF's ownership of the company, more than
one-half of its bikes had to be repaired before leaving the factory. The company attempted to
offset its declining sales of road bikes with the introduction of dirt bikes and snowmobiles
in the early 1970s, but by the late 1970s AMF lost faith in the acquisition and slated it for
divestiture. When no buyers for the company emerged, 13 executives engineered a leveraged
buyout of Harley-Davidson in 1981. Harley-Davidson struggled under the heavy debt load
and came within four hours of bankruptcy in 1985, before then-CEO Ri c::hard Teerlink was
able to convince new creditors to step in and restructure Harley with less costly financing
terms. Teerlink also launched a restructuring programme that updated manufacturing
methods, improved quality, and expanded the model line.
US tariffs imposed on 651+ cc Japanese motorcycles also aided Harley-Davidson
in gaining financial strength and competitiveness in the heavyweight segment of the
US motorcycle industry. Harley-Davidson completed an initial public offering in 1985
and petitioned the International Trade Commission to terminate tariffs on Japanese
heavyweight motorcycles in 1987 when its market share in the US heavyweight category
had improved to 25 per cent from 16 per cent in 1985. Jn 1998, the company purchased:
Wisconsin-based Buell Motorcycle, a performance brand using Harley-Davidson engines
that began as a venture between Erik Buell and Harley-Davidson in 1992. Harley-Davidson
opened its 358 000-square-foot Kansas City, Missouri, plant in 1998 to produce Sportster,
Dyna Glide, and V-Rod models and built an assembly plant in Brazil in 1999 to aid in its
Latin American expansion. The new capacity allowed Harley-Davidson to set production
records each year during the early 2000s to reach 290 000 units by yearend 2003.
Overview of the motorcycle industry
D emand for motorcycles in developed countries such as the United States, Germany,
France, Spain, and Great Britain, grew dramatically at the end of World War II as
veterans who enjoyed riding motorcycles during the war purchased their own bikes upon
Overview of the Motorcycle Industry C127
return to civilian life. Groups of enthusiasts began to form motorcycle clubs that allowed
them to socialize and participate in rallies and races. Two of the earliest motorcycle
rallies in the United States were the Daytona Bike Week and the Sturgis Rally. The first
Daytona zoo, which occurs during Bike Week, was run in 1937 on a 3.2-mile beach
and road course. The first Sturgis, South Dakota, race took p lace in 1938 when nine
participants raced a half-mile track and performed such stunts as jumping ramps and
crashing through plywood walls. These and other such events grew dramatically in
popularity beginning in the 1970s, with both Daytona Bike Week and the Sturgis Rally
each drawing over 200 000 bikers in 2003. The Sturgis Rally was said to be among the
most raucous motorcycle rallies in the United States, with plenty of public drunkenness
and lewd behaviour accompanying the seven days of races. Such behaviour was
common enough that the Rally website (www.sturgis.com) provided the fines and bonds
associated wit.'i such offences as indecent exposure, disorderly conduct, open container
in public, and possession of controlled substances.
The rowdy and rebellious image of bikers is traced to some of the motorcycle clubs
that began after World War II. The outlaw image of cyclists first developed in 1947
when Life magazine photographers captured images of an impromptu rally at Hollister,
California, by a motorcycle group calling themselves the Boozefighters. The group
became quite rowdy during their motorcycling exhibition, but Life reporters embellished
the story significantly, claiming the Boozefighters descended on the town and proceeded
to terrorize its residents by drag-racing down the main street, tossing beer bottles, and
riding motorcycles through the front doors of the town's saloon. The imagery of the
drunken Fourth of July attack on the town became etched deeper into the minds of
the world when the story became the subject of The Wild One, a 1954 movie starring
Marlon Brando. When asked by a local resident what he was rebelling against, Brando's
character, Johnny, replied, "Whaddya got?"3 The general public came to dislike bikers
because of incidents like the one in Hollister and because of the Hollywood treatment of
the event, but the Hells Angels made many people fearful of bikers and put motorcycle
gangs under the close scrutiny of law enforcement at local, state, and federal levels.
The Hells Angels were established in 1948 in Fontana, California, by a group of young
cyclists who had read of the Hollister rampage and wished to start their own outlaw
biker group. The Hells Angels, who took their name and symbols from various World
War II flying units, became notorious during the 1960s when they became linked to drug
trafficking and other organized crime activities. Sonny Barger, a founder of the Oakland,
California, chapter in the late 1950s, became the United States' most infamous biker after
organizing a disastrous security effort for the 1969 Rolling Stones concert in Altamont at
which one concert-goer was stabbed and killed by Hells Angels members. Barger, who
had been convicted of attempted murder, possession of narcotics with intent to sell , and
assault with a deadly weapon, commented in an interview with the British Broadcasting
Corporation (BBC) that he pressed a pistol into Keith Richards' ribs and ordered him to
continue to play after the Rolling Stones' guitarist threatened to end the show because of
Hells Angels' rough tactics with fans.4 •
The Hells Angels and rival motorcycle clubs like the Pagans, the Band1tos, and the
Outlaws, rode only Harleys, which hurt Harley-Davidson's image with the public in the
1960s. Honda successfully exploited Harley's outlaw image with the slogan "You meet
C128 Case 09 Harley-Davidson Overview of the Motorcycle Industry C129

the nicest people on a Honda" to become the largest seller of motorcycles in the United r "I

States during the late 1960s and early 1970s.5 The image of the Hells Angels had spilled EXHIBIT 4 Market shares of the leading producers of motorcycles by geographic region for the heavyweight
segment, 1998-2003 (engine displacement of 651+ cc)
over to the entire industry and contributed to declines in motorcycle demand in the
United States and Europe during the 1960s before a new Hollywood film resurrected 2003 2002 2001 2000 1999 1998
interest in motorcycles. Easy Rider (1969) portrayed bikers as less villainous rebels and
appealed greatly to young people in the United States and Europe. The movie eventually New U.S. registrations (thouunds of units)
Total market new 461.2 442.3 394.3 340 275.6 227.1
gained cult status and helped charge a demand for motorcycles that began in the 1970s
registrlltions
and continued through 2003. The red-white-and-blue 1951 Harley "Captain America" Harley-Davidson naw 228.4 209.3 m .4 155.1 134.5 109.1
chopper ridden by Peter Fonda's Wyatt character helped Harley-Davidson break the registrations
outlaw image and come to represent less malevolent rebellion. Buall new registrations __!§ ~ ~ _..B ~ .-11
Total company new 231.9 212.2 180.0 159.3 138.4 112.3
reg!strations
........................ , ....................................................................................................
Industry conditions in 2003
Percentage mark1t 1b1re
In 2003 more than 950 000 motorcycles were sold in the United States and 28 million Harley-Davidson 49.5% 47.5% 45.0% 45.6% 48.8% 48.1%
motorcycles were in operation worldwide. The industry was expected to grow by motorcycles
approximately 5 per cent annually through 2007 with light motorcycles, Mopeds, and Buell motorcycles ~ JU D.7 E ~ ..!:.1
scooters accounting for most of the expected growth. A general increase in incomes Total Harley-Davidson 50.3% 48.2% 45.7% 46.8% 501% 49.5%
Honda 18.4% 19.8% 20.5% 18.5% 16.4% 20.3%
in such emerging markets as China, India, and Southeast Asia was the primary force
Suzuki 9.8 9.6 10.8 9.3 9.4 10.0
expected to drive industry growth. Demand growth for the heavyweight motorcycle Kawasaki 6.7 69 8.0 9.0 10.3 10.1
category had outpaced smaller motorcycles in the United States during the 1990s and Yamaha 8.5 8.9 7.9 8.4 7.0 4.2
into 2003 , but analysts projected that demand for larger motorcycles would decline as Other 6.3 _§:!! _I:! _M __.§:! ..M
100.0% 100.0% 100.0% 100.0%
Total , .................................................................................................................
the population aged and became less able to travel on two-wheelers. In 2002 demand ........... 00% 100.0%
for heavyweight motorcycles in the United States grew by 17 per cent compared to an New Eurapean registrations (thousands of units)
industry wide growth rate of 10 per cent. Total market new 323.1 3035 292.1 293.4 306.7 270.2
The industry was segmented into various groups on the basis of engine size and registrations
Total Harley-Davidson new 26.3 20.1 19.6 19.9 17.B 15.7
vehicle style. Mopeds, scooters, and some small motorcycles were equipped with registrations
engines having displacements of 50 cubic centimetres (cc) or less. These motorbikes were Percentage market share
best suited for urban areas where streets were narrow and parking was limited or for Total Harley-Davidson 8.1% 6.6% 67% 6.8% 5.8% 5.8%
Honda 16.7 21 a 17.4 218 22.2 24.I
developing countries where personal incomes were limited and consumers could make
Yamaha 16.0 17.7 16.4 17.3 18.0 16.3
only small investments in transportation. Motorcycles used for basic transportation or BMW 15.3 15.1 15.1 13.0 13.0 13.4
for motocross events were typically equipped with engines ranging from 125cc to 650cc. Suzuki 15.5 14.8 16 5 14.3 15.4 17.2
Larger street bikes required more power and usually had engines over 650cc. Large Other .1!:1 .1i! ..l1'l .M 25.6 23.2
1000% 100.0% 100.0% i0oii% 100.0%
motorcycles with engine displacements greater than 651cc accounted for the largest .......................................................
Total 100.0% . ................................. .................. .....................
portion of demand in North America and Europe as riders increasingly chose motorcycles Naw Alia-Pacific ragillrations (tllo11sand1 of units)
with more horsepower and better performance. Exhibit 4 presents registrations of Total market new 58.9 619 62.1 62.7 63.1 69.2
651+ cc motorcycles in the United States, Europe, and Asia-Pacific for 1998-2003. registrations
Total Hartay·Davidson new 15.2 13.0 12.7 12.2 11.6 10.3
Even though Europe had fewer registrations of 651+ cc motorcycles than the United registrations
States, it was the world's largest market for motorcycles, with 1.1 million registrations ·····························································································································
P1rcent1ge marllet 1h11ra
of 125+ cc motorcycles in 2002. Registrations of motorcycles with engine displacements 25.8% 21.3% 20.4% 19.5% 18 5% 14.8%
Total Harley·Davtdson
greater than 125cc in the largest European markets are presented in Exhibit 5. Honda 17.8 19.1 17.3 20.4 22.4 28 0
Kawasaki 13.8 15.8 15.6 18 9 19.0 22.1
Segmentation within the 651+ cc category Yamaha 11 .4 13.6 15.B 170 19.0 16.0
Suzuki 10.7 10.1 12.8 10.4 9.3 79
Motorcycles in the 651+ cc segment were referred to as heavyweights and were grouped Other 20.5 20.1 J!! 13.8 Jll jg
into four categories. Standard heavyweight motorcycles were designed for low·cost Total 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
transportation and lacked many of the features and accessories of more expensive classes Saurce: Herley-Davidson Inc. lO·Kreports and annual reports.
of heavyweights. Performance bikes had streamlined styling, low-profile fairings, and ~
C130 Ca11 09 Harley-Davidson Overview of the Motorcycle Industry C131

In addition, motorcyclists in Europe and Asia tended to choose performance bikes over
EXHIBIT 5 Registrations of New Motorcycles in Major European Markets, 1998-2003 (engine displacement of motorcycles in the custom and touring categories because of the high relative prices of
125+ cc)
such motorcycles. Exhibit 6 presents a regional comparison of motorcycle registrations by
heavyweight category for 1996 through 2002.
Country 1998 1999 2000 2001 2002 2003
Garmany 175,937 187,192 170,636 158,270 145,369 138,712
Italy 79,400 103,BOO 122,085 126,400 129,261 130,224
Competition in the global motorcycle industry
France 88,500 109,105 103,900 106,802 113,852 NIA Rivalry in the motorcycle industry centred on performance, styling, breadth of product
Great Britain 84,500 98,186 93,634 91,543 93,557 NIA line, image and reputation, quality of after-the-sale service, and price. Most motorcycle
Spain 35,600 39,200 38,052 31,829 35,252 N/A manufacturers had good reputations for performance and styling with the greatest variance
NIANotav1Uable. between brands occurring in pricing, variety of models, and quality of dealer service. Most
Sourc1s: Association des Constructeurs Europ6ens de Motocycles, Brussels; lndustriavarband Motcrrad 01J1£cblard a.V
cyclists preferred not to purchase specific brands, even if they were attracted to specific
models, if the company's dealers did not have trained mechanics or had a reputation for
shoddy workmanship or poor parts availability. There was also a great degree of price
seat and handlebar configurations thal required the rider to lean forward; they were variability in the industry with comparable models of Japanese motorcycles typically
characterized by responsive handling, rapid acceleration, and high top-end speeds. carrying retail prices far below that of US-Or European-made motorcycles.
Custom motorcycles ranged from motorcydes with a custom paint scheme to highly
personalized bikes painted with murals or other designs, chromed frames and other
components, and accessories not found on stock motorcycles. The chopper, among the EXHIBIT 6 Regional comparison of the 651+ cc motorcycle market by segment,* 1998-2002 (percentage of
units registered)*
more unusual custom styles, was limited only by designers' imaginations but typically
I
had extended forks, high handlebars, a narrow front tyre, and a rigid "hardtail" frame
design that lacked rear shocks and was stretched longer than normal motorcycles. 1998 1999 2000 2001 2002

Another notable feature of custom choppers was that they were almost always built from United States
stock Harley-Davidson motorcycles, sometimes retaining only the engine. Custom 58.4% 57.7% 56.6% 58.9% 60.3%
Custom bikes were the largest segment of the US heavyweight market for motorcycles Touring 20.4 21.7 21.1 20.3 20.Z
Performance 19.4 18.9 20.4 19.1 17.3
and had become a curiosity for non-cyclists. The Discovery Channel regularly aired two
programmes dedicated to the topic of choppers and other custom vehicles. The names
Standard 1.8 _!! _kJ1 ..Jl ~
100.0% 100.0% 100.0% 100.0% 100.0%
of two custom motorcycle shops, West Coast Choppers {WCC) and Orange County
Europe
Choppers, frequently made the Internet search engine Lycos's list of 50 most-searched
Custom 22.8% 20.2% 17.6% 17.8% 13.8%
terms. Jesse James, a descendent of the famous American Old West outlaw and owner
Touring 5.3 5.5 52 5.2 4.8
of West Coast Choppers, also made Lycos's list of most-searched terms. WCC charged Performance 59.8 58 61.7 59.8 61.2
between $60 000 and $150 000 for its cuslom motorcycles, which were usually sold to Standard 12.1 16.3 15.5 .ill 20.1
celebrities such as movie stars, professional athletes, and rock musicians. 100.~ 100.0% 100.0% 100.0% 100.0%
Touring bikes were set apart from other categories by creature comforts end Asle-Pacific
accessories that included large fairings, storage compartments, CD players, cruise control, Custom 18.3% 286% 26.7% 23.9% n/a
and other features typically found on cars rather than on motorcycles. Touring bikes Touring 3.9 4.7 3.7 7.2 n/a
were popular in the United States since many baby boomers wished to enjoy biking, but Performance 76.1 64.5 66.2 65.5 n/a
with some comfort. Comfortable saddles, upright riding positions, and other features Standard 1.7 _g ~ _M n/a
100.0% 100.0% 100.0% 100.0% n/a
found on touring bikes were especially welcomed by those who took cross-country or
other long-distance journeys on their motorcycles. Custom and touring motorcycles •category definitions:
were less popular outside of the United States since cyclists in other countries were Custom. Characterized by"American sty jng". Ohan personalized by accessorizing.
more likely to travel only short distances and did not necessarily identify with the Touring: Designed primarily for long trips, with an emphasis on comfort. cargo capacity, and reliability. Ohan have fealllres such as
two·way radios lfor communicadon with passangarl, stereo, and cruise contra
individualist or outlaw image associated with heavyweights in the United States. The Performance: Characterized by quick accaleraton. top speed, and handkng Commonly referred to as "sport bikes".
largest segment of the heavyweight motorcycle category outside the United States was Standard. Abasic, no-frills motorcycle with an emphasis on low price.
the performance bike category since most riders in other countries preferred sleek styling Saurer. Harley·Oavidson Inc. 2003 and 2002 10-K reports.
and were more interested in speed and handling rather than in comfort and tradition.
..
C132 Case 09 Harley-Davidson
Regulation and legal Challenges C133

Exhibits 7 and 8 illustrate the difficulty US end European manufacturers had Motorcycle manufacturers, like automobile manufacturers, maintained relationships
experienced in attracting price-sensitive buyers in Europe. The Japanese producers were with suppliers to produce or assemble components such as upholstery, tyres, engine
able to offer high-performance motorcycles at prices below those of Harley-Davidson, parts, brake parts, wiring harnesses, shocks, and rims. Almost without exception, the
Ducati, Triumph, or Mato Guzzi. BMW had achieved considerable success in Europe, manufacturer designed and manufactured its engines and frames. Design and assembly
especially in Germany, because of exceptional performance and reputation, a strong of motorcycles took place in the manufacturer's home country, and completed motorcycles
dealer network, end regional loyalty to the brand. were exported to country markets where dealer networks had been established.
Consumers typically evaluated brands by talking to other cyclists, reading product
reviews, perusing company websites, noting ads in print and other media, and noting
Exhibit 7 Market shares of the leading sellers of motorcycles in Germany, 2001-2003 (engine displacement of a manufacturer's performance in competitive events, Typically, consumers had some
125+cc)
ability to negotiate prices with dealers, but most preferred to buy from dealers with
good service departments, large parts inventories, and attractive financing programmes.
Brand 2001 Market Share 2002 Market Share 2003 Market Share Similarly, strong motorcycle dealers preferred to represent manufacturers with good
BMW 16.D% 18.1% 19.5% reputations and strong consumer demand, responsive customer service and parts
Suzuki 21.7 2D.3 19.2 delivery, formal training programmes for service technicians, and financing divisions
Yamaha 16.3 16.0 15.9 that offered competitive rates and programmes.
Honda 16.8 17.3 15.5
Kawasaki
Consumers purchased motorcycles for various reasons. Some individuals, especially
11.1 10.7 10.6
KTM 3.1 3.8 4.4
in developing countries, were looking for low-cost transportation. Lightweight
Harley-Davidson 3.6 3.7 4.2 motorcycles, mopeds, and scooters were priced inexpensively compared to cars and used
Ducati 2.8 2.8 2.9 far less gasoline. However, motorcycles provided no protection from the elements and
Triumph 2.5 1.8 2.0 were used only for fair-weather transportation by most riders who also owned a car. In the
Apriha 1.7 1.5 1.4
Moto Guzzi
United States and Europe, most consumers who purchased a motorcycle also owned a car
0.6 0.7 0.9
Buell 0.4 0.3 D.6
and preferred to travel by motorcycle on weekends or other times they were not working.
MV/Cagiva 1.2 D.8 0.6 Some in Europe did choose to commute to and from work on motorcycles when weather
MZ 05 0.4 0.3 permitted because of limited parking available in large European cities and the high cost
Sachs 0.3 0.2 0.2 of fuel. Many motorcycle owners, particularly so in the United States, looked at riding as
Other _u _M ~ a form of recreation and had given up other sports or hobbies to spend time touring on
Total 100.0% 100.0% 100.0%
motorcycles. Many middle-aged bikers in the United States had purchased motorcycles
SourcllS'. Kraltfahrtbundtsa1111; lndustrleverband t/O(Ofrad Deutschfand t.V
after giving up sports and activities requiring more athleticism or endurance.

EXHIBIT 8 Best-selling motorcycle models in Germany, November 2003

Regulation and legal challenges
he motorcycle industry was subject to laws and regulations in all countries where

Rank Brand Modal

Manufacturers'
Recommended Price ($ US)
Year-to-Data 2003
Ragisltetions
Haavywaight
Classification
T motorcycles were operated. The European Parliament and the European Council
included motorcycles in their agreement to reduce exhaust gas values during their
BMW R T150 GS $14.500 6,242 Enduro{Touring March 2002 meeting. The agreement required producers of motorcycles and scooters to
2 Suzuki GSF 1200 (KLI 7,399 4,023 Performance reduce pollutants by 60 per cent for all new cycles produced after April 2003. A further
3 BMW F650 GS 8,190 3,524 Enduro{Touring 60 per cent reduction would be required for motorcycles produced after January 2006.
4 Suzuki SV650 6,299 3,444 Standard
5
Demand for motorcycles in Europe was impacted to a great degree by the implementation
Yamaha FZS600 6,499 3,294 Standard
6 Suzuki GSf 600 6.299
of the euro in 2002; prices of motorcycles increased substantially in some countries
3,182 Standard
7 Suzuki GSX·R 1000 10,599 2,836 Performance
when the currency exchange took effect. For instance, because Germany's currency
8 Kawasaki ZIOOO 8.499 2,825 Performance was much stronger tllan that of many other European Union countries, prices of most
9 BMW R 1150 RT 16,290 2,607 Touring products and services increased in Germany after the change lo the euro since the euro
TO BMW R 1150 R 9,990 2,539 Performance attempted to equalize the differences between currencies. The difficulty in obtaining a
S1111rces: Kraftfahrtbundff1mt; lndustrievarband Motorml D t~tschland e.V. driver's licence for motorcycles in some European countries also affected demand for
motorcycles. German laws required separate automobile and motorcycle licences for
C134 case 09 Herley-Davidson
riders of motorcycles larger than 125cc, and France required those applying for motor-
cycle licences to have first held an automobile licence for two years. Austria's licensing
laws were the most restrictive, requiring applicants to first hold an automobile licence for
five years and to complete six training sessions prior to obtaining a motorcycle licence.
Motorcycles that produced excessive noise were also under attack in most European
countries.
In the United States, motorcycle producers were subject to certification by the
Environmental Protection Agency (EPA) for compliance with emission and noise
standards, as well as agencies in some states imposing more stringent noise and emission
standards. The California Air Resources Board (CARB) had outlined new tailpipe
emission standards that would go into effect in 2004 and 2008. The EPA developed
new emission standards that would go into effect in 2006 end 2010 to match national
standards with those in California. Motorcycle producers in the United States were also
required to meet the product safety standards imposed by the National Highway Traffic
Safety Administration (NHTSA).
Also in the United States, many motorcyclists found that their health insurance
providers excluded coverage for any injuries sustained while on a motorcycle. Tbe
American Motorcyclists Association (AMA) had successfully petitioned the US Senate
to pass a bill in October 2003 that would prohibit insurance companies from denying
coverage to someone hurt while riding a motorcycle, a snowmobile, or an all-terrain
vehicle. Insurance companies had based their policies on NHTSA statistics that found
motorcycling to be much more dangerous than travelling by car. While traffic fatalities
per 100 million vehicle miles travelled hit a historic low in 2002, motorcycle fatalities
had increased for a fifth consecutive year, to reach 3244 deaths. There were 42 815 traffic
fatalities in 2002 involving occupants of automobiles. Fatalities involving motorcyclists
aged 50 end older increased by 26 per cent during 2002- a higher rate of increase
than any other age demographic. State legislatures in some states where helmets were
optional had attempted to force motorcyclists who chose not to wear helmets to become
mandatory organ donors. However, the AMA and its membership had successfully
stopped all such attempts to pass mandatory organ donor laws.
Harley-Davidson's strategy for competing in the motorcycle industry
H arley-Davidson was reincorporated in 1981 after it was purchased from AMF by 13
of its managers through a leveraged buyout (LBO). The management team's main
focus at the time was to preserve jobs, but its members soon realized the company would
need to be rebuilt from the ground up to survive. The company's market share in the
United States had fallen to 3 per cent, primarily because its products were unreliable and
had poorer performance relative to less-expensive Japanese motorcycles. In addition, its
network of dealers ran greasy, run-down shops that many people didn't feel comfortable
visiting. Upon assessing the company's situation, the management team concluded that
a strong allegiance to the Harley brand by many bikers was the company's only resource
strength. However, when managers began to meet with customers, they found that long-
time Harley riders felt cheated by the company and were angry about the lack of attention
Harley-Davidson's Strategy for Comp1trng in th• Motol'cycle Industry C135
to product quality and customer service under AMF ownership. Some of the most loyal
Harley riders refused to call models produced in the 1970s Harleys, preferring to label
them as AMFs. After the LBO, Harley management tried to win over previous customers
by attending any function at which motorcyclists congregated. The company's director of
communications at the time commented in a 2003 interview with a trade publication, "At
first we found that our customers didn't like us, and they didn't trust us."6 However, the
distrust subsided when Harley owners saw their suggestions being implemented by the
company.
Harley-Davidson's turnaround strategy included improving product quality by
adopting Japanese management practices, abandoning a reliance on advertising in favour
of promotions at motorcycle rallies, and improving its dealer network to broaden its
appeal to new customers. After hearing complaints about dealers from Harley riders
at rallies and other bike events, Harley-Davidson conducted a pilot programme with
two dealers in Milwaukee that called for the dealers to build clean, attractive stores
to showcase the company's improved motorcycles and display apparel and other
merchandise that cyclists might wish to purchase. The two dealerships recaptured their
investments within 18 months, while other dealers struggled. The pilot programme led
to new or remodelled dealerships across the Harley-Davidson network end helped the
company enter into a new product category. Harley showrooms offered a large assortment
of clothing items and accessories-for example, leather jackets, T-shirts, helmets, and
boots-in addition to new motorcycles. In 2003 Harley-Davidson introduced 1200 new
clothing items and licensed its name to more then 100 manufacturers making everything
from Harley-Davidson Edition Ford F-150 p ickups to Harley Barbie dolls. Apparel and
accessories were so important to the company and its dealers that in 2003 every dealer
had a fitting room.
Cultivating loyalty through HOG membership
After Harley-Davidson's product quality issues had been resolved, the company focused
on cultivating the mystique of Harley ownership. The company formed Harley Owners
Groups (HOGs) in 1983 to provide Harley owners with local chapters through which
they could socialize and ride with other owners. Harley-Davidson established HOGs in
cities where dealers were located, but did not interfere with HOG operations or try to use
the organization in a self-serving way. The company's primary interest in setting up the
chapters was to give motorcycle buyers a sense of community. Management understood
that once new owners came to feel they belonged to the Harley community, they would
bring new buyers to the company without any encouragement from Harley-Davidson.
The company provided each new Harley buyer with a free membership to a HOG
where they could not only meet other area bikers but also learn the ins and outs of the
biker world. HOGs also organized rides, raised money for charities, and participated
in nationwide HOG events. Owners were required to renew their free memberships
each year to ensure that only active participants would be on chapter roles. The HOG
organization started with 33 000 members in 1983 and had grown to 793 000 members
in 1200 chapters in 2003. The company sponsored about 100 HOG rallies in 2003, with
thousands of additional events organized by local chapters.
C136 Case 09 Herley-Davidson
Harley's image and appeal with baby boomers
Even though Harley sold many motorcycles to construction workers, mechanics, and
other blue-collar workers, Harley riders included a great many accountants, lawyers,
bankers, and corporate executives. In 2003 Harley-Davidson's typical customer was
46-year-old male earning $78 000 per year. The company had successfully added upas
consumers t o I'ts 1.ist of customers without
. alienating traditional bikers. Some of the ca1e
traditi.onal bikers did complain about the new breed of "bean counter Harley owners~ore
sometimes calling them "rubbers"-rich urban bikers. Such concern had been calmed'
to some degree by William G. Davidson's continuing involvement with the company
"Willie ?·" was the grandson of the company's cofounder and, as chief designer, . people want to create an image. Everybody has an alter side, an alter ego. And this is a
had designed every motorcyc::le for the company since the 1960s. Willie G. was an
"old-school" biker himselfand rationalized the company's alliance with upscale
baby boomers with comments such as "There's a lot of beaners, but they're out on the
motorcycles, which is a beautiful thing. "7
Part of the appeal of HOG membership was that new motorcyclists could experience
freedom of the open road, much like a Hells Angel might, if only during occasional
weekends when ~e. weather was nice. Some middle-aged professionals purchased
Harle~s because riding was an opportunity to recreate and relax without being reminded
of th~1r. d~ily responsibilities. Belonging to a HOG or other riding group was different
from 101mng a country club or other club dominated by upper-income families; as the
CEO of a Fortune 500 company explained, "Nobody cares what anybody else does. We
share a comm?n. bond of freedom on a bike." This same Harley owner claimed that after a
few hours of ndmg, he forgets he's a CEO. 8 Another affluent Harley owner suggested that
Harley .owners from all walks of life shared the brotherhood of the open road: "It doesn't
matter if you make $10 000 a year or $300 000. "9 Others suggested that Harley ownersh ·
"d . d . lp
gave you an i entity an provided you with a close group of friends in an increasingly
anonymous culture.
. However, ~ther Harley owners were lured by the appeal of Harley-Davidson's outlaw
image. The editor of AARP Magazine believed that baby boomers purchased Harleys
because of a desire to feel "forever young".10 The AARP Magazine editor said that ridin
a Ha:ley hel_ped' take bo?mers back to ~ time when they had less responsibility. "You g
saw Easy Rider ..As a kid, you had a bit of a wild period in the '70s and you ass~iate
the moto.rcyc!e with that. But.you got married. You had kids and a career. Now you can
afford this. Its a safe way to hve out a midlife crisis. It's a lot safer than running off with
a ste~ardess." In fact, many of Harley-Davidson's competitors have claimed that Harley
11
sells lifestyles, not motorcycles. Harley-Davidson CEO Jeffrey Blaustein commented
on the appeal of the company's motorcycles by stating, "Harley-Davidson stands for
freedom, adventure, individual expression and being a little on the edge, a little bit
naughty. People are drawn to the brand for those reasons. "12
The desire to p~se as a Hells Angel, Peter Fonda's Wyatt character, or Brando's Johnny
helped Harley-Davidson sell more than 290 000 motorcycles and over $200 million in
general merchandise in 2003. Many of Harley-Davidson's 1400 dealers dedicated as
much as 75 per cent of their floor space to apparel and accessories, with most suggesting
that between 25 and 40 per cent of their annual earnings came from the sale of leather
Harley-Davidson's Strategy for Compebng in tbe Motorcycl1 Industry C137
·ackets, chaps, boots , caps, helmets, and other accessories. One dealer offered her opinion
~f what drove merchandise sales by commenting, "Today's consumer tends to be a little
rnore affluent, and they want the total look. "1 ;i The dealer also said that approximately
5 per cent of the dealership's apparel sales were to non-bike owners who wanted the
biker image. Even though some high-income baby boomers wanted to be mistaken
from a distance for Hells Angels' "1 per centers"-the most rebellious 1 per cent of the
population-for ~ost it was all s?ow. When looking ?ut at the thous~ds oflea~er-.
clad bikers attendmg Harley-Davidson's 2003 Memorial Day centenmal celebration m
Milwaukee, a Harley owner said, "The truth is, this is mostly professional people ...
chance to have that. "14
Another Harley owner who had ridden his Heritage Softail from his home in Sioux
Falls, South Dakota, to attend the centennial event commented on his expectations for
revelry during the four-day celebration by pointing out, "Bikers like to party pretty big.
It's still a long way to go before you forget the image of the Hells Angels."15 However,
weekend bikers were quite different from the image they emulated. The Hells Angels
continued to be linked to organized crime into 2003 , with nine Hells Angels members
being convicted in September 2003 of drug trafficking and murdering at least 160 people,
most of whom were from rival gangs.16 Similarly, Hells Angels organizations in Europe
had been linked to drug trafficking and dozens of murders.17 Fifty-seven Angels in the
United States were arrested in December 2003 for crimes such as theft of motorcycles,
narcotics trafficking, and firearms and explosives trafficking following a two-year
investigation of the motorcycle club by the Bureau of Alcohol, Tobacco, Firearms and
Explosives. 18
Harley-Davidson balanced its need to promote freedom and rebellion against
its need to distance the company from criminal behaviour. Its website pointed out
that "the vast majority of riders throughout the history of Harley-Davidson were law-
abiding citizens", and the company archivist proposed, "Even those who felt a certain
alienation from society were not lawless anarchists, but people who saw the motorcycle
as a way to express both their freedom and their identity." 111 When looking at the rows
of Harleys glistening in the sun in front of his Southern California roadside cafe, the
long-time proprietor of one of the biggest biker shrines in the United States commented,
"There used to be some mean bastards on those bikes. I guess the world has changed. " 20
A Harley-Davidson dealer commented that dealers considered hardcore bikers
"1 per centers" because they made up less than 1 per cent of a dealer's annual sales.
The dealer found that very affluent buyers made up about 10 per cent of sales, with the
remainder of customers making between $40 000 and $100 000 per year.2 1
Harley-Davidson's product line
Unlike Honda and Yamaha, Harley-Davidson did not produce scooters and mopeds,
nor did it manufacture motorcycles with engine displacements less than 651cc. In
addition, Harley-Davidson did not produce dirt bikes or performance bikes like those
offered by Kawasaki and Suzuki. Of the world's major motorcycle producers, BMW
produced bikes that most closely resembled Harley-Davidson's traditional line, although
C138 Case 09 Harley-Davidson Herley-Davidson's Strategy for Compebng In the Motorcycle Industry C139

BMW also offered a large number of performance bikes. In 2004 Harley-Davidson's was also designed to appeal to buyers in the performance segment of the industry, both
touring and custom motorcycles were grouped into five families: Sportster, Dyna Glide, in the United States and Europe.
Softail, Touring, and the VRSC V-Rod. The Sportster, Dyna Glide, and VRSC models As of 2004 Harley-Davidson had not gained a significant share of the performance
were manufactured in the company's Kansas City, Missouri, plant, while Softail and motorcycle segment in the United States or Europe. Some industry analysts criticized
Touring models were manufactured in York, Pennsylvania. Harley-Davidson considered Harley-Davidson's dealers for the lacklustre sales ofV-Rod and Buell models since
the Sportster, Dyna Glide, and VRSC models custom bikes, while Softails and Touring most dealers did little to develop employees' sales techniques. Demand for Harleys had
models fell into the Touring industry classification. Sportsters and Dyna Glides each exceeded supply since the early 1990s, and most dealers' sales activities were limited to
came in four model variations, while Sofl:ails came in six variations and Touring taking orders and maintaining a waiting list. In addition, most Harley-Davidson dealers
bikes came in seven basic configurations. The VRSC V-Rod came in two basic styles. had been able to charge $2000 to $4000 over the suggested retail price for new Harley-
Harley-Davidson produced three models of its Buell performance bikes in its East Troy, Davidson motorcycles, although most dealers had begun to sell Harleys at sticker price in
Wisconsin, plant. In 2004 Harley Sportsters carried retail prices ranging from $6495 2003. Harley-Davidson's revenues by product group are shown below:
to $8675; Dyna Glide models sold at price points between $11 995 and $16 580; VRSC
V-Rods sold between $16 895 and $17 995; Softails were offered between $13 675 and
Harley-Davidson revenues by product group Un millions$)
$17 580; and the Road King and Electra Glide touring models sold at prices between
$16 995 and $20 405. Consumers could also order custom Harleys through the company's
2003 2002 2001
Custom Vehicle Operations (CVO) unit, started in 1999. Customization and accessories
on CVO models could add as much as $10 000 to the retail price of Harley-Davidson Harley-Davidson motorcycles 3,621.5 3,161 .0 2,671.3
Buell motorcycles .....1ll 66.9 _fil
motorcycles. Images of Harley-Davidson's five product families and CVO models can be 3,697.6 3,227.9 2,733.D
Total motorcycles
viewed at www.harley-davidson.com. Motorcycle parts and accessories 712.8 629.2 509.6
Honda, Kawasaki, Suzuki, and Yamaha had all introduced touring models that General merchandise 211 .4 231.5 163.9
were very close replicas of Harley Sportsters, Dyna Glides, Road Kings, and Electra Other 2.5 ___M __J!1
Glides. The Japanese producers had even copied Harley's signature V-twin engine and Nttrevenue 4,624.3 4,091.D 3,406.B
had tuned their dual-crankpin designs in an attempt to copy the distinctive sound of a SaUTC &: Harley·Davidson Inc. 2002 and 2003 annual reports.
Harley-Davidson engine. However, even with prices up to 50 per cent less on comparable
models, none of the Japanese producers had been able to capture substantial market
share from Harley-Davidson in the United States or in their home markets. (Refer back The number of Harley-Davidson and Buell motorcycles shipped annually between
to Exhibit 4 for a breakdown of market shares in the heavyweight segment in the US, 1998 and 2003 is presented in Exhibit 9.
European, and Asia-Pacific regions.) Indian Motorcycle Corporation had experienced
similar difficulties gaining adequate market share in the US heavyweight segment and Distribution and sales in North America, Europe, and Asia-Pacific
ceased its operations for a second time in September 2003. Harley-Davidson's dealers were responsible for operating showrooms where motorcycles
Harley-Davidson's difficulties in luring buyers in the performance segment of the could be examined and test-ridden, stocking parts and accessories that existing owners
industry were similar to challenges that Japanese motorcycle producers had encountered might need, operating service departments, and selling biking merchandise such as
in their attempts to gain market share in the custom and touring categories of the apparel. boots, helmets, and various Harley-Davidson-branded gift items. Some Harley
US heavyweight motorcycle segment. Harley-Davidson had co-developed and later owners felt such strong connections to the brand that they either gave or asked for Harley
purchased Buell to have a product that might appeal to motorcyclists in the United States gifts for birthdays, weddings, and anniversaries. Some Harley owners had even been
who were in their 20s and did not identify with the Easy Rider or Hells Angels images married at Harley-Davidson dealerships or at HOG rallies. Harley-Davidson dealers
or who did not find Harley-Davidson's traditional styling appealing. Harley management were also responsible for distributing newsletters and promoting rallies for local HOG
also believed that Buell's performance street-racer-style bikes could help it gain market chapters. The 10 000-member Buell Riders Adventure Group (BRAG) was also supported
share in Europe, where performance bikes were highly popular. The Buell brand by Harley-Davidson dealers.
competed exclusively in the performance category against models offered by Honda, Harley mechanics and other dealership personnel were trained at the Harley-
Yamaha, Kawasaki, Suzuki, and lesser-known European brands such as Mota Guzzi, Davidson University (HDU) in Milwaukee, where they took courses in such subjects as
Ducati, and Triumph. Buell prices began at $4595 for its Blast model to better compete retail management, inventory control, merchandising, customer service, diagnostics,
with Japanese motorcycles on price as well as on performance and styling. Buell's maintenance, and engine service techniques. More than 17 000 dealership employees
Lighting and Fireball models were larger, faster motorcycles and retailed for between took courses at the company's university in 2002. Harley-Davidson also provided
$9000 and $11 000. The VSRC V-Rod, with its liquid-cooled, Porsche-designed engine, in-dealership courses through its Web-based distance learning programme. In 2002, HDU
C140 C11e 09 Harley-Davidson
Challenges Confronting Harley-Davidson as it Entered its Second Century C141

EXHIBITS Annual shipments of Harley-Davidson and Buell motorcycles, 1998-2003 smaller East and Southeast Asian markets. Only 73 of Harley-Davidson's Asia-Pacific also
sold Buell motorcycles. The company also had two dealers that ~old Bue~l but no~ Harley-
2003 2002 2001
Davidson motorcycles. Harley-Davidson motorcycles were sold m 17 Lahn Amencan
2000 1999 1998
Harle~·Davldson
countries by 32 dealerships. The company did not have a dealer for its Buell ~ot~rcycles
Sportster in Latin America, but had 13 retail stores carrying only apparel and merchandise m the
57,165 51.T71 50,814 46,213 41,870
Custom• 33,892
151,405 141,769 118,303 100,875 87,806 77,434 region. . d · d
Touring 82,rm 70,713 65.344 57,504
The company's European distribution division based in the Umte Kmg ~m
47,511 39,492
291,147 263,653 234,461 204,592 177,187 150,818
served 32 countries in Europe, the Middle East, and Africa. The European reg10n had
Domestic 237,656 212,833 186,915 158,817 436 independent deniers, with 313 choosing to also carry Buell motorcycles. Buell
135,614 TI0,902
International 53r491 50,820 47,546 45r775 41 r573 39r916 motorcycles were also sold in Europe by 10 deal.ers tha! were ?ot i:arley dealers. Harley-
291,147 263,653 234,461 204,592 177,187
.............................................................................................................................
150,818 Davidson also had 26 non-traditional merchandise reta1l locahons m Europe.
Buell Exhibit to presents the company's revenues by geographic region, along with the
Buell (axe. Blestl 8,784 6,887 6,436 5,043 division of assets in the United States and abroad and a breakdown of financial services
7,767 6,334
Buell Blast 1,190 4,056 3r4B9 5,416 revenues by region. The company's financial services unit provided retail financing to
9,974 10,943 9,925 10,189 1,m consumers and wholesale financial services to dealers, including inventory floor plans,
6,334
"Custom includes Softall, Dyna Giida, and VRSC. real estate loans, computer loans, and showroom remodeling loans.
Sourer. Harley·Davfdson Inc. 2002 and 2003 annual reports.

Challenges confronting Harley-Davidson as it entered its second

held 665 instructor-led classes, 115 online classes, and had participation in their courses century
by 96 per cent of the company's dealers.
s Harley-Davidson entered its second century in 2004, the company not only
The company also held demo rides in various locations throughout the United
States, and many Harley dealers offered daily rentals designed to help novices decide A celebrated a successful centennial celebration that brought more than 700 000
of Harley's most loyal customers to Milwaukee but also a successful year with record
whether they really wanted a motorcycle. Some dealers also rented motorcycles for
longer periods to individuals who wished to take long-distance trips. Harley-Davidson
motorcycles could also be rented from third parties like EagleRider- the world's largest
EXHIBIT 10 Harley-Davidson's net revenues end long-lived assets by business group end geographic region,
renter of Harleys, with 29 locations in the United States and Europe. Harley·Davidson's
2000-2003
Riders Edge motorcycle training courses were also offered by quite a few dealers in
North America, Europe, and Asia-Pacific. The company had found that inexperienced
2003 2002 2001 2000
riders and women were much more likely to purchase motorcycles after taking a training
course. Harley-Davidson management believed the 25-hour Riders Edge programme Motorcycles net revenue
had contributed to the company's increased sales to women, which had increased from United States $3,807,707 $3,416,432 $2,809,763 $2,357,972
Europe 419,052 337,463 301,729 285,372
2 per cent of total sales prior to the adoption of the programme to 9 per cent in 2003 . 141,181 148,684
Japan 173,547 143,298
In 2003 Harley-Davidson motorcycles were sold by 644 independently owned and Canada 134,319 121,257 96,928 93,352
operated dealerships across the United States. Buell motorcycles were also sold by 436 Other foreign countries 89,649 72,520 57,185 57,966
of these dealers. There were no Buell-only dealerships, and 81 per cent of Harley dealers $4,624,274 $4,090,970 $3,406,786 $2,943,346
in the United States sold Harley-Davidson motorcycles exclusively. The company also Financial services income
sold apparel and merchandise in about 50 non-traditional retail locations such as malls, United States $260,551 s 199,380 s172,593 s 132,684
Europe 8,834 4,524 1,214 655
airports, and tourist locations. The company's apparel was also available seasonally in Canada 1Dr074 ~ ~ ~
about 20 temporary locations in the United States where there was significant tourist $279,459 $211,500 s 181 ,545 s140,135
traffic. The company also had three non-traditional merchandise outlets in Canada, Long-lived assets
where it had 76 independent dealers and one Buell dealership. Thirty•two of its United States Sl,400,772 Sl ,151 ,702 Sl,021,946 s 856,746
Canadian Harley dealers also sold Buell motorcycles. Other foreign countries 41,804 3S,138 33,234 27,844
$1 ,442,576 Sl,187,840 $1,055,180 884,590
Harley-Davidson had 161 independent dealers in Japan, 50 dealers and three
Source: Harley-Davidson Inc. 2002 and 2003 10-K reports.
distributors in the Australia/New Zealand market and seven other dealers scattered in
C142 case 09 Harley-Davidson
Challenges Confronting Harley-Davidson es tt Entered its Second Century C143

shipments, revenues, and earnings. New capacity had allowed the company's shipments
to increase to more than 290 000 units, which drove annual revenues to $4.6 billion Notes
and net earnings to nearly $761 million. The company's planned 350 000-square- 1 As quoted in "Analyst Says Harley's Success Had Been to Drive into Buyers' Hearts",
foot expansion of its York, Pennsylvania, plant would allow the company to increase Canadian Press Newswire, 14 July 2003.
production to 400 000 units by 2007. However, there was some concern that the company 2
might not need the additional capacity. As quoted in 21 January 2004, press release.
3
Some market analysts had begun to believe Harley-Davidson's stock was approaching As quoted in "Wings of Desire", The Independent, 27 August 2003.
its apex because of the ageing of its primary baby boomer customer group. Between 1993 4
As quoted in "Born to Raise Hell", BBC News Online, 14 August 2000.
and 2003 the average age of the company's customers had increased from 38 to 46. The 5
average age of purchasers of other brands of motorcycles in 2003 was 38. Some analysts "Wheel Life Experiences", Whole Pop Magazine Online.
suspected, that within the next 5 to 10 years, fewer baby boomers would be interested 6 As quoted in "Will Your Customers Tattoo Your Logo?", Trailer/Body Builders,
in riding motorcycles and Harley's sales might begin to decline. Generation X buyers 1 March 2003, p. 5.
were not a large enough group to keep Harley's sales at the 2003 level, which would 7 As quoted in "Will Harley-Davidson Hit the Wall?", Fortune, 22 July 2002.
cause the company to rely on Generation Y (or echo boomer) consumers. However,
most Generation Y motorcyclists had little interest in the company's motorcycles and e As quoted in "Even Corporate CEOs Buy Into the Harley-Davidson Mystique",
did not identify with the Easy Rider or outlaw biker images that were said to appeal Milwaukee journal-Sentinel, 24 August 2003.
to baby boomers. The company's V-Rod motorcycle had won numerous awards for its e As quoted in "Harley-Davidson Goes Highbrow at Annual Columbia, S.C., H.O.G.
styling and performance, but its $17 000-plus price tag kept most 20-year-olds away from Rally", The State, 26 September 2003.
Harley showrooms. Similarly, Buell motorcycles were critically acclaimed in terms of 10
As quoted in "Even Corporate CEOs".
performance and styling but had been unable to draw performance-minded consumers
11
in the United States or Europe away from Japanese street-racing-style bikes to any Ibid.
significant degree.
12 As quoted in "Milwaukee-Based Harley-Davidson Rides into Future with Baby
Europe was the largest market for motorcycles overall, and the second largest market Boomers Aboard", The News-Sentinel, 5 August 2003 .
for heavyweight motorcycles, but Harley-Davidson had struggled in building share in the
13 As quoted in "Harley-Davidson Fans Sport Motorcycle Style", Detroit Free Press,
region. In some ways the company's 6+ per cent market share in Europe was impressive
28 August 2003.
since only 4.8 per cent of motorcycles purchased in 2002 were touring cycles and custom
cycles accounted for only 13.8 per cent of motorcycles sold in Europe during 2002. The 14 As quoted in "Bikers Go Mainstream 100 Years On", Global News Wire, 11 September
V-Rod's greatest success was in Europe, but neither the V-Rod nor any other HD model 2003.
had become one of the top-10 best-selling models in any major European market. 15
Ibid.
There was also some concern that Harley-Davidson's 14-month production run had
10 "Nine Montreal Hells Angels Sentenced to 10 to 15 Years in Prison", CNEWS,
caused an unfavourable short-term production problem since the company's waiting list,
23 September 2003.
which required a two-year wait in the late 1990s, had fallen to about 90 days begiqning
in mid-2003. The over-availability of 2003 models had caused Harley-Davidson's 11 "Hells Angels: Easy Riders or Criminal Gang?", BBC News, 2 January 2004.
management to adopt a 0 per cent down payment financing programme that began at 1s "Feds Raid Hells Angels' Clubhouses" , CBSNews.com, 4 December 2003.
mid-year 2003 and would run through February 2004. When asked about the programme
during a television interview, Harley-Davidson CEO Jeffery Blaustein justified it by rn As quoted in "Wings of Desire", Global Ne ws Wire, 27 August 2003.
20
noting, "It's not zero per cent financing, as many people understood it to be, its zero Ibid.
dollars down, and normal financing. The idea there was to get the attention of some of 21 Interview with Mobile, Alabama, Harley-Davidson dealership personnel.
the peopla who aren't riding Harleys and are used to a world of other motorcycles where
there's always a financing program of some sort going on. We just wanted to get their 22 As quoted in a CNNfn interview conducted on The Money Gang, 11 June 2003.
22
attention." By year-end 2003, dealer inventories had declined to about 2000 units and
many dealers again began charging premiums over list price, but not the $2000-$4000
premiums charged in prior years.

Case 10
BreH Kebble's corporrate
scandals
Vi Makin
Introduction
rett Kebble, the flamboyant mining magnate (as he was known in the mining
B industry) was shot dead around 21h00 on 27 September 2005 in Melrose,
Johannesburg whilst on his way to a business engagement. His death came as a shock to
many South Africans, particularly business people and those abroad.
Kebble, a lawyer by profession had built his business empire in gold and diamond
mines. Shortly after completing his law degree, Kebble entered the mining industry to
team up with his father Roger Kebble. They acquired a controlling interest in the company
Randgold and Exploration (R&E). Kebble's highest-profile deal came about in 1995 when
he joined with African National Congress (ANC) activist turned businessman Mzi Khumalo
to take control of JCI, one of the oldest and famous mining houses in South Africa.
Kebble acquired wealth and millions of rands within a short space of time. He lived
lavishly and owned two mansions, two private jets, and eight Ferrari sports cars.
He was known to be a people's person and ploughed back to the community by
enabling several empowerment deals that made some people instant millionaires. His
involvement in Black Economic Empowerment (BEE) deals was seen as bringing in a
fresh breath air and new dynamism into the economic sector. He also founded a feeding
scheme that fed 1500 school children in Cape Town.
He was a member of the African National Congress (ANC) and had very close ties with
the ANC President Mr Jacob Zuma. Kebble gave significant support to the ANC Youth League
[ANCYL) to an extent that he was suspected of indirectly controlling the organization.
There were many comments and statements made after his death, some of which were
unpleasant. There are people who believe that Kebble's death was an assisted suicide.
This belief is informed by the fact that when Kebble died he was in financial mess and
the arm of the law was slowly catching up with him. He was allegedly on the wrong side
of the law for tax evasion, fraud, and share-price manipulation.
The Sunday Times, one of South Africa's largest newspapers had this to say about
Kebble's death. "We will not join in the cacophony of eulogies to a man who has been
described by some as a patriot and a great South African. Even though convention
requires that we speak well of the dead, we will not be part of the lies. He was a great
corrupter, a dirty businessman who had little respect for the law or codes of good
practice. He corrupted politicians and created a parasitical network of politically
connected beneficiaries who affectionately called him umlungu wethu [our white man)."
C144
Kebble's Involvement in Mining Companies C145
Kebble's involvement in mining companies
K ebble's was a CEO of two companies, JCI, and Western Areas Limited (WAL) and
a non-executive chairperson of Randgold & Exploration [R&E} of which his father
Roger was the CEO. Kebble later became CEO of R&E. He was very passionate about
the manner in which the mining industry was transforming itself. However, he was
disappointed about the slow economic growth and the fact that the wheels were turning
slowly in the BEE initiatives that he was driving.
His tenure as director, non-executive director, chairman, non-executive chairman
and CEO in several companies was characterized by complicated commercial deals some
of which were perceived to be shady. It appears that non-compliance with corporate
governance principles was the order of the day.
The manner in which Kebble's companies were being run embarrassed the business
community and left much to be desired.
Wars financial woes
In 2004 the company WAL seemed to be under a lot of financial strain. JCI, of which
Kebble was CEO, loaned WAL money to the tune of R600 million. In 2005 in order to
alleviate its financial agonies, WAL announced its intention to raise R639 million. This
was to be done by the way of a renounceable rights offer of 35.5 million shares at a price
of 1.BOOc per share.
WAL's rights offer, although supported by its shareholders, had lots of "frills" and
was structured in the following manner:
• Its shareholders would have the right to subscribe for 95 000 rights shares for every
100 WAL shares they held.
• A special-purpose vehicle [SPV) would underwrite the rights offer up to a
maximum of R250 million, subject to a loan agreement between JCI, SPV and
Investec in which Investec would arrange a loan facility of R460 million. It turned
out later that, in order to limit its exposure in this deal, Investec used this loan
facility as leverage to get Kebble to step down from the boards of JCI and R&E and
replaced him with hand-picked Investec directors.
One of JCI shareholders, Monty Koppel, has approached the Johannesburg High Court
through his lawyers to declare the loan agreement with Investec invalid.
R&E missing shares
In 2004-2005 some assets belonging to R&E worth R2 billion were sold during Kebble's
tenure as its CEO. The proceeds of these sales could not be traced, and there have been
forensic investigations into this matter and court applications to liquidate some of
Kebble's empowerment companies in a bid to trace the assets, and this has been granted.
Investigations have revealed that the ANCYL is linked to a fraud of R268 million
which Kebble orchestrated.
This came about when R&E applied for the provisional liquidation of two companies,
Equitant Trading and Itsuseng Strategic Investments which were controlled by Youth
League executive members Songezo Mjongile, Andile Nkuhlu and Lunga Ncwana
 C146 Case 10 Brett Kebble's Corporate Scandals
(who was a non-executive director in R&E but has since resigned when the company
restructured its board).
Equitant Trading was fraudulently registered and incorporated as a special vehicle
whereby R&E shares worth R268 million were handed to Equitant Trading in return
for Viking Pony Ply, a shelf company owned by Equitant Trading. This transaction was
found to be fraudulent and a sham. R&E received no value for money as Viking pony
never owned any assets in the first place.
In another development Kebble is suspected of having disposed about 48.2 per cent of
R&E shareholding in Randgold Resources Limited (UK-listed sister company) since 2002.
These amounted to 14.4 million shares worth £124 million which Randgold Resources
alleges are not in a South African company name. There is still a question mark as to
what happened to these shares. Investigations are ongoing.
In August 2005 Kebble was forced to step down as CEO of R&E and Peter Gray was
appointed as CEO. In November 2005, some three months after Gray was appointed CEO
he told the media that "there is no doubt that there was massive misappropriation and
mismanagement of shareholder's assets over an extended period. Fortunately, we have
been able to unravel some of the 'Enron style' transactions entered into in the past. Some
were well intended but ill informed, many were dubious and other simply dishonest."
He went on to say "the new board opened a veritable Pandora's box. When we lifted
one layer of transactions, we found layer after layer of misrepresentation. Some of these
structures turned out to be legitimate but unwise, whilst others were fronts for the
misappropriation of shareholder's assets. In almost all cases the value of the underlying
assets had been overstated."
JCI legal battle with skeat
JCI, of which Kebble was CEO, stood surety for a BEE company Kabusha, which was
involved in a long-running legal dispute with Peter Skeat (former chairman of Aflease
(AFL) over an R52 million transaction in which Kabusha alleged fraud on the part of
Skeet. Skeat obtained the High Court order authorizing the sheriff to attach the assets of
JCI. This was seen as a premature move intended to pressurize Kabusha into a settlement,
thereby embarrassing JCI. JCI appealed the order and the appeal was granted.
JCI and Matodzi
Matodzi was Kebble's empowerment partner. Its CEO, Sella Rasethaba, was a non·
executive director in WAL but later stepped down. Matodzi owed R194 million to JCI,
and was allegedly in dire financial straits last year after being dragged into the Brett
Kebble's saga. As a way of getting out of this difficulty and the debt owed to JCI, Matodzi
restructured the debt by allowing JCI to acquire 58 per cent controlling stake in the
company. This restored Matodzi's solvency.
Meanwhile, Matodzi sold its only operation asset, 50 per cent of the company that
controlled the Letseng (a Lesotho diamond mining company), to Oppenheimer's former
family adviser, Clifford Elphick.
Matodzi is planning to buy out JCI. Matodzi owns 10 per cent of JCI and, if the deal
I
succeeds, this could see a share swap.
I
Management Fa1lur.s: Whet Went Wrong C147
Brett Kebble's murder: A mystery
K ebble was gunned down on 27 September 2005 in Johannesburg. He died at a time
when there were a lot of speculation, controversies and allegations of tax evasion,
fraud and maladministration of several companies that he ran.
He was apparently in such a financial mess that there were speculations about the
cause of his death. Some people believed that he was not murdered, but that it was a self-
assisted suicide, as he could no longer manage to duck and dive from the corporate mess
that he had created. Forces of the law were closing in on him. He was allegedly on the
brink of being arrested for criminal fraud that could have had him convicted and locked
up in jail for many years.
Other people believed he was involved with some syndicates which he rubbed up the
wrong way. Glen Agliotti, an alleged drug warlord, was arrested for Kebble's murder, and
Australian businessman John Statton has been linked Kebble's murder. There are court
processes under way to have John Statton extradited to South Africa to come and stand
trial for Kebble's murder.
The motive for Kebble's murder is still unknown and police investigations into
Kebble's murder are still ongoing.
Management failures: What went wrong
s mentioned above, Kebble was forced to step down as CEO of JCI, R&E, and WAL,
A but he remained a non-executive director of JCI. Investec was instrumental in getting
Brett to step down from the boards of JCl and R&E, so it could usher in some of its trusted
people, including Peter Gray who became CEO of R&E and JCI. Investec had an interest
in the matter as it wanted to ensure that its financial risks were not unduly exposed after
participating in a loan between investee, WAL and JCl.
When one looks at the three companies of which Kebble was CEO-namely, JCI, WAL
and R&E and many other transactions that he was involved in, particularly empowerment
deals-the following concerns and questions come to mind:
• How were these companies being run?
• Who were the directors of these companies and how were they appointed?
• Were shareholders consulted and did they approve of these transactions?
• Was corporate governance being observed?
• JCI and R&E were suspended from the Johannesburg Stock Exchange for the failure
to submit annual results, and delisted from NASDAQ, Surely this was indicative of
companies that were badly run?
• How does one person become CEO of three companies? Surely there would be a
conflict of interest, and the CEO would have access to sensitive information relating
to the affairs of one company that he could reveal to another company.
(Ref: Motsoai and Makin, 2008.)
 Endnotes C149

Endnotes Jerry I. Porras "Building Your Company's Vision", Harvard Business Review 74,
no, 5(September-October1996), pp. 65-77; James C. Collins and Jerry I. Porras
Built to Last: Successful Habits of Visionary Companies, New York: HarperCollins,
1994, Chapter 11; and Michel Robert Strategy Pure and Simple II, New York: McGraw-
Hill, 1998, Chapters 2, 3, end 6.
2
Davidson, Committed Enterprise, pp. 20, 54.
Chapter 1 3 Jeffrey K. Liker, The Toyota Way, New York: McGraw-Hill, 2004 , and Steve Hamm

1 "Taking a Page from Toyota's Playback", Business Week, August 22/29, 2005 , p . 72.
Strategic issues are issues which might change the direction of a person's life or a
<1 Cameron, B. (2007), "Millions missing in Fidentia scandal", Business Report, 2 February.
company's course.
2 s As quoted in Charles H. House and Raymond L. Price "The Return Map: Tracking
Executing and implementation will be used interchangeably in this book. Executing
Product Teams", Harvard Business Review60 , no. 1(January-February1991), p. 93 ,
and implementation refer to leading projects, integrating processes and fostering the 6 Robert S. Kaplan end David P. Norton The Strategy-Focused Organization , Boston:
required cooperation from all stakeholders.
3 Harvard Business School Press, 2001, p. 3.
A special "Business Model" edition of Long Range Planning (2010) Vol. 43, 7 Ibid., p. 7. Also, see Kevin B. Hendricks, Larry Menor, end Christine Wiedman
pp. 143-462 discusses this aspect in more detail.
4 "The Balanced Scorecard: To Adopt or Not to Adopt", Ivey Business fournal
Beer, M. end Eisenstat, R.A. (2000) "The silent killers of strategy implementation and
69, no. 2 (November-December 2004), pp. 1-7; and Sandy Richardson, "The
learning", Sloan Management Review, 41(4).
5 Key Elements of Balanced Scorecard Success ", Ivey Business fournal 69, no. 2
Beer, M., Eisenstat, R.A. and Spector, B.A. (1990) The Critical Path to Corporate (November December 2004), pp. 7-9.
Renewal, Boston, MA: Harvard Business School Press. 8 Information posted on the website of Bain & Company, http://www.bain.com/
0
Beer, and Eisenstat, ibid.
7 management tools (accessed 6 April, 2010).
Fonvielle, W. and Carr, T. (2001) "Gaining strategic alignment", Management u Information posted on the website of Balanced Scorecard Collaborative, www.bscol.
Accounting Quarterly, Fall 2001, pp. 4-14.
8 com (accessed 22 August, 2009). This website was created by the co-creators of the
Fonvielle, and Carrm ibid. balanced scorecard concept, Professors Robert S. Kaplan and David P. Norton, Harvard
9
Lorsch, J.W. and Tierney, T.J. (2002) Aligning the stars, Boston: Harvard Business Business School.
School Press. 10 The concept of strategic intent is described in more detail in Gary Hamel and
10
Korogodsky, A. [2004) Moving toward alignment, www.bestreview.com. Accessed on C. K. Prahalad "Strategic Intent", Harvard Business Review 89, no. 3(May-June1989),
1 October 2006. pp. 63-76; this section draws on their pioneering di~~ussion. See.also Mich~el A. Hitt,
11
Michelman, P. (2005) How will you maintain alignment?, Harvard Business School Beverly B. Tyler, Camilla Hardee, and Daewoo Park Understandmg Strategic Intent
Publishing, www.harvardbusinessonline.org. Accessed on 18 January 2010. in the Global Marketplace", Academy of Management Executive 9, no. 2 (May 1995},
12
Kaplan, R.S. and Norton, D.P. (2006) Alignment. Using the Balanced Scorecard to pp. 12-19.
Create Corporate Synergies, Boston: Harvard Business School Press. 11 For a fuller discussion of strategy as an entrepreneurial process, see Henry Mintzberg,
13
The BSC is a strategy tool used to manage tangible and intangible assets and create Bruce Ahlstrand, and Joseph Lampel Strategy Safari: A Guided Tour through the
sustained and high-performance business cultures. Wilds of Strategic Management, New York: Free Press, 1998, Chapter 5. Also see
14
Hough, J. (2010). "Advanced Strategy course, Unpublished course notes". Stellenbosch Bruce Barringer and Allen C. Bluedom "The Relationship Between Corporate
University. Entrepreneurship and Strategic Management", Strategic Managementfournal
15 20 (1999), pp. 421-44 , and Jeffrey G. Covin and Morgan P. Miles "Corporate
Hough, ibid.
Entrepreneurship and the Pursuit of Competitive Advantage", Entrepreneurship:
Chapter2 Theory and Practice 23, no. 3 (Spring 1999), pp. 47-63.
1
For a more in-depth discussion of the challenges of de veloping a well·conceived
vision, as well as some good examples, see Hugh Davidson The Committed Enterprise: Chapter3
How to Make Vision and Values Work, Oxford: Butterworth Heinemann, 2002, t There are a large number of studies of the size of the cost reductions associated with
Chapter 2; W. Chan Kim and Renee Mauborgne "Charting Your Company's Future", experience; the median cost reduction associated with a do~blin~ of cu~u~ative
Harvard Business Review 80, no. 6 (June 2002}, pp. 77-83; James C. Collins and production volume is approximately 15 per cent, but there is a wide variation from

C14B
C15D Endnotes Endnotes C151

industry ta industry. For a good discussion of the economies of experience and of Industry and Competitive Strategy", Strategic Man~gement (our~al 16 (199.5),
learning, see Pankaj Ghemawat "Building Strategy on the Experience Curve", Harvard pp. 461- 76. For a study of how strategic group analysis helps identify .the variables
Business Review 64, no. 2 (March-April 1985), pp. 143-149. that lead to sustainable competitive advantage, see S. Ade Olusoga, Michael P. Mokwa
2
The five-forces model of competition is the creation of Professor Michael Porter of and Charles H. Noble, "Strategic Groups, Mobility Barriers, and Competitive
the Harvard Business School. For his original presentation of the model, see Michael Advantage", Journal of Business Research 33 (1995), pp. 153-64.
E. Porter "How Competitive Forces Shape Strategy", Harvard Business Review 57, no. 2 2
° Far a discussion of legal ways of gathering competitive intelligence on rival
(March-April 1979}, pp. 137-45. A more thorough discussion can be found in Michael companies, see Larry Kahaner Competitive Intelligence (New York: Simon &
E. Porter Competitive Strategy: Techniques for Analyzing IndustriPs and Competitors Schuster, 1996).
(New York: Free Press, 1980), Chapter 1. However, there are also limitations to the 21 Kahaner Competitive Intelligence, pp. 84-85.
use of this model. It is unable to take into account new business models and the scope
and volatility of new and emerging markets. The model does not focus on strategic
alliances, virtual networks, etc. Chapter4
3 1 Many business organizations are coming to view cutting-edge knowledge and
These indicators of what to look for in evaluating the intensity of rivalry are based on
Porter, Competitive Strategy, pp. 17-21. intellectual resources as a valuable competitive asset and have concluded that
4
Porter, Competitive Strategy, pp. 7-17. explicitly managing these assets is an essential part of their strategy. See ~ichael
5 H. Zack "Developing a Knowledge Strategy", California Management Rev1ew41,
When profits are sufficiently attractive, entry barriers are unlikely to be an effective
no. 3 (Spring 1999), pp. 125-45; and Shaker A. Zahra, Anders P. Nielsen and Willi~
entry deterrent. At most, they limit the pool of candidate entrants to enterprises with
C. Bogner, "Corporate Entrepreneurship, Knowledge, and Competence Development ,
the requisite competencies and resources and with the creativity to fashion a strategy
Entrepreneurship Theory and Practice (Spring 1999), pp. 169-89.
for competing with incumbent firms. For a good discussion of this point, see George
S. Yip, "Gateways to Entry", Harvard Business Review 60, no. 5 (September-October
2
In the past decade, there's been considerable research into the role ~ compan~'s.
1982), pp. 85-93. resources and competitive capabilities play in crafting strategy and i~ determm.mg
company profitability. The findings and conclusions have co~le~ced mto ~hat is
c; Michael Porter, "How Competitive Forces Shape Strategy", Harvard Business Review
called the resource- based view of the firm. Among the mast ms1ghtful articles are
57, no. 2 (March-April 1979), p. 140, and Porter, Competitive Strategy, pp. 14-15.
7 Birger Wernerfelt "A Resource-Based View of the firm ", Strategic Management
Porter, "How Competitive Forces Shape Strategy", p. 142 and Porter, Competitive
Journal (September-October 1984), pp. 171-80; Jay Barney "Firm Resources and
Strategy, pp. 23-24.
8 Sustained Competitive Advantage", Journal of Management 17, no. 1 (1991) ,
Porter, Competitive Strategy, p. 10.
11
pp. 99-120; Margaret A. Peteraf, "The Cornerstones of Competitive Advantage:
Porter, Competitive Strategy, pp. 27-28. A Resource-Based View", Strategic Management Journal (March 1993), pp. 179-
10
Porter, Competitive Strategy, pp. 24-27. 91; Birger Wernerfelt, "The Resource-Based View of the Firm: Ten ~~ars ~fter", .
11
For a more extended discussion of the problems with the life-cycle hypothesis, Strategic Management Journal 16 (1995) , pp. 171-74; Jay B. Barney Lookmg Inside
see Porter, Competitive Strategy, pp. 157-62. for Competitive Advantage", Academy of Management Executive 9, n~. 4 _(N~vember
12
Porter, Competitive Strategy, p. 162. 1995), pp. 49-61; and Christopher A. Bartlett and Sumantra Ghoshal ~mldmg
11
: Most of the candidate driving forces discussed here are drawn from Porter, Competitive Advantage through People", MIT Sloan Managem ent Rev1ew 43, no. 2
Competitive Strategy, pp. 164-83. (Winter 2002), pp. 34-41.
14 3 For a discussion of how to measure the competitive power of a company's resource
Porter, Competitive Strategy, chapter 7.
15
Ibid., pp. 129-30. base, see Nick Bontis, Nicola C. Dragonetti, Kristine Jacobsen and Goran Roos "The .
10 Knowledge Toolbox: A Review of the Tools Available ta Measure and Manage Intangible
For an excellent discussion of how to identify the factors that define strategic groups,
Resources", European Management Journal 17, no. 4 (August 1999), PP· 391-401.
see Mary Ellen Gordon and George R. Milne "Selecting the Dimensions that Define 4
Strategic Groups: A Novel Market-Driven Approach", Journal of Managerial Issues 11, For a more extensive discussion of how to identify and evaluate the competitive
no. 2 (Summer 1999), pp. 213-33. power of a company's capabilities, see David W. Birchall and George Tovstiga "The
17
Porter, Competitive Strategy, pp. 152-54. Strategic Potential of a Firm's Knowledge Portfolio", Journal of General Management
111 25, no. 1 (Autumn 1999), pp. 1-16; also see David Teece "Capturing Value from
Ibid., pp. 130, 132-38, and 154-55.
19 Knowledge Assets: The New Economy, Markets for Know-How, and Intangible
Strategic groups act as good reference points for predicting the evolution of an Assets", California Management Review 40, no. 3 (Spring 1998), pp. 55-79.
industry's competitive structure. See Avi Fiegenbaum and Howard Thomas 5 See David J. Collis and Cynthia A. Montgomery, "Competing on Resources: Strategy in
"Strategic Groups as Reference Groups: Theory, Modeling and Empirical Examination
the 1990s", Harvard Business Review 73, no. 4 (July-August 1995), pp. 120-23.
C152 Endnotes
6 2
See Jack W. Duncan, Peter Ginter and Linda E. Swayne "Competitive Advantage and
Internal Organizational Assessment", Academy of Management Executive 12, no. 3
(August 1998), pp. 6-16.
7
Value chains and strategic cost analysis are described at greater length in Michael
E. Porter Competitive Advantage, New York: Free Press, 1985, Chapters 2 and 3;
Robin Cooper and Robert S. Kaplan "Measure Costs Right: Make the Right Decisions",
Harvard Business Review 66, no. 5 (September-October 1988), pp. 96-103; and John
K. Shank and Vijay Govindarajan Strategic Cost Management New York: Free Press,
1993, especially Chapters 2-6, 10.
11
M. Hagert and D. Morris "Accounting Data for Value Chain Analysis", Strategic
Management fournal 10 {1989), p. 183.
0 1
Porter, Competitive Advantage, p. 36.
IO Ibid., p. 34.
11
Hagert and Morris, "Accounting Data for Value Chain Analysis," p. 180.
12 For more on how and why the clustering of suppliers and other support organizations
matter to a company's costs and competitiveness, see Michael E. Porter "Clusters and
the New Economics of Competition", Harvard Business Review 76, no. 6 (November-
December 1998}, pp. 77-90.
13 For discussions of the accounting challenges in calculating the costs of value chain
activities, see Shank and Govindarajan Strategic Cost Management, pp. 62-72 and
Chapter 5; and Hagert and Morris "Accounting Data for Value Chain Analysis",
pp. 175-88.
•• Porter, Competitive Advantage, p . 45.
n For a discussion of activity-based cost accounting, see Cooper and Kaplan "Measure
Costs Right", pp. 96-103; Shank and Govindarajan Strategic Cost Management,
Chapter 11; and Joseph A. Ness and Thomas G. Cucuzza "Tapping the Full Potential
of ABC", Harvard Business Review 73, no. 4 (July-August 1995), pp. 130-38.
16
Shank and Govindarajan, Strategic Cost Management, p. 62.
17
For more details, see Gregory H. Watson Strategic Benchmarking: How to Rate Your
Company's Performance Against the World's Best, New York: John Wiley, 1993; and
Robert C. Camp Benchmarking: The Search for Industry Best Practices That Lead to
Superior Performance, Milwaukee: ASQC Quality Press, 1989. See also Alexandra'"
Biesada "Strategic Benchmarking", Financial World (September 29, 1992), pp. 30-38.
18
Jeremy Main "How to Steal the Best Ideas Around", Fortune (October 19, 1992),
pp. 102-3.
10
Shank and Govindarajan, Strategic Cost Management, p. 50.
20
Porter, Competitive Advantage, Chapter 3.
21
James Brian Quinn, Intelligent Enterprise (New York: Free Press, 1993), p. 54.
22
Ibid., p. 34.
Chapter 5
1
The classification scheme is an adaptation of one presented in Michael E. Porter
Competitive Strategy: Techniques for Analyzing Industries and Competitors
(New York: Free Press, 1980), Chapter 2, especially pp. 35-39 and 44-46.
Endnotes C153
Michael E. Porter Competitive Advantage, New York: Free Press, 1985, p. 97 .
3 The items and explanations in this listing are condensed from ibid., pp. 10-1 07 .
4
Ibid., p . 109.
5 Ibid., pp. 135-38.
6 For a more detailed discussion, see George Stalk, Philip Evans and Lawrence
E. Schulman "Competing on Capabilities: The New Rules of Corporate Strategy",
Harvard Business Review 70, no. 2 (March-April 1992), pp. 57-69.
7 Porter, Competitive Advantage, pp. 160-62.
Chapter&
Michael E. Porter Competitive Strategy, New York: Free Press, 1980, pp. 216-23 .
2 Charles W. Hofer and Dan Schendel Strategy Formulation: Analytical Concepts,
St. Paul, MN: West Publishing, 1978, pp. 164-65.
3 Phillip Kotler, Marketing Management, 5th edn, Englewood Cliffs, NJ: Prentice Hall
(1984), p. 366; and Porter, Competitive Strategy, Chapter 10.
4 Hofer and Schendel, Strategy Formulation, pp. 164-65.
5 The strategic issues companies must address in fast-changing market environments are
thoroughly explored in Gary Hamel and Liisa Viilikangas "The Quest for Resilence",
Harvard Business Review 81, no. 9 (September 2003) , pp. 52-63, and Richard A.
D'Aveni, Hyper-Competition: Managing the Dynamics of Strategic Maneuvering, New
York: Free Press, 1994. See also Richard A. D'Aveni "Coping with Hypercompetition:
Utilizing the New 7S's Framework", Academy of Management Executive 9, no. 3 [August
1995), pp. 45-56; and Bala Chakravarthy "A New Strategy Framework for Coping with
Turbulence", Sloan Management Review (Winter 1997), pp. 69-82.
6 Shona L. Brown and Kathleen M. Eisenhardt Competing on the Edge: Strategy as
Structured Chaos, Boston: Harvard Business School Press, 1998, pp. 4-5.
7
Ibid., p. 4.
8 For insight into building competitive advantage through R&D and technological
innovation, see Shaker A. Zahra, Sarah Nash, and Deborah J. Bickford "Transforming
Technological Pioneering into Competitive Advantage", Academy of Management
Executive 9, no. 1 (February 1995}, pp. 32-41.
0 Brown and Eisenhardt, Competing on the Edge, pp. 14-15. See also Kathleen
M. Eisenhardt and Shona L. Brown "Time Pacing: Competing in Markets That Won't
Stand Still" , Harvard Business Review 76, no. 2 (March- April 1998), pp. 59-69.
10 Porter, Competitive Strategy, pp. 328-40.
11 The following discussion draws on ibid., pp. 241-46.
12 R. G. Hamermesh and S. B. Silk, "How to Compete in Stagnant Industries" , Harvard
Business Review 57. no. 5 (September-October 1979}, p. 161.
13
Ibid., p. 162.
14 Ibid., p. 165.
15 This section is summarized from Porter, Competitive Strategy, Chapter 9.
18 Eric D. Beinhocker "Robust Adaptive Strategies", Sloan Management Review409,
no. 3 (Spring 1999}, p. 101.
 Endnotes C155
C154 Endnotes

17
Gary Hamel "Bringing Silicon Valley Inside", Harvard Business Review77, no. 5
(September-October 1999), p. 73.
18
Beinhocker, "Robust Adaptive Strategies". p. 101.
111
Kotler Marketing Management, Chapter 23; Michael E. Porter Competitive Advantage,
New York: Free Press, 1985, Chapter 14; and Ian C. MacMillan "Seizing Competitive
Initiative", Journal of Business Strategy 2, no. 4 {Spring 1982), pp. 43-57. For a
perspective on what industry leaders can do when confronted with revolutionary
market changes, see Richard D'Aveni "The Empire Strikes Back: Counterrevolutionary
Strategies for Industry Leaders", Harvard Business Review BO, no. 11 (November 2002),
7 R.S. Kaplan and D.P. Norton (1992) "The balanced scorecard: measures that drive
performance", Harvard Business Review (Jan. - Feb.), pp. 71-80.
e M.A. Abernethy, M.H. Home, A.M. Lillis, M.A. Malina and F.H. Salta (2005)
"A multi-method approach to building causal performance maps from
expert knowledge", Management Accounting Research 16 (2005),
135-155.
D Jbjd,
10 Niven, ibid, 24.
11 Niven, ibid, 24.

pp. 66-74. 12 Niven, ibid, 25 .

20
The value of being a frequent first-mover and leading change is documented in Walter 1:1 L.A. Thompson, (2006) "The Successful Workforce", Strotegic Finance (June 2006),

J. Ferrier, Ken G. Smith and Curtis M. Grimm "The Role of Competitive Action in Vol. 87, Issue 12, p. 27.
Market Share Erosion and Industry Dethronement: A Study of Industry Leaders and 14 c. Roebuck, (1996) "Constructive feedback: Key to higher performance and
I ! Challengers", Academy of Management Journal 42, no. 4 (August 1999), pp. 372-88. commitment", Long Range Planning, Vol. 29, No. 3, p . 328.
21 Hamermesh, Anderson and Harris "Strategies for Low Market Share Businesses", p . 102.
1
1
15 P. Palekar, {2006) "Knowledge Acquisition through Selection", !MB Management
22
Porter, Competitive Advantage, p. 514. Review, Mar 2006, Vol. 18, Issue 1, pp. 27-36.
23
William K. Hall "Survival Strategies in a Hostile Environment", Harvard Business rn G.R. Ferris, H.M. Berkson and M.M. Harris (2002) "The recruitment interview process:
Review 58, no. 5 (September-October 1980), pp. 75-85. See also Frederick Persuasion and organization reputation promotion in competitive labor markets",
M. Zimmerman, The Turnaround Experience: Real-World Lessons in Revitalizing Human Resource Management Review 12 (2002), pp. 359-75.
Corporations, New York: McGraw-Hill, 1991, and Gary J. Castrogiovanni. B. R. Baliga 17 W.S.J. Geerlings and K. Van Veen (2006) "The future qualities of workforces: a
and Roland E. Kidwell "Curing Sick Businesses: Changing CEOs in Turnaround simulation study of the long-term consequences of minor selection decisions".
Efforts", Academy of Management Executive 6, no. 3 (August 1992), pp. 26-41 . International Journal of Human Resources Management (Jul 2006), Vol. 1 7, Issue 7,
24
Leigh Gallagher "Avoiding the Pitfalls of Orphan Stocks", www.forbes.com, April 24, pp.1254-66.
2003. 18 Geerlings and Van Veen, ibid.
25
Phillip Kotler "Harvesting Strategies for Weak Products", Business Horizons 21, no. 5 19 Palekar, ibid.
(August 1978), pp. 17-18. 20
26
Palekar, ibid.
William K. Hall, "Survival Strategies in a Hostile Environment", pp. 75-85. 21 M.J. Wesson and c. Gogus (2005) "Shaking Hands With a Computer: An Exa_mination
27
Phillip Kotler, "Harvesting Strategies for Weak Products", pp. 17- 18. of Two Methods of Organizational Newcomer Orientation", Journal of Applied
28
William K. Hall, "Survival Strategies in a Hostile Environment", pp. 75- 85. Psychology (Sep 2005), Vol. 90, Issue 5, p. 1018-26.
22 M.J. Wesson and C. Gogus, ibid.
Chapter 7
23 Niven, ibid, 24.
1
R.D. Ireland and M.A. Hitt (2005) "Achieving and maintaining strategic 24
competitiveness in the 21st century: The role of strategic leadership", Academy of Niven, ibid, 24.
25 P. Folan and J. Browne (2005) "A review of performance measurement: towards
Management Executive (Nov. 2005), Vol. 19, Issue 4, pp. 63-77.
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2
J. Henri (2006) "Management control systems and strategy: A resource-based
26 N. Heraty (2004) "Towards an architecture of organization-led learning", Human
perspective", Accounting, Organizations and Society 31 (2006), 529-58.
3 Resource Management Review 14 (2004). pp. 449-472.
R. Braxton, (2008) "Executive lecture", First National Bank Conference, Johannesburg,
27 Heraty, ibid.
South Africa, May 2008.
4 28 B. Lowed, c. Joyce and L. Weiss (2006) "Making a market in talent", McKinsey
G. Johnson and K. Scholes (1999) Exploring Corporate Strategy, 5th edn, Pearson
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P.R. Niven, (2005) "Driving Focus and Alignment with the Balanced Scorecard'',
traditional and contemporary viewpoints", Human Resource Management Review
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M.A. Malina, and F.H. Salta, (2004) "Choice and change of measures in performance 16 (2006), pp. 125-138.
30 Baruch, ibid.
measurement models", Management Accounting Research 15 (2004), 441-469.
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:n Baruch, ibid. pp. 91-101. For adeptness at capturing cross-business strategic fits positively
32 impacts performance; see Constantinos C. Markides and Peter J. Williamson
E.E. Lawler III (2003) "Reward Practices and Performance Management System
Effectiveness", Organizational Dynamics, Vol. 32, No. 4, pp. 396-404, 2003. "Related Diversification, Core Competences and Corporate Performance", Strategic
'll Lawler, ibid. Management Journal 15 (Summer 1994), pp. 149-65.
13
34
S.L. Brown, Lisa Farrell, Mark N, Harris and John G. Sessions (2006) "Risk preference Peter Drucker (1984) Management: Tasks, Responsibilities, Practices, New York:
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14
Royal Statistical Society, vol. 169(4), pp. 849-63 While arguments that unrelated diversification are a superior way to diversify
3
' Brown et al. Ibid. financial risk have logical appeal, there is research showing that related diversification
311
G.S. Alder (2001) "Employee reactions to electronic performance monitoring: is less risky from a financial perspective than is unrelated diversification; see Michael
A consequence of organizational culture", Journal of High Technology Management Lubatkin and Sayan Chatterjee, "Extending Modern Portfolio Theory into the Domain
Research 12 (2001}, pp. 323-342. of Corporate Diversification: Does It Apply?", Academy of Management Journal 37,
31 no. 1 (February 1994), pp. 109-36.
Alder, ibid, p. 328. 15
311 For a review of the experiences of companies that have pursued unrelated
S. Dwyer, O.C. Richard and K. Chadwick (2003) "Gender diversity in management and
diversification successfully, see Patricia L . Anslinger and Thomas E. Copeland
firm performance: The influence of growth orientation and organizational culture",
"Growth through Acquisitions: A Fresh Look", Harvard Business Review 74, no. 1
Journal of Business Research 56 (2003), pp. 1009-1019.
(January-February 1996), pp. 126-35.
16
Of course, management may be willing to assume the risk that trouble will not strike
Chapters before it has had time to learn the business well enough to bail it out of almost
1
For a further discussion of when diversification makes good strategic sense, see any difficulty. But there is research that shows this is very risky from a financial
Constantinos C. Markides "To Diversity or Not to Diversity", Harvard Business Review perspective; see, for example, Lubatkin and Chatterjee Extending Modem Portfolio
75, no. 6 (November-December 1997), pp. 93-99. theory, pp. 120-32.
2
Michael E. Porter "From Competitive Advantage to Corporate Strategy", Harvard 17 For an excellent discussion of what to look for in assessing these fits , see Andrew
Business Review 45, no. 3 (May-June 1987), pp. 46-49. Campbell, Michael Gould and Marcus Alexander "Corporate Strategy: The Quest
3
Michael E. Porter Competitive Strategy: Techniques for Analyzing Industries and for Parenting Advantage", Harvard Business Review 73, no. 2 (March-April 1995),
Competitors, New York: Free Press, 1980, pp. 354-55. pp. 120-32.
4 18
Ibid., pp. 344-45. Ibid., p. 128.
5
Yves L. Doz and Gary Hamel (1998} Alliance Advantage: The Art of Creating Value 19
Ibid., p. 123.
through Partnering, Boston: Harvard Business School Press, Chapters 1 and 2. 20
A good discussion of the importance of having adequate resources, and also the
Cl Ibid., p. 46. importance of upgrading corporate resources and capabilities, can be found in David
7
Porter, Competitive Strategy, p. 340. J. Collis and Cynthia A. Montgomery "Competing on Resources: Strategy in the 90s",
8
Doz and Hamel, Alliance Advantage, p. 48. Harvard Business Review 73, no. 4 (July-August 1995), pp. 118-28.
9
Michael E. Porter, Competitive Advantage, New York: Free Press, 1985, 21
Ibid., pp. 121-22.
pp. 318-19, 357-53; and Porter "From Competitive Advantage to Corporate iz Drucker, Management, p. 709.
Strategy: pp. 53-57. 23
Drucker, Management, p. 94.
10
For a discussion of the strategic significance of cross-business coordination of value- 24
Zee bee Drankkoff, Tim Koller and Antoon Schneider. "Divestiture: Strategy's Missing
chain activities and insight into how the process works, see Jeanne M. Liedtke Link", Harvard Business Review BO, no. 5 (May 2002), pp. 74-83.
"Collaboration across Lines of Business for Competitive Advantage", Academy of
as Drucker, Man agement, p. 94.
Management Executive 10, no. 2 (May 1996), pp. 20-34.
211
11 See David J. Collis and Cynthia A. Montgomery, "Creating Corporate Advantage",
"Beyond Knowledge Management: How Companies Mobilize Experience", Financial
Times, 8 February, 1999, p. 5. Harvard Business Review 76, no. 3 (May-June 1998), pp. 72-80.
27
12 Drucker, Management, p. 719.
For a discussion of what is involved in actually capturing strategic fit benefits, see
111
Kathleen M. Eisenhardt and D. Charles Galunic "Coevolving: At Last, a Way to See Markides, "Diversification, Restructuring and Economic Performance" ,
Make Synergies Work". Harvard Business Review 78, no. 1 (January-February 2000), pp. 101- 118.
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 C160 Endnotes
18
S. Keys and S. J. Popkins (1998) "Integrating ethics into the strategic management
19
process: doing well by doing good", Management Decision, 36(5/ 6) : 331- 38.
L. Irvin (2002) "Ethics in organisations: a chaos perspective", Journal of
Index
Organisational Change Management, 15(4): 359.
20 C. Corforth (2001) "What makes boards effective? An examination of the relationships
between board inputs, structures, processes and effectiveness in non•profit
1st for Women Insurance
organizations", Corporate Governance, 9 (3), 217-27. Brokers, rocused (or market
11 F. Martinelli (1998) "The Board of Directors: Foundation for Success", New Directions niche) strategies 170
for Philanthropic Fundraising, 20, 25-43.
22 acquisitions, maturing industries
R. I. Tricker (1994) International Corporate Governance, 1st edn, Singapore: Simon &
187
Schuster Pte Ltd, Sunday Times 22 January 2005. activity-based costing 130
23 Hendrickse and Hendrickse (2004). airlines
case C83- l 19
low-cost carriers (LCCs)
C83- 119, 150-1
Mango airline 70- 1
Southwest Airlines C83- 119
aligning department systems,
organizational culture
277- 80
alignment DNA, innovation
R44- 5
alignmenl, slrategic see strategic
alignment/filness
annual performance
1 I management cycle 234- 6
asset-reduction strategies,
I
competitive strategies 207
I
assumptions
vs forecasts R107- 8
st rategy-to-performa nee gap
R107- 8
Audit committee, board of
directors 339-41
Australia, recruitment
• employment services
industry (64-82
authority, delegating 267- 71
Balanced Scorecard
business process perspective
(75- 6
case C64- 82
cause-and-effect relationships
224-5
challenges C79- 80
customer perspective C75
financial perspective C74
implementation process
C76-9
iniliatives 223
learning and growth
perspective C76
Manpower Australia C64· 82
measures 223
objectives 35- 9, 223
perspectives 222- 3
problems C79- 80
strategic alignment 16-18
strategy map C64-82, 223-7
targets 223
banks/banking
Capitec Bank, business model
9- 11
First National Bank (FNBJ 228,
253- 5, 299- 300
leadersh ip R114- 23
merger 299- 300
Nedbank business model 9- 11
Nedbank turnaround Rl 14- 23
organizational culture
Rl 14- 23
Barrell, Colleen, Southwest
Airlines Cl 14
BEE see Black Economic
Empowerment
benchmarking
costs 131- J
ethical conduct 132- 3
value chains 131- 3
besl-cost provider strategies
165- 7
risks 167
Toyota 166-7
Black Economic Empowerment
(BEE)
driving force for industry
change 90- 1
SABMiller 90- 1
board committees, corporate
governance 331-4
board of directors
Audit commiuee 339-41
corporate governance 48- 50,
331-41
foilures 339
leadership 334- 8
responsibilities 334-B
Boardman, Tom, Nedbank
IUrnaround Rll 4- 23
brand values, organizational
cu lture 299
brewing industry
cases C6-18, C23- 37
Corona beer C6- 1 B
SABMiller C28-37
Tanzania Breweries C2B- 37
business models
Capitec Bank 9- 11
Nedbank 9-11
strategy relationship 7- 11
buyer bargaining power,
competitive pressures
78- 81
buyer demographics, driving
force for industry change 85
capabilities development, vision
R23-4
capital investment programme,
Transnet C58
Capitec Bank, business model
9- 11
career and talenl management,
performance managemenl
239-40
cascading process, people
management 231
case study, clusters R32- 6
cases
airlines C83- 119
Balanced Scorecard C64- 82
brewing industry C5- 18,
(28-37
Coca-Cola Sabco C38-44
Corona beer C6- 18
corporate scandals Cl 44- 7
freight transport C45- 63
Harley-Davidson Cl 20-43
Kebble, Brett (144- 7
Manpower Australia C64- B2
mining industry Cl 44- 7
motorcycle industry Cl 20-43
MTN Nigeria C19- 27
operating practices C83- 119
3"3
344 lndelf
organizational culture
C83- 119
Ramos, Maria C45- 63
recruitment employment
services industry C64- 82
Robin Hood C3- 5
SABMiller C28- 37
Southwest Airlines C83- l 19
Tanzania Breweries C28- 37
telecommunications Cl 9- 27
Transnet C45- 63
values C83- l 19
centralized/decentralized
decision making 267- 71
chairman, corporate governance
338- 9
change drivers, external
environment see driving
forces, industry change
change leadership 295- 6
cluster management DNA,
innovation R43
clusters R29- 38
case study R32-6
collaboration R33-4
communication R32 -3
competitive advantage R30- 1
productivity gains RB-4
recognizing R31 - 2
risks outside clusters R34- 5
sales growth R35
suppliers R33-4
vehicle clusters R32- 3
Coca-Cola Sabco 08-44
background C40- 1
caseC38-44
difficulties C41 - 2
Ethiopia C38-44
key success factors (KSFs)
C42- 3
overview C40
results achieved C44
collaboration
strategic allies 273-4
suppliers R33-4, 273-4
work effort 273-4
communication
clusters R32 - 3
strategic vision 29- 30
strategy-to·performance gap
R109
suppliers R32 -3
teamwork 3 1l
Companies Act, corporate
governance 319- 22
compensation
people management Cl 07
Southwest Airlines Cl 07
competencies
assessing 114- 16
competitive advantage 262- 3
core competencies 114- 16,
257- 63
distinctive competencies
114- 16
competition, motorcycle
industry Cl 31 - 3
competitive advantage
clusters R30- 1
competencies 262- 3
competitive capabilities
262- 3
differentiation strategies
161 - 2
production system 260- 1
quest for 6- 7
strategic approaches 6- 7
strategy statements R8
sustainable 6- 7
Toyota Production System
(TPS) 260- 1
value chains 135 - 7
competitive capabilities 107-43
building 257- 63
competitive advantage 262-J
costs l 24-37
identifying 113- 14
prices 124- 37
vs rivals' competitive
capabi Ii ties 13 7-41
strength ratings 140- 1
SWOT analysis 1l 2- 24
competitive deficiencies,
identifying 1l 8- 20
competitive environment 58-IH
see also external environme nl
competitive forces 61 - 81
competitive jockeying 63- 7
entry threats 67-71
new entrants 67- 72
rivals' strategic moves 98- 100
competitive forces
industry environment 61 - 83
profitability 81 - 3
competitive position, analysing
Tl - 12
competitive pressures
buyer bargaining power
78- 81
entry threats 67- 72
seller-buyer collaboration
78- 81
substitute products 72-4
supplier bargaining power
74-8
supplier·seller collaboration
74- 8
competitive strategies 147- 75
asset-reduction strategies 207
best-cost provider strategies
165- 7
content follower strategy
205- 6
contrasting features 172- 3
crisis-ridden businesses
206- 11
declining industries 188- 90
differentiation strategies
159- 65, 168- 7 1
Distel! 200- T
distinctive-image st rategy 205
electric car (Joule) 179- 80
emerging industries 177-81
five generic T47- 75
focused (or market niche)
strategies 168- 71
fragmented industries 194- 7
Harley-Davidson Cl 34- 5
harvest strategies 210- 1 T
industry leaders 199- 202
Joule (electric car) 179- 80
leaders, industry 199-20.?
liquidation 211
low-cost provider strategies
150- 9, 168- 71
low-cost ri vals, strategic
responses R48- 60
market share 203-4
maturing industries 184-7
offensive strategies 203-4
rapid company growth,
sustaining 197- 9
rapidly changing markets
190-4
rapidly growing market~
182-4
risks 199
runner-up companies 202-6
specialist strategy 205
superior product strategy 205
ten commandments 212- 13
Transnet 208- 9
turbulent, high velocity
markets 190-4
turnaround strategies 206-10
vacant-niche strategy 204- 5
weak businesses 206--11
competitor dynamics,
recruitment employment
services industry C66- 7
competitors' next moves,
predicting 99- 100
competitors' strengths/
wea knesses 98-9
complacency, leade rship R90-2,
R99- 101
content follower strategy,
competitive strategies
205- 6
control
corporate governance 323-4
separation of ownership and
control 323-4
core competencies 114- 16
building 257- 63
Corona beer C6- 18
2 Tst-century challenges Cl 2
beer markets C9 12
brew ing industry C6 18
case C6-18
e xporting C8- 9
futu re challenges Cl 7
global player C1 6- 17
Grupo Modelo C6- 18
market leader Cl 2- 14
world markets Cl 0- 12
corporate governa nee 31 5-4 2
board committees 331-4
board of directors 48- 50,
331-41
chairman 338-9
Companies Act 319- 22
control 323-4
defining governance 325-6
directors 33 T-4 l
Enron 316
ethics 329- 31
Fidentia J 17- 18
governance tests 326
Kebble, Brett C144-7, 316- l i
King 111 Report 319- 22,
32 7-41
Macmed Hea lth Ca re Ltd
318- 19
manageria l process 48-50
mining industry Cl 44- 7,
31 6-17
non-executive d irectors
338-9
ownership 323-4
public companies 322-4
risk gove rnance 341 - 2
separation of ownership and
control 323-4
sustainabi lity 329- 31
Tra nsnet C60
corporate intrapreneurs, crafting
a strategy 41 - 2
corporate SLandals, Kebble, Brett
C144- 7
corrective ad justments,
managerial process 47-8
cost changes, driving force for
industry change 87
cost--effkient ma nageme nt, va lue
chains 151- 6
costs
activity-based costing 130
benchmarking 13 1- 3
competiti ve capabilities
124- 37
c: ost d isadvantages 133-5
cost structure 127
low-cost provider strategies
150- 9
low-cost riva ls, stra tegic
responses R48-60
strategic options 133- 5
crafting a strategy
corporate intrapreneurs 41 - 2
mt1 nagerial process 39-46
participants 39-41
strategic plan 45- 6
strategy-making hiera rc hy
42-4
uniting the strategy-making
effort 44- 5
cri~ es
leadershi p R90-2, R99- 101
Southwest Airlines Cl 14- 17
c risis-rl dden businesses,
competitive strategies
206- 11
cross-unit coordination, work
effort 271- 3
Index 345
c ulture, organizationa l see
organ izational cuhurc
customer foc us, Southwest
Airlines C97- 100
decentra Iized/centra Ii zed
decision making 267- 71
decision making
centra lized/decentralized
267- 71
people management 267- 71
declining industries
competitive strategies 188- 90
e nd-ga me strategies 189-90
delegating, people management
267- 71
De ll, leadership R92- 3
differentiation strategies 159- 65
competit ive advantage 16 1- 2
focused (or market niche)
strategies 168- 71
perceived va lue 162
pitfalls 163- 5
product differentiation 88
signalling value 162
themes 159- 60
va lue cha ins 160-1
directors, corporate gove rnance
33 1-41
Diste ll, competitive strategies
200-1
distinctive competencies 114 16
distinctive- image strategy,
compe titive strategies 205
DNA of innovation R.39-47
driving forces, industry cha nge
83- 94
Black Economic
Empowerme nt lBEE) 90- 1
buyer demographics 85
cost changes 87
efficiency c hanges 87
entry/exit, major companiC)
87
globall zatfon 84·5
growth rate , industry's
long-term 85
impacts 93-4
Internet capabilities 84
manufacturi ng process
innovat ion 86
marketing innovation 86- 7
product diffe rentiation 88
346 Index
product innovation 86
product standardization 88
regulatory influences 88- 9
risk reduction 88
social issues 89
talent management 91 - 2
technical know·how diffusion
87
technological change 86
Edward Jones
activity-system map R9- 11
strategy statements R9- 11
efficiency changes, driving force
for industry change 87
electric car (Joule), competitive
strategies 179-80
emerging industries
competilive strategies 177- 81
Joule (electric car) 179-80
strategy options 180- 1
unique characteristics 178- 80
employee constituency,
innovation R45- 6
employee productivity,
Southwest Airlines Cl 11
employee relations
see a/so people management
Southwest Airlines C107- 8
empowerment, innovation R46
end-game strategies, declining
industries 189- 90
energizing lhe organization,
vision R26
engaging the organization,
vision R22 - 3
Enron, corporate governance
316
enlerprise performance
management 217-42
Balanced Scorecard 221 - 7
clements 21 9
fr;i rnework 2 18- 19
levels 219
measurement 218- 19
people rnanagernenl 227- 31
performance management
232-40
vision and strategy 219- 20
entrepreneurial mindset
First National Bank (FNB)
299 -300
leadership 299- 300
entry/exit, major companies,
driving rorce for industry
change 87
entry threats, competitive
pressures 67-72
ethical conduct, benchmarking
132- 3
ethics, corporate governance
329- 31
Ethiopia C38- 9
Coca-Cola Sabco C38-44
economics C39
politics C38-9
prospects C39
evaluating performance,
managerial process 47- 8
executing the strategy
framework 248 -50
managerial components
248- 50
managerial process 46- 7
movement and energy
2 74- 80
organizational culture
274- 80
outsourcing 263 - &
slralegy-critical activities
266- 7
value chains 263- 6
work effort, execution-related
aspects 263 - 74
execution capabilities
rewarding and developing
Rl 12- 13
strategy-to-performance gap
R112- 13
exhaustion, leadership R90- 2,
R99- 101
external environment 56-106
see also competitive
environment
competitive cnvironmenl
58 -83
components 57- 8
driving forces, industry
change 83- 94
industry economic fealures
59- 61
industry environmenl
53-83
industry outlook 103-4
key success factors (KSFs l
100- 3
market positions 94- 8
rivals' strategic moves 98- 100
external threilts, identifying
121 - 2
failure reasons, vision R17- 18
Fidentia, corporate governance
317 - 18
financial objectives 35
financial ratios 110- 12
First National Bank (FNB )
entrepreneurial mindset
299- 300
leadership 299- 300
management learn 253- 5
people management 228
fit/fitness, orgilnizalional
see strategic alignment/
fitness
FNB see First National Bank
focused (or market niche)
strategies 168- 71
1st for Women Insurance
Brokers 170
differentiiltion slralegies
168- 71
Formula 1 Hotels 169
low-cost provider stralegies
163-71
forecasts, vs assumptions
R107- 8
forming stage, leamwork 306 7
Formula 1 Hotels, focused (or
market niche) strategies
169
fragmentation, Transnel
C47- 50
fragmented industries
competitive strategies 194- 7
strategy options 196- 7
freight transport, case C45- 63
General Electric (GE)
Immel!, Jeffrey R94- 5
leadership R94- 5
Ghosn, Carlos
leadership R96
Nissan R96
global positioning systems
(GPS), competitive
strategies 183-4
globalization, driving force for
industry change 84- 5
CPS (glob<1l positioning systems),
competitive strategies 183-4
growth rate, industry's long-term,
driving force for industry
change 85
Grupo Modelo, Corona beer
C6- 18
Harley-Davidson Cl 20-43
appeal Cl 36-7
case C120-43
challenges C141 - 2
company history Cl 22- 6
competitive strategies Cl 34- 5
distribution Cl39-41
financials Cl 23-4
image Cl 36- 7
loyalty Cl 35
motorcycle industry overview
C126- 8
product line C137- 9
sales Cl 39-41
segmentation, motorcycle
industry Cl 28- 31
harvest strategies, compelitive
strategies 210- 11
hierarchy, strategy-making 42-4
human capital, Transnet C60-2
Immel!, Jeffrey
General Electric (GE) R94- 5
leadership R94- 5
implementing lhe strategy,
managerial process 46-7
inconsistency, leadership R90-2,
R99- 101
independence, people
management 267- 71
industry change, driving forces
see driving forces, industry
change
induslry environment 58- 83
competitive forces 61 - 83
industry economic reatures
59 61
industry outlook 103-4
industry leaders, competitive
strategies 199- 202
initiatives, leadership R95- 6
innovation R39-47
alignment DNA R44- 5
cluster management DNA R43
DNA R39-47
effects R39-40
employee constituency R45 - 6
empowerment R46
knowledge management DNA
R41 - 3
value m<inagemcnt DNA
R43-4
Internet capabilities, driv ing
force for industry change 84
interpersonal level, leadership
289
Joule (electric car), competitive
strategies 179- 80
Kebble, Brett
case C144- 7
corporate governance C144- 7,
316- 17
corporate scandals Cl 44- 7
mining industry C144- 7,
316-17
Kelleher, Herb, Southwest
Airlines (88- 114
key success factors (KSFs)
Coca-Cola Sabco C42- 3
external environment 100-3
low-cost provider strategies
157- 8
MTN Nigeria C23- 7
SABMiller CJJ- 5
King 111 Report, corporilte
governance 319- 22,
327-41
knowledge management DNA
R41- 3
KSFs see key success factors
lay-off pol icy
people management Cl 08
Southwest Airlines C108
LCCs see low-cost carriers
leaders, industry, competitive
strategies 199- 202
leadership R88- 102, 285- 314
Africa/South Africa 286- 7
approaches R88- 90
behaviours 292- 3
board of direclors 334-8
challenges 286-7
change leadership 295- 6
complacency R90-2, R99-101
components 288- 90
Index 347
crises R90-2, R99-101
defining 285- 8
Dell R92- 3
effective 292- 3
entrepreneurial mindset
299-3 00
exhaustion R90-2, R99-101
First National Bank (FNB)
299- 300
General Electric (GE) R94- 5
Ghosn, Carlos R96
Immel!, Jeffrey R94- 5
inconsistency R90-2 , R99- 101
interpersonal level 289
management team R97- 8
managerial level 289- 90
merger 299- 300
Nissan R96
organizational capabililies
R98-9
organizational culture
297- 305
organizational level 290
personal level 289
purposeful initiatives R95- 6
Situational Leadership Model
290- 1
skills 292- 3
Southwest Airlines Cl 12- 14
starting points R90-2
strategic R88- 102
styles 292
task-orienled behaviours
293-4
trust 296- 7
'why' factor R92- 5
learning and development,
performance management
239
legal hurdles
motorcycle i ndustry Cl 33-4
Southwest Airlines C87- 8
line-of-sight, strategic alignment
16-18
liquidation, competitive
strategies 211
long-term objectives 37
low-cost carriers (LCCs) 150-1
Southwest Airlines (83- 119
low-cost provider strategies
150-9
focused (or market niche)
strategies 168-71
 350 fndttx
slralegic alignment/fitness
R61 - 87
strategy stalemen ts R3- 15
visions, enabling bold
R16- 28
recruiting and retaining, slaffing
lhe organization 255- 6
recruilment and selection
people management Cl 04,
229
Southwes1 Airlines C104
recruilment employmenl
services industry
Australia C64- 82
case C64- 82
compelilor dynamics C66- 7
Manpower Australia
C64 - 82
marker grow1h forecasts C67
market size C65- 6
redirecting lhe business,
Transnet C57- a
regulalion, molorcyde induslry
CT33-4
regulatory influences, driving
force for industry change
BB 9
remuneralion and rewards,
performance management
240
resource deployments,
strategy-to-performance
gap R109- 10
resource strengths
competitive power 116- T8,
l T9 20
SWOT analysis 113- 18
resource weaknesses,
identifying 118-20
resources, company, analysing
11 12, 107-43
return on inveslment (ROI),
people managemenl 241 2
risk governance, corporate
governance 34 T- 2
risk managemenl, Transnet C60
risk reduction, driving force for
industry change ll8
Situational
risks
best-cost provider slra!egies
slogans, srralegic vision 29 -JO
167
social issues, driving force for
competi11ve strategies 199
rivals' struregic moves
Southwest Airlines C83- Tl9
competitive environment
98- 100
strategic group mapping
98- 100
strategic responses R48- 60
Robin Hood, case C3-5
ROJ see relurn on inveslment
role models, organizational
cuhure 275 - 6
role profiles, performance
management 232-4
runner-up companies,
competitive strategies
202- 6
SABMiller C28- 37
Black Economic
Empowerment (BEf)
90-l
brewing industry C28- 37
case C2B- 37
difficulties in Tanzania C32- 3
key success factors (KSFs)
03- 5
overview C29- 30
rapid growth C29- 30
strategic approach C30
Tanzania Breweries C28- 37
sales growth, clus1ers R35
screening candidates, Southwest
Airlines Ctos
segmentation, motorcycle
industry Cl28 31
seller-buyer collaboration,
compelitive pressures
78-81
separation of ownership
and control, corporate
governance 323-4
seven keys lo business,
Nedbank RI 19
SFP see Slralegic Filness Process
shorl-lerm objectives 37
signalling value, differentiation
stralegies 162
single-business company,
present strategy 108- 12
leadership Model
290-1
indus1ry change 89
Barrell, Colleen Cl 14
case C83- 119
company background CB4- 5
compensation CI07
core values Cl l O
crises CT 14- 17
culture committee Cl I 0-1 l
customer focus C97- TOO
employee produc1ivity Cl TT
employee relations CT07- 8
financials C90- l
Kelleher, Herb C88- l 14
fay-off policy CT 08
leadership CT 12--T4
legal hurdles CB7- 8
low operating cosls C94- 100
managemenl styles CI09- IO
marker foothold CB5- 7
markeling and promotion
Cl00-2
mileslones C89- 90
operating practices C83 - l l 9
organizational cuhure
C83- Tl9
Parker, James Ct 12- 14
people management Cl 03- 8
performance management
Cl 12, Cl 13
recruitment and selection
CI04
regulatory hurdles C87- 8
rivals Cl 17
screening candidates CI05
strategy elements C93-4,
C102- 3
lraining C105- 6
values C83 - l T9
specialist strategy, competilive
slrategies 205
slaffing lhe organization 252- 6
see a/so people manilgemenl
managemenl learn 252- 5
recruiting and retaining
255- 6
recruitment and selection 229
training 262
sfillements, strategy see strategy
s1a1ements
Slorming stage, teamwork 307
strategic illignment/filness
R61 - 87
aligning department syslems
277- BO
approaches R64- 6
Balanced Scorecard 16-l 8
barriers 13- 15, R66-9
continual process R66
disciplined process R6 l - 87
inlegrated analylical
framework R71 - 7
limilalions R82- 3
line-of-sighl l 6-18
managing 15- 19
organizalional change
processes R79-82
principles l 3
SFP R61- 87
silent killers R69- 71
steps 15- 16
vision R24- 5
strategic allies, collabor<1tion
273-4
strategic balance sheet
management, Transoet
C59- 60
Strategic Fitness Process (SFP)
R61 - 87
strategic group mapping
market pos itions 94- 8
rivals' strategic moves 98- 100
strategic inlent, objectives 38
slralegic issues, immediate
managerial attention 141 2
strategic objectives 35
strategic plan, crafting a strategy
45- 6
strategic responses, low-cost
rivals R48- 60
sl ralegic sweel spot, strategy
statements R12 14
strategic vision
see also vision
communication 29- 30
developing 24- 7
examples 27
managerial process 22- 34
mission statemenls 27 9, 31-4
objectives 34- 9
I
slogans 29-30
v.1l ues 31-4
strate gies, compelitive see
competitive stralegics
I strategy
defining 5
enterprise performance
management 219-20
Index 351
slrategy·crit ical activilies,
success reasons, Transnet C62
execut ing lhe strategy
superior product slralegy,
266-7
competitive strategies 205
strategy design, Transnel C52-4
supplier bargaining power,
strategy execution see executing
compelitive pressures 74-8
the strategy
supplier-seller collaboration,
strategy foligue, Transnet C47
competitive pressures 74- 8
strategy-making hierarchy,
suppliers
crafting a s1rategy 42-4
dusters R33-4
strategy map
collaboration R33-4, 273-4
Balanced Scorecard C64- 82,
communication R32 - 3
223- 7
sustainability, corporate
Manpower Austra lia C64- 82 governance 32 9- 31
slralegy options
suslainable competitive
emerging industries T80- T
advantage, strategic
fragmented industries 196 7
approaches 6-7
strategy process, this book's
SWOT analysis 11- 12, l 12-24
19- 20
competitors' strenglhs/
slralegy slalements R3- T5
weaknesses 98- 9
competitive advilnlage RB
conclusions 123-4
developing R12- l 4
external threats 121- 2
Edward lones R9- 11
marker opportunilies T20- 1
elements R4- 5
resource strengths 1 T3- TB
hierarchy R5- 7
resource weaknesses l 18-20
LPL Financial RT 2
weak busi nesses, competilive
Merrill Lynch Rl 1
strategies 206- 11
misinterpretation R14- l 5
mission slatements 27- 9, 3 1-4
lalenl and career managemenl,
objectives RS
performance management
scope R7- 8
239 -40
strategic sweet spot R12- 14 lalenl managemenl, driving fo rce
Wal. Marl RB- 9
for industry change 91 - 2
Wells Fargo Rll - 12 Tanzania
strategy·lo-performance gap economics C29
R104- 13
overview C2B
see also performance
politics C28-9
assumplions RI 07- 8 prospecls C29
darily Rl 07
Tanzania Breweries
closing R106- 13
brewing industry C28- 37
communication R109
case C28- 37
execulion c<ipabilities
mission slalements C35
Rl 12- 13
SABMiller C28- 37
framework R109
values C35- 7
moniloring performance R11 l
vision C35
organizational culture Rl06
!ask-oriented behaviours,
priorities RT 10 leadership 293-4
resource deployments
leamwork 305- 14
Rl09- TO
see a/so ma nagement learns
styles
assessing 313- 14
eildership 292
building effective learns
management C109- IO, 274 - 5 309- 14
substitute products, competili~ e
climale 311 - 12
pressures 72-4 communication 311
3:52 lnda.t
crealivily 312- 13
effective 305
forming 306- 7
managcmenl teams R97- 8,
252 -5
norming 308
performing 308-<J
purpose 3 10- 11
qualilies of learns 305
stages 305- 9
slorming 307
lechnical know-how diffusion,
driving force for industry
change 87
technological change, driving
force for induslry change 86
telecomm un icat ions
case Cl 9- 27
MTN Nigeria Cl 9- 27
ten commandments,
competitive stralegies
212- 13
Toyola
besl -cost provider slralegies
166- 7
competilive advantage 260
Toyota Production Syslcm
(TPS) 260- 1
!racking
Nedbank R120- 1
performance R104- 5
Iraining
people management Cl 05 6
Southwesl Airlines Cl 05- 6
slaffing the organization 262
transformation, Nedbank
R117 111
transforming slrategy, Transnct
C56- 63
Transnct C45 63
capilal investmenl
programme C58
case C45 -63
compctilive slr<1lcgies 201l- 9
corporale govern<1ncc C60
di<1gnosing problems C46-7
fragmentation (47- 50
freighl transport C45 - 63
human capilal C60 -2
ownership lack C47
Ramos, Maria C45 63
re·enginccring the business
C57- 8
redirecling lhe business
C57- 8
resistance, addressing C52-4
risk managemenl C60
solulion developmenl C50- 2
strategic balance sheel
management C59- 60
s1ra1egy design C52-4
strillegy fatigue C47
success reasons C62
transforming strategy C56-63
trends, organizational culture
280- 1
lrust, leildership 2%- 7
turbulent, high velocily markets,
competitive strntegies
190-4
turnaround strategies,
competitive slralegies
206- 10
uniting the stralegy-making
effort 44- 5
v;:icant-niche slrategy,
compelilive strategies
204 5
value chains 12, 125 6
benchmarking 131 - 3
company 125- !l
competilive advant;ige 135 7
cost-efficient management
151 - 6
differentiation slralegies 160
differing 127- 8
executing the slralcgy 263 - 6
industry 128 9
low cosl provider str;itegics
151 6
maluring induslrics 1116
outsourcing 263- 6
performing valuc-ch;iin
aclivities 135 7
revamping 154- 6
unneccss;:iry aclivities 154- 6
work efforl 2 63 -6
value management ONA.
innovation R43-4
value proposilion, Wal ·M<1rl
Rll- 9
v<1lues
case C83 119
core v<1lues Cl 1O
mission sl<1temen1s 31-4
o rganizational culture
2<J9- 300
Southwest Airlines C83- T19
strategic vision 31-4
Tanzania Breweries C35- 7
workplace values 299- 300
Yahoo 33
vision
see afso slrategic vision
capabilities development
R23-4
defining 5- 6
enabling bold visions Rl 6-28
energizing the organization
R26
engaging the organization
R22- 3
enlerprise performance
management 219 -20
failure reasons Rl 7- lll
five·phase model R1 9- 2 7
framing the agenda R19- 22
Nedbank R11 5
revision R2 7
slralegic alignment R24 5
Tanzania Breweries C35
Wal-Mil rt
strategy stalements Rll-9
value proposilion RB- 9
weak businesses
see also SWOT analysis
competilive strategies 206- T1
Wells Fargo, strategy statements
Rl 1- 12
'why' factor, leadership R92 - S
work effort
aulhorily 267- 71
collaboration 273-4
cross-unit coord ination 271 3
delegating 2b7- 71
cxecul ion-related aspcc ls
263- 74
slrategy· critical activ ilies
26fJ 7
value chains 263 6
workplace values,
organizational cuhurc
299- 300
Yahoo
mission 3J
values 33
t reputable US text, the 2nd South African Edition of Crafting & Executing Strategy
&Very senior-level or entry-level MBA student in South Africa needs to know about crafting,
:f aligning business strategies, through presentation of core concepts and analytical
>eparate case and readings sections build on the main text by demonstrating theory in
tten for students in South Afric&i the core concepts are explained in clear and accessible
:h relevant examples from small, medium and large South African companies.

lures Include:
: chapters have been updated and improved with the latest information from industry.

corporation of a 'Strategy Process' model for sustainable high performance has been
ated into each chapter and assists students in understanding the bigger picture.

.
·ction of Readings reinforce students' understanding of theories of strategy.
CREATING SUSTAINABLE
at1on Capsules' boxes throughout the text apply the chapter topics to real-life
~ic decisions. HIGH PERFORMANCE
er 10 1s devoted to Corporate Governance & Ethics. The chapter contains significant
ige of the King 3 Report.
IN SOUTH AFRICA:
!Xt contains excellent coverage of the perspectives of the Balanced Scorecard and TEXT, READINGS
:al examples to cascade the strategic objectives throughout organisations in
Africa.
AND CASES
·ction of ten Cases 1s provided, of which five are based on South African companies.

1prehens1ve package of support material is available, including case notes to accompany

cases.

::tors have the option of packaging access to two excellent Simulation Games with
ing & Executing Strategy. The Business Strategy Game and GLO·BUS are
etition-based strategy simulations that are delivered online and feature automated
ssing of decisions and grading of performance.

h is Professor of Strategy at Stellenbosch University and the Managing Partner of the

orecard Institute of South Africa and Balanced Scorecard Africa.

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