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Essay #1: Case Study: Astro Airlines
Arthur Burton established Astro Airlines in 1980; two years after the airlines were deregulated. Burton’s vision for the new airline has two key elements. First, the airline would provide low‐cost, no‐frills service to people who formerly could not afford to travel by air. Second, the airline would have a novel type of organization that provided a better way for people to work together, thereby unleashing their creativity and improving productivity. Burton was a dynamic, emotionally stirring speaker with a kind of evangelical fervor, and he took advantage of every opportunity to teach and affirm his vision. Many employees regarded him as an inspirational leader who made you believe that you could do anything. The climate at Astro Airlines in the initial years was one of enthusiasm, excitement, and optimism.
Instead of the typical bureaucratic organization, the new company had only three levels of management and few support staff. The emphasis was on equality, informality, participative leadership, and self‐management. Employees were organized into teams with shared responsibility for determining how to do their work. The teams elected members to represent them in advisory and coordinating councils that met with top management, thereby enabling them to participate in making important decisions. Managers were expected to provide direction but not to dictate methods or police efforts. Employees were expected to perform multiple jobs and to learn new skills. Even the managers were expected to spend some time doing regular line jobs to keep informed about problems and customer needs. The “status perks” found in most large organizations were eliminated. For example, executives answered their own telephones and typed their own letters. New employees were carefully screened, because Burton sought to hire young, enthusiastic employees who were willing to learn new jobs and who could function as part of a cooperative team. All permanent employees were required to share in the ownership of the company, and they could purchase shares of stock at a reduced price.
Burton believed that a strategy of discount fares and convenient schedules with frequent flights would attract new passengers who would normally travel by car, train, or bus, or who would otherwise not travel. By keeping operating costs low, Astro Airlines was able to offer fares that were much lower than those of competitors. The salaries of managers and employees were lower than normal for the airline industry, although employees also received generous fringe benefits, profit sharing, and stock dividends. Costs were also reduced by purchasing surplus aircraft at bargain rates, reconfiguring aircraft to carry more passengers (e.g., converting first class into coach seats), and by innovative scheduling that allowed the planes to fly more hours each day. Customers were charged for some frills such as meals and baggage handling that other airlines included in the price of the ticket. To reduce space normally needed for ticket counters at terminals, the ticketing for flights was done either in advance by travel agents or on the plane itself with innovative ticketing machines.
The new company was an immediate success, and passenger volume expanded rapidly. In less than three years the company grew from a few hundred employees with three planes to more than 3,000 employees with 22 planes servicing 20 cities. This success occurred despite dismal conditions that caused widespread operating losses in the airline industry, including a severe economic recession, a crippling national strike of air traffic controllers, and brutal price wars. The flexibility of the company and the commitment and creativity of its employees aided its early growth and facilitated rapid adaptation to crises such as the strike of air traffic controllers.
Despite the early successes, the rapid growth of the company was also creating some serious organizational problems. Employees believed that after the initial chaos of starting up the company, things would settle down and the intensely heavy workload would be alleviated. They were wrong; communication problems increased, the workload remained overwhelming, decisions were taking too long to be made, and too many decisions had to be resolved by top management. These problems were due in part to the informality and absence of structure. As the number of routes, facilities, and flights increased, operational problems became more complex, but formal structures were not developed to deal with them effectively. The number of managers did not increase nearly as fast as the number of nonsupervisory employees. Burton refused to recruit experienced managers from outside the company, preferring to promote current employees into positions for which they initially lacked sufficient expertise. Overburdened managers lacked adequate support personnel to which they could delegate routine responsibilities. Managers complained about the pressure and stress. They spent too much time in meetings, they could not get issues resolved and implemented, and they could not provide adequate training for the rapidly increasing number of new service employees. The new employees were not getting the extensive training and socialization necessary to prepare them to provide quality service, rotate among different service jobs, and use team management practices. Operating problems (e.g., canceled flights) and declining customer service (e.g., rude attendants) alienated customers and eroded the company’s reputation.
Adding to the confusion was the worsening conflict between Burton, who as CEO was responsible for strategic planning, and the company president who was responsible for operational management. In 1982, the president resigned, and Burton assumed his responsibilities rather than finding an immediate replacement. At this time Burton finally decided to appoint a task force composed of executives to develop ideas for improving the organization. The task force presented some initial proposals for new managerial roles and structures. Employees were subsequently promoted to these roles, and management training activities were initiated for them. Burton was heavily involved in this training; he conducted some of it himself, and he faithfully attended sessions taught by others, thereby indicating the importance he placed on it. However, other necessary changes in management processes were not implemented, and the position of president was still not filled. In short, Burton seemed unwilling to take the steps necessary to transform Astro Airlines from an entrepreneurial start‐up to an established organization. Indeed, his remedy for the firm’s problems was to set out on a new growth path rather than to concentrate on consolidation. He believed that what the company needed was an even bigger vision to get people excited again. Thus, he began yet another period of rapid expansion. The airline added new routes, purchased new and larger aircraft, and hired more new employees.
By 1984, Burton no longer seemed content to run a successful regional airline. He continued to make changes designed to transform Astro into an international airline that would compete with the major carriers. He decided to acquire some other regional and commuter airlines that were financially weak. His strategy of rapid expansion was overly optimistic, and it ignored some important changes that were occurring in the external environment. Burton failed to anticipate the likely reactions of major airlines that were stronger financially and prepared to conduct a long price‐cutting war to protect their market position. New passenger traffic did not increase enough to justify the cost of the added flights, and Astro was unsuccessful in attracting many business travelers accustomed to frills and better service. The company began to experience losses instead of profits.
Internal problems also worsened in 1985. There was an attempt to unionize the pilots, and a substantial number of pilots quit, complaining that they were exploited and mistreated. Other employees began questioning Burton’s sincerity and accused him of being a manipulator. The perception among many employees was that he was now acting like a dictator, and no one dared to cross him. When asked about the absence of independent outsiders on the board of directors, Burton replied that he was the founder and largest shareholder, and he could determine what was best for the company. He fired a key managing officer who had been with the company since it was formed, presumably for challenging him and asking questions he no longer wanted to hear. Another founding executive whom Burton had appointed as president resigned and took several other employees with him to establish a new airline.
In 1986, as financial performance continued to deteriorate, Burton abruptly abandoned the distinctive strategy of discount fares and no‐frills service and began offering full service with higher fares to lure business travelers. However, operating losses continued to mount, and in a last desperate move, Burton changed back to his original strategy. It was all to no avail. By the summer of 1986, the losses increased and the company entered bankruptcy proceedings.
Essay #2: Case Study: Costco
Costco is one of the largest retail sales companies in the United States, and it has more than 500 stores in 37 states and eight countries. Despite low profit margins in the retailing industry, the company is more profitable than most competitors, and it is growing rapidly. In the University of Michigan’s annual survey of customer satisfaction with U.S. retailers, Costco has had the highest ratings in recent years.
The company’s basic strategy is to provide quality products at the lowest available prices, and the products include clothing, electronics, and food. Costco’s leading competitor — Wal‐Mart’s Sam’s Club — offers more variety and some lower priced items, but Costco’s products are generally of a higher quality. Around 20% of the products consist of limited‐time supplies of deeply discounted luxury goods and other special bargains. Examples include Rolex and Movado watches, gourmet imported chocolates, Waterford crystal, plasma televisions, and Burberry and Coach handbags. This strategy of temporary special bargains creates customer excitement and increases purchases of items that shoppers had not intended to buy when they visited the store.
Charging customers for the privilege of shopping at Costco provides a steady source of revenue for the company and increases customer loyalty. Costco has two types of members: businesses and individuals. Even though the cost of membership is a little higher than for competitors, Costco’s card renewal rate was over 86% in 2006, and membership increased by 14%. To increase the value of the memberships and attract additional customers, Costco also offers services such as travel plans, health and home insurance, banking, and financial planning. Individual shoppers average two Costco visits per month, and many travel great distances to stock up on supplies. Unlike most discount stores, Costco has many affluent customers who are “treasure hunting” for the special bargains on luxury goods rather than merely looking for low prices on basic commodities. Costco’s merchandise buyers have to experiment and take big risks with luxury items, because a lot of money is tied up in inventory if the items do not sell quickly. The buyers need to rely on their intuition and creativity to find items that will be popular and profitable. Innovation in design and packaging is also important for making some types of products such as food items more appealing to customers. Recent initiatives, for instance, include the elimination of Styrofoam trays from meat packages and the use of individually sealed packets. The design is more environmentally sound and enables consumers to freeze unused portions without repackaging or rewrapping products.
Costco has generous pay, excellent health benefits, and a good 401(k) plan for its more than 120,000 hourly employees in the Unites States. The average wage for a full‐time worker at Costco is around 40% higher than at Sam’s Club. Around 82% of Costco employees have health‐insurance coverage, as compared with less than half of the employees at Wal‐Mart, and Costco employees pay much less of their health premiums. Around 91% of Costco’s employees are covered by retirement plans, as compared to 64% of employees at Sam’s Club, and company contributions to the plan are nearly twice as high per employee at Costco. The company policy is to promote from within the ranks, and workers at all levels have good opportunities for advancement.
The company has one of the most loyal and productive workforces in the retailing industry. The high level of organizational commitment is reflected in the turnover rate (around 6% for workers on the job for more than one year), which is well below the average rate of 44% for the industry. The cost from turnover (lost productivity, recruiting and training new employees) is 40% lower at Costco than at Sam’s Club. Employee theft at Costco is the lowest in the industry. The savings from lower turnover costs, lower employee theft, and higher employee productivity more than offsets the higher cost of compensation at Costco. The operating profit per hourly employee in the United States is nearly twice as high at Costco as at Sam’s Club. The high level of employee motivation and commitment is not only because they are well compensated, but there is also a high level of intrinsic motivation among Costco employees. They are encouraged to suggest ways to improve the stores and product mix, and creativity is valued. Each morning before the store opens there is a conversation about ways to be more efficient and to provide better customer service. All employees are trained to be friendly and helpful when customers need assistance. When shoppers need assistance in locating an item, employees are expected to show them where it is rather than merely pointing to a distant spot or providing vague directions.
The methods Costco uses to minimize costs include a no‐frills approach to their stores, which also function as their warehouses. The buildings have metal exteriors and steel racks. Instead of individual products on shelves, there are pallets on steel frames that soar to the ceilings. Above every pallet is a card with a simple product description, and they keep everything as simple as possible for the product displays. Marketing costs are low because Costco does not do any advertising; there is no public relations manager or expensive advertising agency. Instead, Costco depends entirely on happy customers who tell their friends about the fantastic bargains available at Costco stores.
The company keeps layouts standard in its stores to reduce costs and give shoppers a feeling of familiarity at every location. The products sold in each store are similar, except for foods, which vary according to local tastes. Inventory costs are reduced by having only a limited variety of product sizes, and by packaging many products for bulk sales. Products move right from the delivery truck to the sales floor, and the signage looks like it was made with a cheap laser printer. There are not even any shopping bags for customers. A computer system that tracks sales in the stores makes it possible to determine when more fresh foods are needed in the display cases and reduces costs from waste and overproduction. Jim Sinegal, the CEO of Costco, is very modest about his contribution to the success of the company and quick to share credit with others. He understands how important it is to have talented people working for a company, and he does many things to attract and retain them. At the company headquarters in a Seattle suburb, his office is an open space with no door. His desk is pushed up against the wall so that, at first glance, he appears to be someone else’s secretary. Sinegal usually answers his own phone, uses a nametag like other employees, and usually wears one of the low‐priced dress shirts sold in his stores. As the cofounder of Costco, Sinegal is a major shareholder, but his annual compensation is only 10% of the average amount for CEOs. He tries to limit his salary and bonus to no more than twice what a Costco store manager earns, and he declined his bonus for the last three years in order to achieve that objective.
At the annual Managers’ Conference, Sinegal meets with more than 1,000 Costco managers and product buyers to review the past, discuss the present, and plan the future. He also has monthly budget meetings with groups of around 70 store managers to talk about the importance of exercising tight cost controls, getting the details right, and adhering to the Costco credo. Important values at Costco include hard work, respect for customers, and high ethical standards. Sinegal communicates a strong concern for high performance, but he is not coercive or overly critical. He is careful not to discourage his product buyers when they take risks on new products. Employees are empowered and encouraged to “think outside the box.” Sinegal still attends every new store opening, and he tries to visit every Costco store twice a year. He spends nearly half of his time on the road checking out his stores as well as the competition to make sure they are not undercutting Costco’s prices.
Sinegal has a strong concern for his employees, and he is perceived as dedicated, caring, and hard‐working. He is able to remember the names of most of his managers, and they know him by sight. At a recent annual meeting when he answered a question by stating that he had no plans to retire soon, the audience gave him a spontaneous standing ovation. In 2003, the rising cost of health care made it necessary to increase the employee contribution to their health insurance. Sinegal sent a letter to employees explaining why the increase was necessary, and the letter generated more than 100 responses, nearly all of which were supportive.
Sinegal tries to do what is right for employees, customers, vendors, and stockholders. Recently a major decision was made to put a 90‐day limit on customer returns of electronics products. The old policy was unique in American retailing, but it was becoming too costly. The new policy could save the company more than $100 million a year, but Sinegal did not want to change it without a viable alternative. Thus, as part of the new policy, he decided to extend the manufacturer warranty by a year.
Essay #3: Case Study: Turnaround at Nissan
In 1999, Nissan was in a state of serious decline and had lost money in all but one of the previous eight years. Only Renault’s willingness to assume part of Nissan’s debt saved the Japanese company from going bankrupt. As part of the deal, the French automaker appointed Carlos Ghosn to become Nissan’s chief operating officer. However, there was widespread skepticism that the alliance between Renault and Nissan could succeed, or that someone who was not Japanese could provide effective leadership at Nissan.
During the three months prior to assuming the position of COO at Nissan, Ghosn met with hundreds of people, including employees, union officials, suppliers, and customers, to learn more about the company and its strengths and weaknesses. From these meetings and earlier experiences with turnaround assignments, Ghosn understood that major changes would not be successful if they were dictated by him and the experts he brought with him from Renault. Soon after assuming his new position at Nissan in June 1999, Ghosn created nine cross‐functional teams and gave them responsibility for determining what needed to be done to revive the company. Such teams had never been used before at Nissan, and it was unusual in a Japanese company to involve a broad cross‐section of managers in determining major changes.
The cross‐functional teams examined different aspects of company operations to identify problems and recommend solutions to Ghosn and the executive committee. Several interrelated problems were identified, and they were mostly consistent with Ghosn’s initial impressions. The poor financial performance at Nissan was a joint result of declining sales and excessive costs, and weak management was the primary reason for the failure to resolve these problems. Management lacked a coherent strategy, a strong profit orientation, and a clear focus on customers. There was little cooperation across functions, and there was no urgency about the need for major change.
One reason for excessive costs at Nissan was that only half of the available capacity in the company’s factories was being used; production capacity was sufficient to build almost a million more cars a year than the company could sell. To reduce costs, Ghosn decided to close five factories in Japan and eliminate more than 21,000 jobs, which was 14 percent of Nissan’s global workforce. To simplify production operations at the remaining factories and make them more efficient, Ghosn planned to reduce the number of car platforms by half and the number of power train combinations by a third. Plant closings can undermine relations with employees, and Ghosn took steps to ensure that employees knew why they were necessary and who would be affected. In general, he understood that most employees prefer to learn what would happen to them and prepare for it, rather than remaining in a state of uncertainty and anxiety. Ghosn attempted to minimize adverse effects on employees by selling subsidiaries and using natural attrition, early retirements, and opportunities for part‐time work at other company facilities.
Purchasing costs represent 60 percent of the operating costs for an automaker, and Nissan was paying much more than necessary for the parts and supplies used to build its cars. After comparing expenses at Nissan and Renault, Ghosn discovered that Nissan’s purchasing costs were 25 percent higher. One reason was the practice of purchasing small orders from many suppliers instead of larger orders from a smaller number of global sources. It would be necessary to reduce the number of suppliers, even though this action was unprecedented in a country where supplier relationships were considered sacrosanct. Higher purchasing costs were also a result of overly exacting specifications imposed on suppliers by Nissan engineers. The engineers who worked with the cross‐functional team on purchasing initially defended their specifications, but when they finally realized that they were wrong, the team was able to achieve greater savings than expected. Excessive purchasing costs are not the type of problem that can be solved quickly, but after three years of persistent effort it was possible to achieve Ghosn’s goal of a 20 percent reduction.
Years of declining sales at Nissan were caused by a lack of customer appeal for most of the company’s cars. When Ghosn made a detailed analysis of sales data, he discovered that only 4 of the 43 different Nissan models had sufficient sales to be profitable. The head of engineering made final decisions about the design of new models. Designers were taking orders from engineers who focused completely on performance, and there was little effort to determine what types of cars customers really wanted. To increase the customer appeal of Nissan vehicles, Ghosn hired the innovative designer Shiro Nakamura, who became another key leader in the turnaround effort. The designers would now have more authority over design decisions, and Ghosn encouraged them to be innovative rather than merely copying competitors. For the first time in over a decade, Nissan began coming up with cars that excited customers both in Japan and abroad. Ghosn planned to introduce 12 new models over a three‐year period, but the time necessary to bring a new model into production meant that few would be available until 2002.
Another reason for declining sales was Nissan’s weak distribution network. In Japan strong brand loyalty is reinforced by efforts to maintain close relationships with customers, and it is essential for the dealerships to be managed by people who can build customer loyalty and convert it into repeat sales. In 1999, many Nissan dealerships in Japan were subsidiaries managed by Nissan executives nearing retirement, and they viewed their role more in social terms than as an entrepreneur responsible for helping the company to increase market share and profits. Ghosn reduced the number of company‐owned dealerships (10 percent were closed or sold), and he took steps to improve management at the remaining dealerships. Saving Nissan would also require major changes in human resource practices, such as guaranteed lifetime employment and pay and promotion based on seniority. Transforming these strongly embedded aspects of the company culture without engendering resentment and demoralizing employees was perhaps the most difficult challenge. The changes would primarily affect nonunionized employees at Nissan, including the managers. A merit pay plan was established, and instead of being rewarded for seniority, employees were now expected to earn their promotions and salary increases through effective performance. Areas of accountability were sharply defined so that performance could be measured in relation to specific goals. New bonuses provided employees an opportunity to earn up to a third of their annual salary for effective performance, and hundreds of upper‐level managers could also earn stock options. These and other changes in human resource practices would make it possible for Ghosn to gradually replace weak middle‐ and upper‐level managers with more competent successors.
In October 1999, Ghosn announced the plan for revitalizing Nissan. He had been careful to avoid any earlier leaks about individual changes that would be criticized without understanding why they were necessary and how they fit into the overall plan. The announcement included a pledge that Ghosn and the executive committee would resign if Nissan failed to show a profit by the end of 2000. It was an impressive demonstration of his sincerity and commitment, and it made what he was asking of others seem more acceptable. Fortunately, the primary objectives of the change were all achieved on schedule, and by 2001 earnings were at a record high for the company. That year Ghosn was appointed as the chief executive officer at Nissan, and in 2005, he would become the CEO of Renault as well.
Essay #4: What are some guidelines for strategy formulation? Why is external monitoring important for strategic leadership? Give an instance of successful or failed strategy in the mobile space. Why do you think they succeeded/failed and what lessons can be learnt?
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