Dr. Dennis J. Bava

Profesor de Catedra de Posgrado

Tecnológico de Monterrey – Campus Santa Fé

Maestría en Administración de Negocios

June 1, 2004

“A leader is the one who needs the others.”

Antoine de Saint Exupéry

Abstract:

Our business milieu has been continuously changing since 1990. However in 2004, not all companies have discovered the key to be successful when the environment turns from friendly to hostile. An organization is composed of persons, structures, cultures, and strategies; it is extremely difficult to adjust a monolithic firm when macroeconomics exert a constraint on it. With business turbulence apparently here to stay, the corporate capability to develop and implement situational strategies is an increasingly vital competence. It is a question of flexibility, anticipation, effectiveness, and a high level of adaptation.

Some firms are more successful than others when they need to adapt because they face organizational and business turbulence. What are the helpful hints and secrets of success for these companies? How do they become more competitive? For the less successful firms, what is the impact of a constantly changing business environment on their performance results?

CEO leadership is an essential part of the firm's success story. Today, an effective CEO needs to be a communication stimulator throughout the organization and act as both a sender and receiver of all indispensable information necessary, in the decision-making process. Consistency and coherence of objectives and strategies are the operative words in this leadership profile. With these characteristics, companies can profit from business turbulence and implement powerful stratagems, in order to create distinctive competencies among their competitors. For these firms, a market threat can suddenly turn into a demonstrative opportunity.

Outline:

General Objectives

Specific Objectives

Albert Einstein once said that: “During crisis only the imagination is more important than knowledge.” Is it really the imagination that counts to shareholders when financial results are affected by the economical environment?

To achieve a firm's objectives, an effective manager has to make good decisions. In this case, imagination will permit managers to find the most suitable managerial tool to achieve goals.

How to be an efficient and effective manager in a world of constant change? Normally, high performance firms must restructure their organizations in order to align their business interactions efficiently with a changing environment.

The paper will attempt to answer the following:

Performance Results in the Organization

How to perform as a leader? This is the question that Francois Pichault (1999), lecturer at Liege University , tried to answer by explaining that “every conduct and every practice must be justified by the validity of decisions that belongs to a strong value system.” An organization's business practices represent the definition of competency since the results reflect the firm's actions. Depending on the industry sector, leaders must adopt a strategy which is reactive (defensive) or proactive (anticipation ).

As an example, former British Airways CEO, Bob Ayling announced in February 2000, that for the first time after being privatized in 1987, the company recorded a deficit of USD4.45 million. In this business situation, British Airways discarded what had been recognized as the world's best airline financial structure?

The transportation industry has been in constant evolution since the 1990s. Total control cost skills were honed and companies embraced Total Quality Management programs, outsourcing, and job flexibility. In order to follow a proactive approach, airlines had to confront structural and systemic changes within their organizations. Additionally, huge alliances among airline companies evolved in order to control effectively foreign markets, realize economies of scale, and augment their various cost control programs (Qualiflyer, Star Alliance, Oneworld, Wings).

The number and the variety of business elements that can affect an organization vary considerably. It depends on the type of industry and the degree of interaction within the environment. For example, it can be a hostile or friendly airline which belongs to a highly competitive environment since it may generate conflicts and threats. For BA, the specific threat affecting its market dominance was the Asian crisis of 1997-1998. The crisis resulted in competitors increasing their flights to Europe thereby, increasing the number of airline carriers in the North Atlantic region which represented 75% of BA's operating profits.

In the entertainment industry, EMI encountered several obstacles due to business circumstances such as an economic slowdown in the U.S. , increasing access to free music on the Internet, proliferation of CD piracy, etc.

Other examples of an unfriendly economic environment is the one that faces Kodak and Fuji Film, with the rapid raise of digital technologies and the tobacco industry, which is affected by high taxes and government measures to prevent cancer diseases. In these examples, it is better to centralize the decision-making process because managers have better control on potential market threats and thus, they can counter them successfully. But, it also requires a certain degree of flexibility and a certain degree of adaptation (J.Gordon 1999), in order to react faster than the competition

Organizational change management is a continuing challenge for organizational leaders, as they learn to apply improved techniques developed from theory. When the economy, technology, or other major conditions of the business environment change suddenly, not everyone loses. There are some winners. Successful firms tend to correctly appraise the situation and quickly adopt a strategy which is adapted to its contours. Companies that are vulnerable to unfriendly economic environments must implement flexible business models. In order to face business turbulences, leaders must continually review the following three dimensions of their business context (D.R Rigby 2002).

During 15 years operating the Louis Vuitton (LV) brand, LVMH has largely demonstrated the effectiveness of their methods. With a sense of vision and leadership, Bernard Arnault has recently opened the biggest LV store worldwide in New York , although the Euro has risen by about 50 percent against the dollar in the last three years. Currency fluctuation often affects the luxury goods industry more than other industries because it is labor-intensive and wages are denominated mainly in European currencies. Arnault explained that since 2003, sales have increased 30% worldwide and that 87% of the clientele is North American. It represented a trump card for Arnault to establish a base in the U.S. The strong Euro did not substantially affect sales volume because each product is unique and owns an exceptional brand quality. By taking control of the customers' reaction, LV can easily adjust their prices when currencies fluctuate.

When the business environment exerts a constraint on the organization, it is imperative there is an immediate response from management. The organization's performance is the result of strategic choices. However, strategies can reach performance goals when they are in perfect coherence with company's business structure and culture. Within a hostile environment, the strength of notable companies lies in the accuracy of the implementation of its strategy, which combines the three essential elements of strategy, corporate culture and organizational structure.

Regarding the airline industry, in 1994, when Gordon Bethune assumed the presidency of Continental Air Lines, he implemented a cultural turnaround of the company by symbolically burning the service manual. Bethune considered that the service manual was too rigid and inflexible. He gave the opportunity to employees to take their own decisions regarding customer service. In order to follow the strategic goals, Bethune emphasized the necessity to enhance the most important benchmarks for the industry, which are customer satisfaction, reduction of luggage lost, and flight arrivals and departures on time.

Often, within an aggressive, competitive environment profits tend to decline. The business response is to reduce total costs followed by a restructuring plan and the implementation of a coherent strategy to deflect a hostile environment. For example, Louis Vuitton plans to follow an expansion strategy in affluent countries and promote the sales of luxury goods in developing countries.

On the other hand, when Carlos Ghosn took the presidency of Nissan in 1990, he noticed that some business practices were harmful for the firm. First, the company was suffering from a lack of finances which obstructed their investment capabilities in order to modernize product lines.

Second, the company paid and promoted employees based on their age and their seniority. The more time they worked for the company the more money they received. Ghosn decided to remove the seniority rule and reorganize the wage structure in order to reward performance rather than seniority. He also reduced the work force. At a first blush, Ghosn and his management measures were strongly criticized. However, he had the confidence of the employees because from the beginning he showed them respect. Given his decision-making consistency and leadership style, Ghosn convinced the employees that despite a massive structural change within the company, he was sensitive and sensible to protect the identity and the dignity of the firm. He was consistent with the corporate culture and adopted a strategy that permitted him to increase Nissan's profits.

Lack of Leadership

To pilot an organizational change is not easy. The leader's challenges lie in the truthfulness of impulse messages of trust and loyalty in order to succeed in the systemic development of the organization (C. Handy, 1990). The airline industry is not the only one facing a hostile, economic environment. The manufacturing industry has undergone significant structural transformation since 1990. The standout performers and leaders have been those who knew how to detect market needs in order to transform threats into market opportunities. The efficiency and performance results lie in their power of influence within the organization. It is a reciprocal process, where leaders and employees exert the same influence among themselves. The key of success is not a question of intelligence, education, or diversity but rather, a question of how to become an integral part in the social triumph of the organization (J R Darling, Tomas M Box, 1999).

As mentioned, Carlos Ghosn set in motion the Nissan Revival Plan (NRP) and in two years reduced supplier costs by 20%. The NRP was based on 2,000 ideas submitted by employees. This was the result of the methodology used in cross-functional teams. Different teams were in charge of resolving operational issues that a pyramidal organization was not able to solve. The teams' main focus was on the firm's real problems which occurred due to hierarchical borders.

Pizza Hut is an example of a company which underwent a cultural change. The idea was to change the company image from “fast food” to a “value-focused” company. Pizza Hut's CEO asked employees to define their input and engagement based on the most important values to them. This approach permitted the CEO not only to augment his credibility with his employees, but also to open a path of communication within the organization.

Ronald Hefts (1999), an expert in political science, argued that “people turns towards providential men no matter the message they deliver as long as the message is strong.” This type of leadership style is represented in the following five examples:

In an era of globalization, mega mergers and technological revolutions, CEOs are forced to transform themselves into communication sages in order to explain to their organizations how the company is adapting towards changes and new challenges. It is vital to share:

•  The CEO and company's objectives.

•  What is the CEO expecting from employees?

•  How the organization will reach its objectives?

Consequently, there is a connection between the decision-making process and objectives in order to increase the probability to realize the business goals. The quality of the leader's participation within an organization is truly a function of his own personality (I Chaleff, 1998). The most difficult part for a CEO who faces a complex business issue is to understand in which vicious circle he is in. The execution of power in an unfriendly context requires much more information than one person can effectively manage in an organization.

Set Situational Strategies

One could analyze all of the existing enterprises in the present market, but one will realize that the secret of success lies mostly on the CEO's leadership style, rather than the values, dignity, and intelligence of each employee. These leaders embrace empowerment and they offer employees the opportunity to perform their best and they are rewarded to act this way. Large firms are seeking entry-level employees who are qualified to adopt a decision-making model in a hostile, economic environment.

For example, L'Oreal has encouraged students to participate in business “simulation” games organized in collaboration with famous business schools. With the e-Strat- Challenge of L'Oreal, a thousand teams (already selected in 137 countries) have to manage via Internet, a leading company in the beauty care industry which is identical to L'Oreal. The best 250 performing teams will have the opportunity to present a detailed business plan to L'Oreal. At the end, the 15th finalists will defend their strategy in front of a jury composed of L'Oreal managers.

Another example, Danone has launched in March 2004, a business simulator called Trust. The idea is to integrate social and environmental issues within the business administration of a company. Hence, students are faced with hostile takeover bids, refractory clients, employee strikes or, even union conflicts.

Companies are searching for future executives that will spend less time trying to create accurate models and compute predictions of the future, and be more proactive in contingency planning for a broad range of business possibilities. For this reason companies should institutionalize business turbulence planning. Managers will prepare a Plan A budget for the most likely scenario and they also will develop a Plan B budget and a Plan C budget to cope with an economic downturn. If the economy slows, the planning scenarios enable the company to react fast to protect profits. There exist many rational procedures for the decision-making process in support of theoretical models. Organizational professionals have suggested that data collection and its analysis are best when guided by theoretically supported models which are fine-tuned through experience.

The model (D. R Rigby, 2001) argued in order to appraise environmental issues is as follows:

Conclusion

Companies can profit from business turbulence. However, they need to be scrupulous in their stratagems in order to detect benefits from instability in the following ways.

Distinguish technology as an activity accountable for the organization, not for inputs or outputs to it. Technological properties are owned by the evaluated organization and are related to the systematic actions the organization deploys with an effect on its business activities.

References :

Pauline Damour (Fév 2000) British Airways pique du nez. Capital P40-42

Marc Roche (12 mars 2000 ) British Airways paie le prix de ses ambitions démesurées . Le Monde Intéractif www.lemonde.fr

Jeffrey D. Schaffer (Fév 1986) Structure and Strategy: Two Sides of Success . The Cornell HRA Quarterly P76-81

François Pichault : Modèles de GRH et jeux de pouvoir en contexte de changement: de l'analyse à l'intervention , Colloque HEC Lausanne (17 Mars 2000 )

Judith R. Gordon (1999) Organizational Behavior a Diagnostic Approach . New Jersey , Prentice Hall

Keith Harper (Jan 2000) Frustrations of the world's favorite airline . Management Today . London . P42-47

Daniel Held (Jan-Fév 1997) Rompre la spirale de la démotivation et du désengagement . PME magazine .

Charles Handy Understanding Organizations. BBC Books London 1990.

John R Darling, Thomas M Box (1999) . Keys for success in the leadership of multinational corporations, 1990 through 1997 , S.A.M Advanced Management Journal . Vol 64 No4

Anonyme (2000), CEOs champion change; PR counselors shape the messages that move people ; PR News, Potomac . Vol 56 No 14

Ira Chaleff. (1998). Full participation takes courage , The journal for quality and participation . Cincinnati Vol 11 No1 36-39

Véronique Boudier-Lecat (Déc 1988- Jan 1989). Qu'est ce qu'un chef. Tertiel - N°43/44 Reg Birchfield (Mar 1998). Wanted: Effective leaders . Management . Vol 45 No1

Daniel Goleman (Mar/Apr 2000). Leadership that gets results . Harvard Business Review . Vol 78 No2

Stéphane Lauer (Oct 1999), Carlos Ghosn à l'épreuve de Nissan. Le Monde intéractif : vwww.lemonde.fr

Jeanne M. Plas (1996) Person-centered leadership, an American approach to participatory management . SAGE Publications, Inc. Thousand Oaks California.

Daniel Bensaïd, Philippe Corcuff (Déc 1999) Le vrai gâchis Le Monde Intéractif . www.lemonde.fr

Véronique Boudier-Lecat (Déc 1988- Jan 1989). Qu'est ce qu'un chef. Tertiel - N°43/44

Darrell K Rigby, Situational strategies (Nov/Dec 2001 )A management tool for turbulent times, Strategy & Leadership , Chicago

Suzy Menkes, (2004) Luxury labels search for new identity in as shaken world International Herald Tribune

Dana Thomas, (2004) Addicted to Japan , Vuitton has tied its fate to the world's riskiest rich nation , Newsweek New York

Jackie Alexander Di Pofi (2002) Organizational diagnostics: Integrating qualitative and quantitative methodology , Journal of Organizational Change Management , Bradford

Firm. (Who We Are)
Services for you
Knowledge
Academic Materials
About Us

Download this file: