Corporate Governance Failure: Marconi

An Exploratory Study of Failure in Successful Organisations: The Case Study of Marconi 1. Introduction and Objectives There has arguably never been a worse case of corporate governance failure than Marconi. In October 2005, Marconi accepted a A£1.2bn offer from Sweden’s Ericsson, signalling the end of one of the UK’s finest manufacturing companies. Over the past six years it has been shorn of its telecoms equipment business and reduced to an obscure rump company, called telent, which is not even permitted the dignity of a capital letter to its name. (Riley, 2005) Marconi was once, briefly, the most valuable company listed on the London Stock Exchange, under the name General Electric Company, but over the course of 20 years it has gone through various stages of decline. Under an autocratic chief executive, Arnold Weinstock, it attained its greatest power in the late 1970s and early 1980s by exploiting cost-plus, inflation-proofed contracts in telecoms, power engineering and defence: all at that time in the public sector. Orders in those conditions were carved up politically. However, the GEC drifted into becoming a fading conglomerate as the British economy was privatised and tt was unable, in contrast to its US near-namesake General Electric, to reinvent itself to suit different circumstances. After Arnold Weinstock retired in 1996, it was seized by eager wheelers and dealers, including the controversial corporate financier John Mayo, and transformed into a dangerously overleveraged telecoms – particularly internet equipment – specialist (Riley, 2005) British institutional investors stood by and watched this happen and even encouraged it as marking an improvement on the semi-stagnation of the end of the Weinstock period. There followed, after the technology bubble burst, as close a brush with bankruptcy as could be, with shareholders in 2003 losing 99% of their equity in the restructured company (Birkinshaw, 2004). Even a multi billion dollar debt for equity refinancing could not save the business, and in April 2005 Marconi failed to win even a small slice of BT’s A£10bn network upgrade programme. Various European and Chinese suppliers easily underbid Marconi, including Alcatel, Siemens and Ericsson itself, leading to claims that France, Germany and Sweden know something about supporting national champions that the UK does not (Riley, 2005). Maybe the stricken Marconi was no longer up to the job when the BT opportunity appeared, but it also appeared that the new management, led by chief executive Mike Parton, had been given inappropriate incentive packages and was unwilling to suffer the pain of the low BT tender price required. Or perhaps the Marconi bosses believed their long-time clients at BT would help them out for old time’s sake. (Riley, 2005) The group’s long-term investors had effectively been wiped out and the shareholder list was dominated by short-term investors, including former bondholders swapped into equity, supplemented by speculative buyers of what was seen as a high-risk recovery stock. Following the initial crash and debt for equity deal, something of a false dawn ensued and, as the company recovered partially after its May 2003 relisting there was a bonanza for managers: 50 of them gained A£28m in bonuses, including A£10m for Parton. However, these windfalls were earned mostly for repaying debt and only partly for achieving what eventually turned out to be a temporary rise in the share price. With hindsight it appears that little attention was being paid to the preservation of Marconi as a substantial independent force in the telecoms manufacturing industry, which is often what happens when a business is being run for the benefit of its creditors (Burkinshaw, 2004). It has been claimed that, in reality, stock market investors failed to relate to any of the successive management regimes that took the group down the slippery slope from GEC through Marconi to telent: the domineering conglomerate boss, the reckless cowboys of the bubble brigade, or the double-or-quit rescue squad loaded with stock options (Riley, 2005). The decline of Marconi can be seen as a stark example of what happens when a country like the UK sucks a disproportionate amount of its talent into the financial engineering sector: the other forms of engineering: mechanical and electrical, suffer. However, surveying the wreckage following the burst of the dotcom bubble of 2001, it is easy to overlook the persistence and rapid growth of e-business throughout the global economy. While many high-flying technology firms, including Beyond.com, Boo.com, and Webvan vanished, and companies relying on their business, such as Marconi, suffered heavily, use of the Internet as an essential business tool continued to grow drastically. Indeed, whilst “pure-play” online grocers Homegrocer and Webvan received enormous media attention and heavy investment from venture capitalists, today, both are out of business, while the traditional supermarket chain Tesco has emerged as the most successful grocer online. As a result, this work intends to conduct a theoretical study into the factors that make organisations successful, the reasons why previously successful organisations go from being successful to failing, and the lessons which can be learnt from these organisations. It will then analyse the origins, rise to success and ultimate failure of Marconi, in the context of the theory, and looking for areas where Marconi’s failure was in line with theory, in for areas where it was unique. 2. The Success and Failure of Organisations – Theoretical Background 2.1 What Makes for Successful Organisations? Managers crafting a successful business strategy today face a far more difficult task than their forebears. Historically, crafting a strategy centered around three elements: the “fit” between the company and its industry (Porter, 1980); allocation of limited resources among investment opportunities (Barney, 1992); and a sustainable long-term perspective. These elements created a frame of reference for many managers that, more than anything else, bound them to approaching strategy as if they were going to war. Unfortunately, they often use the most recent “war” as their guide to framing tomorrow’s problems and solutions and, led into this type of war game, managers began to believe that sheer weight and mass could overcome speed and agility. However, resources: the firm’s ‘weight and mass’, alone no longer can guarantee industry leadership. During the 1980s the U.S. auto industry spent close to $100 billion on automation, acquisitions, and restructuring their operations. However, none of the “Big Three” was able to satisfy customer demands for a high-quality, low-cost car that could match Japanese standards until the early 1990s. Regardless of how much GM, Ford, and Chrysler “strategically” planned their future investments, their earlier organizational structures were not geared toward speed and learning. Some of the strategic practices that hindered large U.S. companies from pursuing new opportunities quickly are those that have also lead to several companies failing to achieve success. Vertical Integration For most of this century, views of corporate strategy were shaped by industrialists such as Andrew Carnegie, Jay Gould, Cornelius Vanderbilt, and Henry Ford, all of whom believed that vertical integration could guarantee sources of supply and secure leverage on vendors (Peyrefitte and Golden, 2004). Vertical integration can help firms build and protect their competitive advantage when technology is predictable and markets are stable. The Big Three auto makers at one point vertically integrated into coal and iron ore mines, steel plants, glass and rubber factories, and credit financing operations to secure stable sources of raw materials and easy access to customers. However, vertical integration also can inhibit a firm’s ability to learn, since it insulates the organization from market changes that may redefine its firm’s core competence. Thus, vertical integration limits a firm’s learning potential when technologies and markets are fast-changing (Penrose, 1995). In the computer industry, the most successful firms tend to be loosely integrated, since they need to incorporate the newest chips and components from whoever produces them. In contrast, IBM trails its competitors, such as Compaq, Apple, and Dell, partly because its internal operations are geared to a high level of vertical integration, rather than fast-response to customer needs (Hitt, 1999) Unlearning the competitive advantage of vertical integration has been a painful and humbling experience for many of this century’s most successful firms. Diversification In the 1950s and 1960s, diversification became the strategic weapon of choice. It was popular to break organizations down into decentralized profit centers and treat them as independent SBUs. The rise of conglomerates, such as ITT, Litton, and Textron, mandated that managers adopt new strategic perspectives to manage their far-flung and often unrelated businesses. In response to this management need, the Boston Consulting Group advised top managers to locate each unit’s position based on its market growth rate and relative market share. This resulted in business units being labeled “cash cows,” “stars,” “question marks,” and “dogs.” (Hambrick and MacMillan, 1982) Dogs were clear candidates for divestiture because they required too much cash; however unfortunately, managers often found that promising new question mark areas were laden with other dangers, as Westinghouse learned. Seeing a decline in the 1980s in the domestic demand for power generating equipment, Westinghouse diversified into office furniture, cable television, broadcasting, and financial services: all of which came under tremendous pressure to change in the 1990s. Simultaneously, Westinghouse sold off its power distribution equipment business to Asea Brown Boveri, thereby losing the opportunity to convert a domestic “dog” into a global “star” by serving developing countries’ huge, pent-up demand for electricity (Klebnikov, 1991). Generic Strategies for Success Low Cost, Differentiation, and Focus Michael Porter developed a generic strategy model that could be used in a variety of industries (Porter, 1980) This model required companies to find markets they could defend from competitors either by becoming the low-cost producer, differentiating products in ways that could command higher prices and, therefore, higher profits, or erecting entry barriers for new competitors. A low-cost strategy requires a firm to excel at cost reduction and efficiency, which calls for reducing administrative expenses, maximizing economies of scale, securing inexpensive suppliers, and minimizing sales, advertising, and service costs. A differentiation strategy emphasizes offering a unique product or service, which allows a firm to charge a premium. It often relies on extensive advertising or an emphasis on quality that stresses unique attributes that appeal to customers’ distinctive preferences or loyalty. Firms employing a differentiation strategy can earn higher profits without necessarily investing in highly capital intensive, hard-to-change manufacturing processes. A focus strategy requires a firm to identify a defined niche in which it will either offer a unique product or low cost. For example, Acura Legend LS, Lexus LS500, Mercedes-Benz, and BMW 735i are targeted to a niche market of American car buyers (Greuner et al, 2000). SWOT Analysis SWOT analysis became the buzzword of the 1980s when Jack Welch used it to assess where GE stood in each of its various businesses (Thompson, 2004). The acronym SWOT refers to internal strengths and weaknesses and external opportunities and threats. The goal of a SWOT analysis is to help a firm identify its critical strategic factors and then build on vital strengths, correct glaring weaknesses, exploit significant opportunities, and avoid disaster-laden threats. An objective SWOT analysis can help form the initial steps of building a learning-based strategy. Used to question current assumptions and strategic plans, SWOT analysis can help managers break free of traditional modes of thinking and planning. At GE, SWOT analysis was designed to give managers a platform for rethinking how to compete with other firms. Using SWOT analysis, Welch managed to more than triple GE’s productivity growth rate, double the proportion of annual revenues coming from high-growth technology and service sectors, and initiated joint ventures with foreign firms like the Tungsram Company of Hungary (light bulbs) and Ericsson of Sweden (cellular communications) (Thompson, 2004). However, these conventional market- and competitor-driven approaches to strategy lack the speed and sensitivity of the modern marketplace: low cost, differentiation, and focus are descriptive of strategies that provide managers with checklists to identify and “freeze” market niches and segments. In contrast, modern, often learning-based, strategies are designed to “unfreeze” existing markets to create new ones in which rapid product development, high-quality manufacturing and service, and innovation are exploited to their fullest. The following four strategies have all been designed, and used by companies, to provide sustained competitive advantage and long term success in the modern economy. Specific Strategies for Success Sustainable Growth In her management classic The Theory of the Growth of the Firm, Edith Penrose comes to the conclusion that growth is essential for organizations. (Penrose, 1995) However, organizations that grow too rapidly push, as a result of scarce resources, against their administrative and cognitive boundaries and easily lose control. (Hambrick and Crozier, 1985). An empirical study by Cyrus Ramezani at the California Polytechnic State University confirmed this theory: continuous growth first has a positive effect on profitability and company value, but this effect turns unmistakably negative as soon as an optimum growth value has been exceeded, making firms slow and unwieldy (Ramezani et al ,2002). Firms should thus limit their growth to an optimum rate. To what extent growth can be sustained is firm specific. Three influencing factors are particularly important in determining the optimum rate of growth, notably financial, market, and managerial indicators (Penrose, 1995). The sustainable growth rate from the finance literature provides the first and foremost indication of how much growth should be envisioned. The rate of organic market growth in the targeted segments provides a second indication. Continued growth that is significantly above that of the market can only be achieved through acquisitions, diversification, or a mix of both. Studies reveal that both an increasing number of acquisitions (Kusewitt, 1985) and a high degree of diversification are negatively related to performance (Hitt et al, 1998). Inorganic growth should thus be limited to a manageable level. How much growth a firm can manage is a third indicator of both inorganic and total growth. The internal ability to cope with growth depends on factors such as the organizational structure, the reward mechanisms, and the characteristics of the leadership team (Hambrick and Crozier, 1985). Stable Change Insights from strategy research reveal that an organization’s ability to innovate and change is in-dispensable in dynamic environments. However, excessive change leads to the destruction of an organization’s identity. People are only able to act when they have a specific degree of certainty. Organizational controls provide certainty, routines, and habits. If the change exceeds a certain dimension, organizations increasingly lose their ability to act (Nelson and Winter, 1982) Organizations therefore need a certain degree of both stability and change to survive (Leana and Barry, 2002). While certain aspects of organizational identities need to change, others have to be maintained to provide the necessary security to accomplish change, and companies thus need to balance stability and instability in their identities in order to keep the ability to change rapidly, whilst making sure that the change is successful (Gagliardi, 1986). Shared Power Studies from leadership research indicate that, although the optimal leadership style in organizations may be dependent on the situation, in the majority of situations mutual or shared power utilization leads to the greatest success. Only in a few selective crisis situations can an autocratic leadership style be an advantage (Ogbonna and Harris, 2000) Empirical studies have shown that a healthy balance between CEO and board powers is required to ensure effective company performance and for effective checks and balances in corporate governance (Pearce and Robinson, 1987). Healthy Organizational Culture Insights from game theory indicate that egoistic competition between employees has less success in the long-term than trusting cooperation. However, in successful large organizations excessive trustfulness may lead to an increasing number of free riders being dragged along. The system then becomes unattractive for high performers. Game theory therefore advises the middle way of a “defensible” culture of trust. An achiever can count on being rewarded; those who do not achieve can count on being penalized: the tit-for-tat strategy (Axelrod, 1984). Organizational culture thus has to strike an optimal balance between rivalry and cooperation in order to maintain a reasonable degree of focused reactivity to change (Abell, 1996) Keeping the Balance In general, most successful organisations appear to keep an optimum balance, in line with the four specific strategies, and based on the two generic ones. Minor fluctuations around the ideal are, nevertheless, completely normal however, at a certain point, e.g. during continuous overloading, due to market pressures, the system becomes increasingly vulnerable. Successful organizations therefore ensure that they keep the balance in the long term, and don’t overreact in to short term trends. Indeed, some of the most consistently successful organizations of the last twenty years, among them BMW, General Electric, Siemens, and Toyota, pursued an organizational policy which kept the organizations in balance in the long term (Abell, 1996) 2.2 Why Do Successful Organisations Fail? Managers have been quick to blame their failure on external conditions such as declining stock markets or intensifying competition. It is certainly true that the general market decline over the past years contributed to the failure of so many once respected companies. The large number of failures in the airline business and in the telecom industry shows that industry-specific effects such as in-creasing fuel prices or technological changes play an important role in explaining corporate failure. However, as discussed above, industry effects alone cannot explain why some companies within these industries failed, while others continued to be successful. For example, the telecom giants AT&T and Worldcom figure prominently on any list of failed companies, while competitors such as SBC Communications and Swisscom remained highly profitable (Probst and Raisch, 2005) In order to explain such differences, it is necessary to analyse firm specific reasons for failure: factors that firm managers can actively influence. Over the last few years it has scarcely been possible to read a book on management without encountering four key factors of success: a high growth rate; the ability to change continuously; a highly visionary company leadership; and a success oriented company culture. However, the great majority of the failed organizations of the last few years possessed these success factors in abundance, and exactly here lay their problem. It seems that there is a boundary outside of which these success factors have a counterproductive effect, and previously successful companies that fail, often owe their failure to at least three of the following four characteristics: excessive growth; uncontrolled change; autocratic leadership; and an excessive success culture (Maslach, 2001). Excessive Growth A huge proportion of the recent TMT company failures followed a phase of tremendous company growth. For example, the revenues of the energy broker Enron grew at an unbelievable 2000 percent between 1997 and 2001 (Swartz and Watkins, 2003). High growth has been related to a number of constraints and long-term problems in the literature among which are the managerial constraints on firm growth (Penrose, 1995). Fast-growing firms are likely to incur managerial problems and reduced effectiveness in their core operations (Slater, 1980). The problems arise from the lack of suitable management to coordinate the increasing complexity of an organization during its expansion. While a few firms do surmount the problems that high growth engenders, many fail (Gartner, 1997). Second, there are market constraints on firm growth (Penrose, 1995), as companies quickly reach the limits of organic growth. In order to maintain their high growth rates, many failed companies turn increasingly towards acquisitions. For example, at ABB there were 60 takeovers in two years, at WorldCom 75 in three years, at Interpublic Group 200 in four years, and almost 300 in five years at the French energy provider Suez and the conglomerate Tyco swallowed more than 200 companies per year at the height of its hyperactivity (Probst and Raisch, 2005) However, there is a long history of literature that recognizes the risks associated with acquisitions (Sirower, 1997) Empirical studies have shown that the majority of all acquisitions fail and that in general acquiring firms experience negative re-turns (Agrawal et al, 1992) Finally, there are financial constraints on firm growth. The finance literature provides the “Sustainable Growth Rate” (SGR) concept that, based on a firm’s financial position, calculates how much sales growth it can afford (Higgins, 1977). In the finance literature “excessive” growth, defined as growth above the SGR, is regarded as the main reason for insolvencies (Higgins, 1977). In order to finance growth above the SGR, many companies borrow large amounts of outside capital, and studies have shown that such highly leveraged firms are substantially more sensitive to an economic downturn than their competitors (Opler and Titman, 1994). In a recession the company loses earnings that are urgently needed for debt repayment. Even companies that can avert threatening insolvency face a mountain of debt that will tax their development for years. Uncontrolled Change Sooner or later high growth leads to the saturation of the original target markets. To ensure further growth, many of the examined companies diversified aggressively into new markets. The literature shows that an increasingly disparate portfolio of businesses leads to coordination problems and control losses (Rumelt, 1982). Especially the integration of a wide variety of acquired companies caused an in-crease in complexity and unrest in the analyzed companies (Jemison and Sitkin, 1986) The absorption of managerial time and resources in the new business fields led to the erosion of the core business (Ahuja and Katila, 2001). Some companies went even further and sold their core business to focus on the newly acquired fields. These companies suffered from a complete loss of organizational identity (Dutton and Dukerich, 1991). A typical example is the technology group of companies, ABB. After 60 acquisitions in various industries and a true restructuring frenzy, a dissipated, homeless group was all that remained. With the sale of the rail technology and the power station construction, the heart and soul of the organization was sold. The constant direction change and radical reconstruction led to a complete loss of company identity. (Probst and Raisch, 2005) Marconi had a similar experience, with the radical reconstruction from being a defense contractor to a telecom company being regarded as a chief cause of the failure. Prior research has shown that organizational changes lead to an immediate increased risk of organizational failure due to the disruption and destruction of existing practices and routines (Amburgey et al, 1993). A certain organizational identity is required; companies cannot endure without developing a solid core that provides some guidance during changing times (Collins and Porras, 1994). Fundamental changes, such as radical transformation, adoption of a brand new business model, entering a different industry or merging with another firm, always lead to a certain destruction of identity (Bouchikhi and Kimberly, 2003). A loss of identity occurs if a new identity that the organization’s members neither understand nor accept replaces the existing identity, for example, in Enron’s case, in the end “no one could any longer explain what the basis of our business was,” according to a top manager (Hamilton, 2003). Autocratic Leadership Any organization that relies on the ability of a single person at the top is living dangerously. A top executive who has too much power has been found to be a major source of organizational decline (Argenti, 1976). Consistent with agency theory arguments, enhanced power may provide CEOs with sufficient discretion to pursue objectives that are inconsistent with company objectives (Daily and Johnson, 1997). Empirical research shows that firms where powerful boards effectively controlled managers’ actions are associated with superior performance (Pearce and Zahra, 1991). Almost without exception blessed with a charismatic and self-confident personality, autocratic leaders use their position to pursue aggressive and visionary goals, and the press, shareholders, and analysts praise initial successes with increasing rapture. These leaders are the “superhero” Bernie Ebbers at WorldCom, the “genius” Jean-Marie Messier at Vivendi and the “godfather” Percy Barnevik at ABB. Surrounded by followers, they indulge in increasingly excessive conduct (Whetten, 1980). Tyco’s CEO Kozlowski was called the “Roman emperor,” Ahold’s CEO Cees van der Hoeven, “the Dutch Napoleon.” Prior research has identified success, media praise, self-importance, and weak board vigilance as key sources of CEO hubris (Finkelstein, 1992).CEO hubris, manifested as exaggerated pride or self-confidence, played a substantial role in the failure of many companies in the first half of this decade (Probst and Raisch, 2005). Excessive Success Culture The downside of a highly competitive company culture became apparent during the crises at the examined companies. Competitive reward systems had been designed to motivate employees with high salaries, bonus payments, and opportunities for swift promotion. To this day legends are woven about those who were privileged at Enron. The success culture was perfected by a rigid selection, long working hours, and a belief in strong rivalry. Employees at companies such as Enron, Finova Group, Tyco, TimeWarner or World-com characterized their company’s culture as “shark-like,” “egoistic,” or “gun-slinging.” Studies have shown that increased rivalry and competition between employees can be detrimental to trust (Ferrin and Dirks, 2003). A lack of employee trust has a negative effect on openness in communication, in particular regarding information sent to the superior (Roberts and O’Reilly, 1974). Two-thirds of Abbey National’s staff, for example, indicated in a recent survey that their managers aren’t open and trustworthy (Probst and Raisch, 2005) This illustrates why no one questions excessive leadership behaviour, or reacts to the first signs of a crisis in autocratic companies. Recent revelations of accounting irregularities in various companies show that despite a large number of accessories, no one challenged these practices, and the lack of trust also affects job satisfaction and the organizational climate (Probst and Raisch, 2005). An unhealthy work climate and other job stressors, such as an excessive work load, have been mentioned as key contributors to job stress, which ultimately leads to degraded job performance (Driskell and Salas, 1996). Flagging employee morale and high management turnover, which deprived the examined companies of key talent, are among the immediate consequences. The Pattern behind the Dotcom bubble In summary, the four described factors can be classified as symptoms of the same illness that has been termed the ‘Burnout Syndrome’ (Probst and Raisch, 2005). In the long run organisations burdened by an excessively ambitious CEO, and by excessive growth and inexorable change, simply burn out. In an extreme case, organisational systems, weakened by high debts, growing complexity, and constant uncertainty, simply implode. There are so many examples of the Burnout Syndrome in the aftermath of the boom period of the late 90s that one could almost speak of an epidemic (Probst and Raisch, 2005). In a period of market decline, highly leveraged firms suffer most from plunging margins that make debt repayment increasingly difficult. However, this doesn’t mean that the Burnout Syndrome is a unique phenomenon at the end of a historical upswing period. In each decade there have been numerous examples of the Burnout Syndrome, among which are the U.S. steel producer LTV (1970), the German electrical company AEG (1974), the U.S. computer pioneer Atari (1984), and the German Metallgesellschaft (1993) (Sutton et al, 2001). However, Probst and Raisch’s (2005) long-term studies provided some indication that the number of burnouts rapidly rises in the aftermath of a stock market crash. Exemplary in this regard is the collapse of a high-flying utility empire, Middle West Utilities, as a result of the crash in 1929 that economic historians describe as identical to the fall of Enron (The Wall Street Journal Europe, 2002). While the root causes are internal, the danger of a burn-out appears to increase significantly in times of market decline. 2.3 Examples of how Organisations Learn from Failure? Using learning strategies to become an industry leader, and avoid the failures of others, requires a company to adopt three management practices that capitalize on its capabilities and culture as well as its competitive strengths. Managers’ greatest challenge is to hone these practices and drive them relentlessly through the organization. The first practice is developing a strategic intent to learn new capabilities, the second is a commitment to continuous experimentation and the third is the ability to learn from past successes and failures (McGill, at al, 1992) These practices will enable a firm to constantly renew itself and develop new sources of competitive advantage, and specifically a firm will be better able to uncover and serve new markets and new customers. Strategic Intent to Learn Bally Engineering Structures, Inc. is one company that has focused on its strategic intent to learn from its customers. Tom Pietrocini, its president, decided that Bally’s survival depended on changing from a company that made specific products, like refrigerated rooms and walk-in coolers, to one that could custom-manufacture a wide range of products, but at a cost of standard mass-produced goods (Harvard Business Review, 1993). When Pietrocini joined Bally in 1983, it was a high-quality, high-cost producer struggling to survive in a mature market. Pietrocini repositioned it into a lean, cost-efficient manufacturer. He used continuous-improvement processes to reduce the number of defects and the time to fill orders. In addition, he broke down barriers between functional departments and gave quality teams wide latitude to make changes. He made employees responsible not only for doing their own jobs, but also for figuring out better ways of operating, and he rewarded them for making improvements (Harvard Business Review, 1993). Determined that Bally would learn how to be the number one walk-in refrigerator company, Pietrocini had to convince employees that they were an integral part of the company’s success. He spent countless hours teaching them to view the company in terms of its capabilities and values rather than as a maker of products: for example, that customer demands and Bally’s widening array of manufacturing processes would determine what products they would produce (Harvard Business Review, 1993) Learning to listen more closely to customer complaints and suggestions rather than relying for feedback solely on customer-reported defects or customer-satisfaction surveys, Bally’s employees gained valuable insights into applying new technologies in unanticipated ways. For example, after a customer complained that his floor kept wearing out every 18 months from the hot steam he was using to clean the freezers: a process not recommended by Bally, a cross-functional team of Bally employees developed a completely new technology to prevent moisture from entering crevices and destroying the floor. Bally not only won back the customer, but in rising to the challenge of meeting one customer’s specific needs, it also created and leveraged a technology that gave it a sustainable competitive advantage in its market (Harvard Business Review, 1993). Bally also broke up its rigid manufacturing processes. Before the restructuring, employees built refrigeration units in well-defined sequences along an assembly line, precluding any potential for offering the customer options. By rethinking the manufacturing process to eliminate this rigidity, Bally has expanded its customer options from 12 to 10,000 (Harvard Business Review, 1993) Different modules, such as welded construction, finishes, and air-and-electrical-control systems, are now brought together for the customer as needed. A sophisticated information-management system is the central nerve system that coordinates customers’ needs and Bally’s manufacturing know-how. A sales rep can custom-design each order in the customer’s office on a laptop computer connected to Bally’s computer via a modem. Once the design is completed, the software defines the precise combination of modules required to make the customer’s product and makes this information available to all employees working on the order. Employees with the necessary skills can be quickly assembled to provide whatever the order requires (Harvard Business Review, 1993). Retailing giant Wal-Mart also has climbed to success by developing a strategic intent to deliver products to customers with minimal inconvenience. It focuses on learning to eliminate steps in the distribution process that increase its overhead and that separate Wal-Mart from the customer. Wal-Mart has developed a “cross-docking” distribution process in which goods are continuously delivered to its warehouses, where they are selected, sorted, and sent to stores, often the same day (Biederman, 2006) Cross-docking takes advantage of the economies of scale achievable with full-truckload purchasing. It requires continuous contact among Wal-Mart distribution centres, suppliers, and every store’s point-of-sale cash registers. By ensuring that orders can flow in and be consolidated and processed within a matter of hours, cross-docking gives Wal-Mart the benefits of speed, low inventory, and fast response to the market’s demands. To fully leverage this core competency, which competitors find difficult to imitate, Wal-Mart operates its own satellite communication system that sends daily point-of-sale data directly to its 4,000 vendors. In essence, customers “pull” products when and where they need them through Wal-Mart’s distribution system. By running 85 percent of its goods through this warehouse system, Wal-Mart has reduced its sales cost by 2 to 3 percent over the industry average and enabled it to pass on everyday low prices to its customers. Senior managers’ role is not to control what store managers do, but to create an environment in which they can learn from each other and from the market. (Seiders and Voss, 2004) At Bally’s and at Wal-Mart, competitive advantage is sustained by the commitment to continuous learning from every interaction with employees, customers, and suppliers. Commitment to Continuous Experimentation The second practice of crafting a learning strategy is to encourage continuous experimentation. Often this includes embracing ideas that come from customers as well as from employees in other divisions and other companies. To learn from others, managers must continuously scan their environment for opportunities to develop new products or services. The company must then rush these to the market before their competitors. Not only does bureaucracy slow down the decision-making process, but also ideas and imagination wilt in a bureaucracy; conversely, they flourish in an atmosphere that fosters speed and agility (Garvin, 1993). Management processes in learning organizations are specifically engineered for speed and responsiveness, and managers in agile organizations believe that it is often better to make the wrong decision than to make a late one. Crafting a strategy is as much about bringing new products to the market as it is about getting the right trajectory and following through. Deciding today and implementing tomorrow enables the company to capture the initiative from competitors. Johnson & Johnson is one company known for fostering new ideas and developing them quickly. Managers work hard at developing open-mindedness and encouraging employees to experiment. For example, after learning of an inexpensive way of making contact lenses (a technique developed by a Copenhagen opthalmologist), J&J’s Vistakon, Inc., a maker of specialty contact lenses, was able to create a new, disposable lens called Acuvue (Weber, 1992). The tip, which came from a J&J employee who worked in an entirely different division, got to the ears of Vistakon’s president. At that time, J&J only made contact lenses for people with astigmatism, and its sales totaled $20 million. The president sought out the ophthalmologist and, realizing the commercial value of the idea, quickly bought the patent rights to the new technology. The company assembled a team to oversee the product’s development and built a state-of-the-art manufacturing facility in Florida in less than a year (Silk et al, 1997). Vistakon’s managers were willing to incur high manufacturing costs even before a single lens was sold because the new facility would enable it to leap-frog major competitors Bausch and Lomb and Ciba-Geigy. When initial customer reception cooled because competitors challenged the lenses’ safety, Vistakon express-shipped some 17,000 lenses to eye-care professionals (Weber, 1992). This speedy reaction built up goodwill in the marketplace and indicated to eye-care professionals how much service they could expect. It also led to a new marketing approach: Vistakon went directly to eye-care professionals and showed them the profit they could make from prescribing these new lenses. Vistakon saw each obstacle as an opportunity to learn how to improve its customer responsiveness and delivery speed. In 1992, with more than $255 million in sales, Vistakon had captured 25 percent of the U.S. contact lens market, and began working on a technology to make the initial lenses obsolete (Weber, 1992) As with Bally Engineering, J&J practices self-obsolescence to cultivate new sources of competitive advantage. Experimentation with new products is not always successful. In the 1980s, the public was not ready for Sony’s new Mavica digital filmless camera, which could take clearer pictures faster than a traditional camera. Sony withdrew the camera, but it used the digital technology insights to develop new generations of compact disc players, VCRs, and portable communication devices (McGill, at al, 1992) Rather than penalize Mavica managers for experimenting with a new digital technology, Sony encouraged them to apply their expertise to products such as HDTV. The irony is that Sony’s failure with the Mavica reinforced its long-standing philosophy that new products create new markets if a company can galvanize its strategic intent to learn from its own experiences (Garvin, 1993). Learning from the Past For decades, St. Louis-based Emerson Electric has posted an enviable record, celebrating 36 consecutive years of improved earnings and earnings per share (Probst and Raisch, 2005). Emerson is committed to learning from its successes and to seeking improvement. Its strategic intent is to continuously learn how to be the best-cost producer. Emerson’s strategy, developed in the 1980s and little changed since, begins with the recognition that customers’ expectations are increasing and, to remain competitive, it must meet or exceed the highest standards of performance, including on-time delivery and after-sale service (Bernstein and Macias, 2002). Emerson’s strategy depends on continuous improvements in six areas: commitment to total quality and customer satisfaction; knowledge of the competition; focused manufacturing, competing on process as well as product design; effective employee communications and involvement; formal cost reduction programs; and commitment to this strategy through capital expenditures (Mechanical Engineering, 2001) The two underlying management practices that have enabled Emerson to implement its best-cost producer strategy are continuous cost reduction (Mechanical Engineering, 2001) and open communication (Probst and Raisch, 2005). Managers and employees embrace these ideals as pillars that define Emerson’s unique competitive advantage and these practices, by forcing Emerson to strive for ever higher levels of improvement, result in the company’s habitually exceeding its previous accomplishments and performance. In good times and bad, Emerson has practiced cost-reduction goals at every level. It requires employees to identify specific measures necessary to achieve these objectives and managers to report every quarter on the progress against these goals. The second principle: open communication, means that division presidents and plant managers meet regularly with all employees to discuss the specifics of the business and what the competition is doing (Bernstein and Macias, 2002). This creates an open, collaborative culture, and means that Emerson is always looking to respond to change, and is always prepared when change arrives. Learning from Failure In learning organizations, failures are looked upon as useful steps in helping managers acquire new experience, insights, and knowledge that may be applicable to future products, technologies, or markets. Although failures may reflect the organization’s initial inability to satisfy a particular market or customer, they can spur innovative efforts to renew and improve the organization’s basis of competitive advantage (Garvin, 1993) To learn effectively from failures, managers need to see how previous missteps can translate into knowledge or actions that ultimately strengthen their firm’s core competencies and competitive advantage. Managers must confront the reasons for earlier failures head-on and answer the question, “How can we apply what we learned to future activities?” (McGill, at al, 1992) The fabled, mythological Icarus is said to have flown so close to the sun that his artificial wax wings melted and he plunged to his death in the Aegean Sea. His greatest strength, the power of his wings, led to his demise. That same paradox can be applied to companies: their victories and strengths often seduce them into excesses and neglect that cause their downfall (Miller, 1990). Success leads to specialisation and exaggeration, to confidence and complacency, to dogma and ritual. Recently, firms have begun to recognize the importance of the link between learning from earlier failures and developing future sources of competitive advantage (McGill, at al, 1992). For example, diversifying into new products or industries can be costly when management does not really understand how to leverage a firm’s core competency. Kodak’s experiences during the late 1980s and early 1990s provide a case in point. Kodak is the world’s largest producer of chemical-based film used in consumer photography, medical imaging, and industrial-commercial processes. The company’s strategic intent is to dominate the technology behind imaging: capturing, recording, transferring, and enhancing images, no matter who the end user or customer may be. To further advance its imaging-based core competencies, Kodak has spent incredible amounts on R&D, developing leading-edge thermal printers, colour manipulation software, and a digital technology that stores images electronically and translates them into digital data. Despite Kodak’s imaging strengths in the lab, its biggest diversification move in 1988 was the acquisition of Sterling Drug, a pharmaceutical firm that appeared to have numerous promising drugs in the pipeline. Kodak reasoned that, with its extensive knowledge of chemical-based lab processes, it would instantly become a formidable player in the profitable pharmaceutical industry. Because Kodak’s blood analyzer, diagnostic equipment, chemical substrates, and film products were already widely used in medical laboratories, its managers thought that Sterling would provide them with an easy entry into a new industry that would not face the same kind of intense competitive pressures characterizing the photographic film industry (Jaffe, 1989). These expectations never materialized, however. Kodak found few real opportunities to leverage and share its industrial, film-driven, chemical laboratory processes with pharmaceutical product development. Competitive advantage and success in the pharmaceutical industry depended more on basic lab research that involved molecules, proteins and carbohydrates, while Kodak’s labs had deeper, more applied experience with organic chemistry, polymers, and enzymes. The ability to leverage technologies used in films and imaging did not fit well with the skills required for smooth integration and mastery of the pharmaceutical industry (Hammonds, 1989). Kodak eventually placed a major part of its Sterling Drug acquisition into a joint venture with French pharmaceutical giant Sanofi. In July 1994, Kodak sold its portion of the pharmaceutical joint venture to Sanofi (Hammonds, 1994). Kodak’s most recent moves appear more promising. Rather than seeking external diversification opportunities, it has refocused its efforts on building a strong presence in new digital-imaging technologies Now wary of how peripheral businesses can distract the company from its core imaging businesses, Kodak is investing in new products and creating strategic alliances that extend and renew its imaging-based competencies (Tauhert, 1997). Even though advances in digital imaging may eventually displace sales of Kodak film and development paper over the course of this century, the company appears committed to learning and applying new skills and techniques to play a leading role in the emerging multimedia industry. The Learning Organisation By the end of the 1990s, “the learning organization” and the concept of “organizational learning” had become indispensable core ideas for managers, consultants and researchers looking to make ensure continued success for an organisation. For any business or organization, the ability to learn better and faster than its competitors is an essential core competency. A learning organization can be recognized from the outside by its agility in changing how it relates to the external world and how it conducts its internal operations (Marquardt, 2002) It can be recognized from the inside by an ethos in which learning from challenges and mistakes is central (Lytras et al, 2005) While successful results are very important to learning organizations: typically they set very high standards, they recognize that often success is only achieved after initial mistakes, and what people learn from those early mistakes is often the key to eventual success. People must learn from everyone’s mistakes, not just their own, as it is too costly to have people repeating mistakes that have already been made by others (Lytras et al, 2005). A story from IBM Corp. tells of a very worried manager going in to see his boss right after the failure of the big innovation project he had headed. Wasting no time, he said, “I suppose you’re going to fire me.” “Why should I do that,” replied the boss, “when I’ve just invested $6 million in your education?” (Sugarman, 2001) That tale reflects several ways of thinking that are characteristic of a learning organization: important learning comes from mistakes, once they have been properly analyzed; this form of learning is at least as important as formal training; and a company must take good care of the people who develop this knowledge. A learning organization is good at two kinds of learning: good at creating new solutions, and good at sharing knowledge with other members who may need it. So there must be openness to new ideas, wherever they come from, and to sharing knowledge for the good of the business. It becomes important to set aside the embarrassment over sharing one’s mistakes and the reluctance to ask for help or to borrow someone else’s solution. It is not just individual attitudes that have to change, though; it is also the policies and patterns of management behaviour (Lytras et al, 2005). When employees can trust that their bosses will not penalize them for revealing mistakes or for seeking help with a difficult problem, then there will be more organizational learning and better solutions to be shared. The goals for a successful learning-based change initiative are usually two-fold: they focus on improvement in specific, short-term business results through making major improvements in the work processes and interpersonal relationships at the workplace. Because of these goals, “work” includes certain kinds of “learning.” In most cases, a key role in formulating these dual-focus goals, and in negotiating the strategy is played by a “core learning team,” a reflective leadership group of enthusiasts who initiate the change process. This learning-based change process depends upon change bubbling up from the core of the organization, rather than on a program cascading down from the top (Lytras et al, 2005). The top executives of many successful companies are among the change leaders in their programs or units, and this takes place under their initiative, not their boss’s. They are volunteers, not under orders to lead change and, in presenting it to their followers; they seek volunteers who want to become engaged in the initiative (Lytras et al, 2005). As such, the learning-based approach introduces into the workplace ways of thinking and behaving that are significantly different from what has been ingrained by over a hundred years of the old industrial tradition (Marquardt, 2002) The new economy demands a new kind of organization, based on new ways of thinking. For an established company to make such a change is a huge accomplishment: even in just one segment of the whole, but the rewards can be immense. 3. The Marconi Case 3.1 Marconi: a Brief History General Electric Company (GEC) grew rapidly in the 1960s under Arnold Weinstock’s domineering but effective leadership. (The Economist, 1995) Like its American counterpart, General Electric, GEC grew into a conglomerate with interests in such diverse businesses as white goods, defence electronics, telecoms and power systems. While there was no real logic underlying this array of businesses, Weinstock held the company together through a combination of his imposing personality and a strict system of financial controls, and at its peak GEC had sales A£11bn, a cash pile of A£2bn and was the most valuable company in the UK FTSE (Fildes, 1996). Lord Weinstock retired in 1996 and was replaced by George Simpson, a former executive at Rover. Over the course of the next five years, Simpson and his finance director John Mayo masterminded a complete rethinking GEC’s corporate strategy. They decided to focus the company strongly on the fast-growing telecoms equipment industry. Simpson bought two mid-sized US competitors for large sums of money: Reltec for $2.1bn and Fore for $4.5bn, and invested in developing a range of new products to compete with industry leaders Cisco and Nortel (Sheffler, 1999) To pay for this growth, most other businesses, including defence electronics, white goods and power systems were sold off. To reflect this change of strategy, GEC was renamed Marconi. Marconi, as a telecoms-equipment maker, was never an ordinary company. Initially, it was renowned as one of Britain’s modern business success stories, the transformation of sluggish, unfashionable GEC into slick, forward-looking Marconi. 3.2 Problems Start On the back of the dot-com boom, Marconi’s share price peaked in August 2000 at A£12. Then things started to go badly wrong, as the dot-com bubble burst, and demand for new telecoms equipment dried up. Lucent, Cisco and Nortel all announced profit warnings and Marconi’s share price dropped even though it denied that its sales had been hit. Marconi stood as the Teflon of the European equipment space until July 2001 when it cut in half its profit forecast for this year and cut 4,000 jobs (Omatseye, 2001). This took investors by storm and sent its stock into a sudden plummet, as angry investors dumped the stock. Chief Executive George Simpson acknowledged that his company was vulnerable for a takeover, although he said “there are no talks with competitors at the present time.” He noted that with the company’s share price now low, “I know we are vulnerable.” (Omatseye, 2001) Industry speculations hinted that Alcatel, Cisco Systems Inc., Nortel Networks and Lucent Technologies Inc. were eyeing the company (Druce, May 2002). In addition, two U.S. class-action law firms filed lawsuits on behalf of Marconi’s investors in the District Court for the Western District of Pennsylvania for “materially false and misleading” statements about the company’s growth prospects. Marconi also faced trouble with its unions. “Our members are angry that their jobs have been put in jeopardy by a failed management strategy,” said Roger Lyons, general secretary of the Manufacturing Science Finance union. (Omatseye, 2001) However, in the build up to the 2001 profit warning, even as they could see Marconi was plunging into the abyss, its bosses kept quiet. They paid the price for this at the annual general meeting at London’s Queen Elizabeth Conference Centre in July, where some shareholders clearly had difficulty believing they were getting the full story from the podium, where the company’s directors stood (Druce, September 2002). It now emerged that the shareholders were indeed left in the dark; but they were not the only ones, as some of the most important members of the board of the company claimed that they had not been told the full details, and that the chairman, Sir Roger Hurn, and the chief executive, by then Lord Simpson, had claimed that the company was only in a temporary blip (Omatseye, 2001). With telecoms companies looking weaker by the day, it was hard to see where Marconi’s optimism came from, but right up to and through the acrimonious annual general meeting, Simpson and Hurn insisted they believed the world would improve, and soon. They also refused to countenance writing down the value of Marconi’s acquisitions in America, despite the fact that its American peers had all written down their acquisitions and the value of telecoms companies had plummeted (Druce, May 2002). Even the A£1 billion of excess stock Marconi had collected was deemed to be worth as much as ever. “Our view is that we will consume that excess stock as we go through this year,” Simpson told a sceptical shareholder at the annual meeting. When the shareholder asked what would happen if the telecoms market was to take another dive, Simpson replied: “What I can say is we have taken fast and draconian action. We should be able to sustain any reasonable development in sales levels.” (Druce, May 2002) Shareholders at the annual meeting were openly sceptical and up on the podium Marconi’s directors looked distinctly uncomfortable. There were signs, too, that the relationship between Hurn and Simpson had started to come unstuck. According to at least two sources, Hurn discovered soon after the July profits warning that big institutional shareholders were not placated by the firing of Mayo, that they believed Marconi’s fall from grace required more radical action than simply ditching the finance director, and that Simpson knew little about telecoms (The Economist, 2001) According to these sources, Hurn raised the issue with Simpson, suggesting that perhaps he should depart before the calls became louder. Simpson responded by seeking the backing of the rest of the board. He received it, but the once close relationship between the two men was damaged, and this may have contributed to both men being fired at the Monday meeting, as the angry directors took their revenge (The Economist, 2001). Immediately following the meeting, the revelations of the losses made meant that the company, loaded down by huge debts from its acquisitions, was struggling to remain afloat. Those close to GEC in its old guise were outraged at the destruction that has been wrought. Roy Gardner, the Centrica chief executive, was a former GEC board member: “What happened at Marconi could not have happened under the old GEC management,” he said. “Either they changed the control environment or they ignored what they were told.” (Omatseye, 2001) Derek Bonham, the former Hanson executive who joined the board in April 2001, took over as chairman, with the greatest reluctance because, as chairman of Cadbury and deputy chairman of Gallaher, the tobacco company, he had plenty to occupy his time, and knew that the problems with Marconi were likely to get worse (The Economist, 2001). Indeed, it was reported that, after the company’s first profits warning in July, he was asked by Hurn, then chairman, if he would take on the role, and declined (Druce, May 2002). However, by the time of the general meeting, Bonham knew he would have to rethink, and over the weekend he discussed the prospect with his wife. The information handed out to non-executive directors ahead of the meeting showed that Hurn and Simpson had been hopelessly optimistic in their July estimates of how the company would fare. Its debts had spiralled, its losses had climbed to A£227m in the three months to June 30, the first quarter of Marconi’s financial year, trading remained dire and another 2,000 jobs would have to go (Omatseye, 2001). Bonham could not see how Simpson and Hurn could avoid joining the casualty list, and so agreed to take on the role. Whilst Simpson and Hurn did not put up a fight to stay on the board, it would be wrong to suggest their departure was anywhere near amicable. Thousands of Marconi workers, and thousands more former Marconi workers, felt badly let down by their management team, and the disenchantment extended right up to the boardroom (The Economist, 2001). If Hurn and Simpson had hoped to salvage their reputations by staying on after the July profits warning and making John Mayo, the finance director fired at the time of the profit warning, a scapegoat, the ploy backfired badly. Shortly after stepping down, Hurn made it known that he will not be seeking a pay-off, and Bonham made it plain he expected Simpson to agree to similar terms. However, whilst Simpson and Hurn could retire to lick their wounds, and avoid the mess they created, the remains of the Marconi management team was forced to try and salvage what remained of the firm from bankruptcy, and Michael Parton, head of the Communications Networks Division, was moved up to the chief executive’s office. Unlike Simpson, whose background was in engineering, Parton was well versed in Marconi’s core businesses. However, until the crisis, few analysts had thought him chief-executive material, with Mayo due to take over from Simpson before the company started falling apart (Druce, May 2002). Indeed, as Bonham expected, the problems were far from over, as Marconi’s banks were shocked by the three month trading statement, and by the news that debts had risen by more than A£1 billion since the year end to reach A£4.4billion in August (Druce, Sept 2002). Marconi claimed it believed that its debts had peaked and would now start to decline, but the banks worried that if the company was proved wrong there would ne little they could do to stop more of their money being pumped into the ailing group. In May, Mayo had signed up the banks to a new 3 billion Euro banking facility at a low interest rate, and with virtually no covenants: the restrictions that allow banks to call back their money if a company starts to fail. (Druce, Sept 2002) The single real restriction was a “material adverse change” clause, which most banks say they would not invoke except in exceptional circumstances. However, at the time at least one of the fourteen banks in the syndicate backing Marconi had investigated the possibility. Without the traditional banking covenants to restrict it, Marconi managed to avoid a damaging liquidity crisis, and in theory, had it required, it could have drawn another A£2 billion from its banks. In reality, had it attempted to use this as a solution, it would have likely sent the banks to their lawyers to find ways of avoiding paying up (Druce, Sept 2002). However, the new Marconi board put together a recovery package, which in theory would result in no need for further cash. It agreed to sell its medical systems business to Philips, bringing in A£780 million, and put several other non telecoms businesses up for sale, including its half share in Hotpoint, and its petrol-pump assembly business: both remnants from Marconi’s old guise as the General Electric Company. The businesses earmarked for sale had revenues of more than A£1billion a year and whilst some, such as the white goods joint venture, were in far from sought-after

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