CASE 1: ROBIN HOOD
This case is a fun vehicle for introducing the basic concepts of business strategy and
structure, and relationships between values and strategy. It should be used early in a
business policy course—perhaps even on the first day, for it can easily be read and
analyzed in class. It allows the professor to begin the class—and the course—with a
discussion orientation yet obtain rather complete closure on complex organizational
issues: how to manage growth in size and how to cope with an increasingly hostile
environment.
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CASE 2: ASTRAL RECORDS, LTD., NORTH AMERICA
This case gives a good flavor of the challenges in acting as general manager, in particular
when one is new to the job. The case explores the “parachuting in” of Sarah Conner, a
venture-capitalist (BLL, 60% owner of Astral) employee, to take over the running of
Astral (North America) following the sudden death of its long-time president (Maxwell).
Astral is mostly a manufacturer of CD records for other labels, though Maxwell has
expanded its own recording business (10% of revenues) across a range of musical genres.
Astral has established a name for quality and innovation, but generally-available
technology has become so reliable that quality no longer really serves as a differentiator
in the industry.
Conner, though young, has a good music background and several years operating
experience at BLL, where she has risen fast. Unsurprisingly, she faces a stack of issues
calling for her attention at Astral (see the various Case exhibits). Given the high
involvement and sudden departure of Maxwell, not least among these issues for Conner
will be getting Astral employees to assume more decision-making power, while she
comes to grips with the business. This will involve trying to quickly plumb the motives
and ability of the various influential individuals (e.g., Alexander, Exhibit 2).
In such a situation, Conner should likely maintain certain symbolic roles played by
Maxwell, especially those that served to communicate with employees (e.g., the “high
teas”, as indicated in the case exhibits). Other aspects of his schedule should be chosen
more judiciously—Conner should be careful in assuming she can simply “show up”, as
some of these events will require background knowledge. Moreover, she will also want
to begin to put her own stamp on things. In particular, she will need to negotiate a
relationship with Count Smirnov, Astral’s founder who, as Case Exhibit 4 indicates, may
be overbearing. Other more narrowly operational matters demanding her attention
include the resin supplier and the interview with Billboard magazine: Exhibits 7 and 8
respectively. The resin is an especially pressing matter and indicates the importance of
prioritizing issues to be dealt with.
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CASE 3: MACARTHUR AND THE PHILIPPINES
Overview
This case offers an excellent opportunity to integrate three aspects of the strategy
formulation and formation process. It deals with the strategists themselves, dominantly
MacArthur and Roosevelt. There are definite aspects of strategy formulation. However,
the famous island hopping strategy actually emerges from a series of decisions and
interplays between various powerful forces. Hence, the case allows one to raise the key
issues of power and politics in strategy. The case deals with the way in which the most
spectacular strategy of World War II, island hopping in the Pacific, was simultaneously
developed and implemented.
It allows the professor to bring out many of the classic principles of strategy as they
emerge from the military/diplomatic field and suggests how they can be used to evaluate
strategies. Executive audiences find this case very powerful. They tend to empathize
with the kind of thinking that goes into strategies on this scale and see the business utility
of military strategy concepts. The case, based on William Manchester’s book, American
Caesar, debunks many of the myths about MacArthur, offering a further opportunity to
query students or executives about their own perception screens concerning MacArthur
as a leader. Their initial views are often distorted by myths, misinformation, hearsay, etc.
The case goes well with readings on the strategist, strategy formulation, strategy
formation, power, bureaucratic strategies, and evaluation of strategies.
Session Structure
We usually begin this session by asking the students to define in their own words what
the Allies’ strategy was in World War II. This allows the professor to introduce different
levels of strategy: global grand strategy, U.S. political strategy, and the Pacific campaign
strategy. The Allies’ global strategy was to first concentrate on what was the greatest
perceived threat, Nazi Germany, and destroy that force. In the meantime, sufficient
forces were deployed to Southeast Asia to “contain” the Japanese threat. Then, after the
defeat of Germany, all forces were to be concentrated in the Pacific area to finish off
Japan. The Allies hoped to form a more stable post-war world based upon more
democratic governments in all of the areas conquered by Germany and Japan. The
conflict in goals between the Western Allies and Russia—and the need to compromise
goals and strategic thrusts to accommodate these differences—can be brought out in the
discussion, as can the trade needs and aspirations of each party in the post-war world.
This provides a broad framework for the overall Pacific campaign strategy.
However, it is also worthwhile to note the dominant influence of U.S. political
strategies—especially the need for Roosevelt to be re-elected and the fear that
MacArthur’s popularity would make him an overwhelming opponent in such an election.
The visions and conflicts of Roosevelt, MacArthur, Marshall, and the Joint Chiefs of
Teaching note copyright © 1987 James Brian Quinn. This note was prepared by Prof. Quinn and Research Associate Penny C.
Paquette.
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Staff may also provide an interesting focal point. This level of strategy can be brought
out as an adjunct to the discussion of the Pacific campaign strategy, if so desired.
Defining Strategy Itself
Rather than providing a canned definition of strategy, it is useful to have the students
define in their own words what the strategy in the South Pacific really was. As the
description comes forward it will contain several major goals, i.e., to capture a series of
key islands as stepping stones; free the Philippines to avoid being flanked in any attack
on the main Japanese islands; neutralize the Japanese fleet by a steady war of attrition;
control the air above all major military action areas; cut off the supply lines of the
Japanese in the south, capture weak areas and use these to sortie against the Japanese
supply lines; obtain bridgeheads close enough to the Japanese mainland to launch a fullscale bombing attack; weaken Japan's production capabilities so that an invasion could
occur; and obtain unconditional surrender.
A series of major policies (rules or limits) will also tend to fall out of the discussion.
Chief among these policies are: concede the Asian land mass to the Japanese; bypass the
Japanese great strengths on the mainland and in their own most fortified island strong
points; avoid massive frontal attacks; move rapidly to avoid exposure during movement;
sacrifice materiel not men; utilize the overwhelming production capabilities of the United
States to produce materiel; never leave air cover unless absolutely necessary; form
coalitions with liberated governments in order to avoid having to leave strong occupation
forces behind; and so on.
Finally, there is a rather distinct sequence, which develops in the strategy. This sequence
includes delaying the Japanese advance during an initial fall back to gain time enough to
bring superior air and naval forces to bear; regroup using Australia as a base and begin
moving north, bypassing Japan's concentration of strength on the mainland; stop the
Japanese advance at sea; capture a few key islands; cut the supply lines of the Japanese;
starve and isolate the remaining troops; create forward bases at the Philippines and at
Okinawa nearer to Japan; soften up Japan through bombing; obtain a Russian coalition to
force Japan to fight on two flanks; invade Japan; achieve total victory; and be
magnanimous in victory.
Sources of This Strategy
One can ask what were the determinants of this strategy? Clearly, the U.S. value system
influences many choices, notably the belief in the value of human life; the capacity to
squander material resources; the belief in the superiority of the U.S. cause; the confident
outlook of U.S. leaders; etc. Next, of course, are the leaders' (Roosevelt's and
MacArthur’s) own values and power needs as highly charismatic leaders. MacArthur had
seen the dreadful waste of life in the stalemated trench warfare of World War I and was
determined to avoid such a situation in the Pacific. He felt a moral obligation to return to
the Philippines and liberate them. He was knowledgeable about the Japanese situation
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and felt he could make more sensible choices than those leaders isolated from the Far
East. Political needs clearly determined the strategy. Roosevelt and MacArthur both
constantly balanced the amount of action given to the different services, making sure
each had a high enough profile role to maintain their morale and political support.
Roosevelt needed to show concrete progress before an election. MacArthur had to deal
with the realpolitik in the United States. MacArthur undoubtedly saw himself as a
political candidate for the presidency and worked his public relations skills to maintain a
high profile. This also allowed him flexibility for action in the field. MacArthur also
understood his opponents’ political situation in Japan and was able to modify the overall
strategy to accommodate this, moving rapidly and flexibly at the end of the war to save
lives and resources on both sides. Politics and strategy are intimately intertwined.
Situation Analysis—Strengths and Weaknesses
Beyond these more qualitative points, one can analyze the relative strengths and
capabilities of the Japanese vs. the United States. The key weaknesses of Japan were its
necessity to import all raw materials; the sheer number of people in the combined armies
of the Allies; the extensive land mass Japan was trying to control with a relatively small
army; their less extensive and more vulnerable production facilities; their inability to
modernize their aircraft and ships as rapidly as the United States; the fact that the United
States could read all of the Japanese codes and know their major alignments; etc. The
strengths of the Japanese situation lay in their control of extensive areas with key
resources (like tin and rubber); their highly disciplined culture and armies; their
experienced field commanders; the attacker’s advantage of surprise; some excellent
equipment designs; the population intensity and loyalty of its citizens if Japan itself were
attacked; a number of forward bases from which to attack to the South and East; and so
on.
The Allies aligned their strategies much more carefully to the opportunities the post-war
world offered in former colonial countries. The Allies for the most part very carefully
targeted their propaganda and political approaches to the most important emerging trends
in the worldwide political scene. Chief among these were the emergence of nationalism,
anti-colonialism, a deep resentment of the cruelties of the Japanese, the disintegration of
the European economic dominance, empires, and colonial “special concessions" or areas
of influence in the Far East. The United States in particular recognized the emergence of
Russia as a dominating world power, the importance of high technologies (air, chemical,
and nuclear) to nations with small manpower bases, the importance of developing
countries as sources of raw materials and as possible future markets, the need to
neutralize possible communist expansion, etc.
It is very useful to show how the strategy was influenced by the dominating perceptions
of these various factors in the United States at the time. A most significant weakness of
the strategy was the failure to see the people of emerging countries and their political
needs as coequal with those of the Western nations. Perhaps most poignant was the
willingness of the United States and the Allies to write off China as a desirable focal
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point for direct military or political energies. Instead, China was handled through a weak
coalition partner, not having a strong popular base, and the U.N. was conceived as a
bastion for maintaining existing power arrangements in the post-war world.
Evaluation of the Strategy
After describing the strategy and classifying its components in a fashion, which helps the
professor, develop his or her particular view of strategy, it is desirable to ask, “Why was
this an effective strategy? What are the characteristics of an effective strategy? What
can we learn by looking at this most successful strategy of World War II?” Perhaps the
following are the things that stand out most strikingly:
A.
U.S. leaders had a relatively clear vision of the post-war world they wished to
achieve and the role of the United States in that world.
B.
The goals of the strategy were clear and decisive.
C.
There was a careful evaluation of the relative strengths and weaknesses of the
contending parties.
D.
There was a careful and constant evaluation of the enemy's changing potentials and
its leaders’ intentions.
E.
The United States extended its own resource capabilities by forming coalitions with
China, the occupied countries, and the other Allies.
F.
The strategy was based on the careful use of intelligence derived from reading the
Japanese codes, local native guerrillas, and formal intelligence gathering bodies.
G.
Much attention was paid to the full logistics (oil, ammunition, food, etc.) necessary
to support the advance.
H.
Careful attention was given to the motivation and morale of the troops and
supporting groups in Japanese-occupied countries.
I.
When the organization was unified, the results were much more effective; however,
unification of command was not always achieved.
J.
Communications among the services and the Allies were a constant challenge.
While it worked amazingly well between the Allied countries, this aspect of the
strategy was not always well carried out between the U.S. services themselves.
K.
The strategy used the overwhelming U.S. strengths of its undiminished production
base, its constantly strengthened Navy, its capacity to out-produce Japan's aircraft
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industry, its better command of high technologies, the capacity for mobile fast
striking forces, independent action, etc.
L.
Strategy offset weaknesses of the United States, particularly in numbers of troops,
which could be committed in the Southeast Asian sector.
M.
The strategy used surprise and speed of movement to leverage resources and obtain
higher impact with limited resources.
N.
The strategy protected the flanks of the advance, thus avoiding the Japanese cutting
off the supply lines of the United States.
O.
The strategy attacked the weaknesses of Japan (i.e., places where there was local
guerrilla activity, command or small garrisons, etc).
P.
The strategy used minimum resources (particularly human lives) to achieve its
goals.
Q.
The strategy was internally flexible to changes in the environment, notably in its
decisions concerning the attacks on Formosa and Luzon.
R.
The urgencies of timing were constantly kept in mind (both at the political level and
in the need to arrive at the Philippines before the Japanese could reinforce them).
S.
Concentration of overwhelming resources at chosen points (the 700 ship Armada
was the largest ever assembled in the Far East).
T.
The use of synergy (i.e., the additive effects of air, land, and sea forces when
coordinated).
U.
The strategists anticipated the opponents’ moves. MacArthur worked back and forth
in his own mind the various “what if” contingency plans until he had thought
through all major alternatives.
V.
The strategy split opponents’ strengths and enabled the Allies to attack key points
piecemeal.
W.
The Allies were able to maintain the initiative and thus leverage their own resources
by making the Japanese respond at points selected by the Allies.
The main weaknesses of the strategy were:
A.
Key leaders did not really understand their opponents.
B.
There were misassessments of various environments (the weather and soil
conditions in the Philippines).
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C.
There were communications breakdowns especially in the Navy's handling of the
battle of Luzon and the Surigao Straits.
D.
There were intelligence failures in understanding the internal collapse of Japan's
military and economy.
E.
Periodically, the Allies would attack strong positions unnecessarily (e.g., Buna and
Okinawa).
F.
Because of MacArthur’s ego needs, he sometimes announced victories prematurely
or misassessed the situation.
G.
MacArthur periodically exceeded his authority—which could have been disastrous
if a failure had occurred.
Following this evaluation, it is useful to ask, “What could the Japanese have done better
in light of the strategy which MacArthur did adopt? If they had taken these
counteractions, how should MacArthur have responded?” Some items are fairly clear.
The Japanese overextended their resources by trying to attack as far south as Australia.
The attempt to conquer all of China would also have used up more resources than Japan
had available. Clearly, there were also tactical errors, e.g., not coming into Leyte Bay
and staying there; the U.S. fleet could possibly have been seriously damaged at that point.
The Japanese lost the support of local countries by the atrocities they committed and their
excessive use of violent control techniques. An earlier withdrawal to a perimeter and
concentration on U.S. sea and air forces within that perimeter would have made it very
difficult for the United States. Obviously, there are other strategic possibilities. Each of
these can be analyzed in the same fashion.
How Was the Decision Made?
There is much information in the case on the decision process itself. It is clear that the
“island hopping” strategy did not burst forth from MacArthur’s brain in a single brilliant
flash. At first, the Pacific strategy was dominantly a delay and containment strategy until
the Allies could bring sufficient forces to bear at key points to stop the Japanese advance.
At the time, later stages of the strategy could not be clearly conceived because
information about later conditions was not available. In the early stages, the Japanese
maintained the initiative, had overwhelming forces, and could strike essentially at will
throughout the southwest Pacific area. Only after the containment strategy became
successful was the “advance” strategy marked out. Even then, MacArthur had to see at
first hand the devastating effects of trying to advance in force through the jungles against
a well-trained and positioned enemy. In such a battle situation, the United States could
not bring to bear its most significant strengths, i.e., air power and heavy firepower. The
professor may want to note that these same limitations later hampered, if not destroyed,
the military strategy in Vietnam. Even then “island hopping” was not clearly planned in
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advance. There were experiments that worked. From these the overall pattern and
strategy emerged.
One can ask, “Who decided on the island hopping strategy? Who originated the idea?”
Answers to both questions are murky. Roosevelt had to approve of the strategy; but then
again, so did MacArthur and King or it would not have been acceptable. MacArthur
clearly championed the strategy and led others to his conclusion. However, it is
interesting to note that the strategist in this case had to persuade the commander-in-chief
of his viewpoints. The strategy does not come from the top, i.e., Roosevelt, down to
MacArthur. Even after the grand strategy was agreed upon, MacArthur still had to
persuade Kenny and King about key elements in the strategy, and major decisions were
made by Sutherland, Truman, those who chose to build and drop the atomic bomb, and
others who modified the strategy at key points.
The Hawaii Conference provides an interesting vehicle for investigating how such
decisions were made. Roosevelt used the conference to obtain some of his other goals,
personal publicity, headlines, and identification with MacArthur. He also used the
meeting to bypass the Pentagon bureaucracy and get an independent view on strategy. At
the meeting, MacArthur won in part because he was both better informed than Nimitz
and was arguing for himself. Nimitz was not as articulate, was arguing for King, and was
not as prepared on the politics of the issue. In essence, the result of the meeting was a
coalition between MacArthur, Leahy, and Roosevelt that bypassed the Pentagon's power
base. Instead of acting as a line officer giving commands, Roosevelt acted as a chairman
leading a debate. When the decision involved variables which are not easily measurable,
MacArthur moved the argument to the “values” level, bringing in unarguable concepts
like honor, promises kept, moral issues, etc., which others cannot really debate.
Finally, as the strategist, MacArthur obtained the best advice he could from his
subordinates. He consciously pitted the subordinates against each other to maintain his
own power base and to improve the quality of the information he had. He went to the
front to obtain information personally, making sure it would not be biased by the
perceptions of intermediates. He consciously chose commanders who had different
command styles and attitudes toward risk than he did. The result was a series of checks
and balances on his own judgment. MacArthur constantly updated and changed his views
as new information became available. He was even forced to allow certain actions,
which he did not support to go forward. These included the attacks on Okinawa and Iwo
Jima, which cost heavily in casualties.
The students should notice how symbols and dramatic flair help implement a strategy.
The best examples are MacArthur and Roosevelt before the Hawaiian conference,
MacArthur and his staff wading onto the Philippines beaches, and finally, their unarmed
appearance in Japan.
The students should be asked to consider how MacArthur and Roosevelt’s broader
worldviews affected the actual outcomes of the war. Without linking the Pacific
campaign ultimately to strongly held higher values, the United States could have won the
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war and lost the peace. Instead, MacArthur, Marshall, and Roosevelt converted the peace
itself into the true triumph by rebuilding and modernizing the nations that were
conquered. Thus they avoided the very mistakes that brought Japan to its knees.
Strategic Principles
After the discussion, it is useful to ask students what strategic principles can be drawn
from this case. Military strategists would point out the following:
A.
Clear decisive objectives allow local commanders to act independently, yet
coordinate their actions toward the desired strategy. Objectives must be as simple as
possible, understood (whether written or not) and decisive (i.e., if achieved, they must
assure victory). This is the basis of decentralization in organizations.
B.
A good strategy maintains the initiative and choice of points at which contact will
be made with the enemy. This choice allows one to obtain greater gains for a given
commitment of resources, i.e., to leverage resources. This is a corollary benefit of having
a distinctive competitive edge. Those who are determining events find it easier to
maintain morale, and morale itself helps to utilize resources more effectively—i.e., with
limited resources one obtains a higher effect. Defensive strategies tend to become
reactive and make it difficult to maintain morale. Because the defender cannot determine
the point of attack, he must spread or disperse resources, losing the advantage of
concentration.
C.
A well-designed strategy concentrates more force at selected points than the
enemy can possibly deal with. This ensures a series of local victories. The local victories
build morale and bring new resources under the control of the victor. Concentration and
resource building are among two of the most important principles of strategy. These are
the reasons behind the emphasis on a distinctive maintainable competitive edge and the
highest market share concepts in industrial strategies.
D.
Concession of certain positions is necessary to obtain concentration. In business
strategies, this is a most difficult issue to get managements to deal with. They want “to
do everything for everyone.” In order to achieve concentration and focus, one must set
policies limiting commitments to other areas severely. Yet, this limitation must be
achieved while leaving sufficient force to protect the flanks of the area of concentration.
E.
Planned flexibility is another key element in strategy. Since by definition a
strategy deals with a set of forces whose power, interactions, and ultimate outcomes are
unknowable, one needs to design conscious flexibility into the strategy. This allows one
to use later information and intelligence either to anticipate new modes of attack or to
take advantage of developing weaknesses in the enemy's position, which might not have
been expected in the initial strategy. To obtain such flexibility requires maintaining
reserve resources, flexible communications channels, a fast response organization and
support capabilities, and the full logistics necessary to move forces into new positions
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quickly. Opportunistic moves leverage resources through timing advantages. Over
planning or loss of flexibility can waste resources by maintaining commitments to
obsolete goals or policies.
F.
A coordinated command is necessary to achieve maximum effectiveness from
resources. When commanders disagree on what should be done, much effort is wasted
and the strategy can be undermined. The Okinawa campaign is an example of the split in
battle fleets at the battle of Leyte. Similarly, lack of a working consensus among
members of a top management team can waste resources and confuse the entire
organization.
G.
Surprise leverages resources. When the enemy is not prepared, one can achieve
greater results with fewer resources. A good strategist consciously tries to hit the enemy
where he least expects it. This is one of the great failings of the “formula approaches” to
strategy formulation in businesses. Many of the most successful enterprises develop
totally unique postures that accomplish goals in a new way.
H.
A secure base for operations is an essential element in strategy. One must have a
set of resources that is essentially unassailable from which to launch other ventures. This
is the principle of having a “cash cow” or a large raw material or installed product base in
business organizations. In warfare, it means having a secure production base or landmass
where production and training can occur. As soon as the mainland of Japan could be
attacked, it lost this crucial position, while the United States was fortunate to maintain a
secure base during the entire war.
Utilizing the criteria developed for evaluating a strategy given above, one can develop a
series of “principles of strategy” which provide useful memory triggers and strategic
concept structures for executives and students. Executives particularly like to think in
these terms. They find the analogy very useful in designing corporate strategies. And
strategic planners or consultants find the analysis useful in critiquing or recommending
corporate strategies. Most strategies fail because they violate one or more of these key
principles.
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CASE 4: RUDI GASSNER & THE EXECUTIVE COMMITTEE OF BMG
INTERNATIONAL (A) & (B)
Note: only the (A) case has been included in the case collection; notes on the (B) case
have been included as background material for the instructor.
Case Summary
BMG International was the international music subsidiary of the German media
conglomerate, Bertelsmann, the second largest media enterprise in the world. In May
1993, CEO Rudi Gassner and the executive committee were gathered for one of their
quarterly meetings. Arnold Bahlmann, a regional director and executive committee
member, had recently negotiated a reduced manufacturing transfer price for the upcoming
year’s production of CDs, records, and cassettes. Because business plans for the year had
been established in March based on the assumption of a higher manufacturing cost, the
new price would realize an unanticipated savings of roughly $20 million. As a result, the
executive committee was now faced with some tough decisions. It had to decide whether
or not to change the business plans of each country and the managing director’s bonus
targets (which were based primarily on their achievement of the targets) to reflect the
new manufacturing price.
In Gassner’s mind, the issues were clear. BMG International had achieved tremendous
success and growth in its short lifetime of 6 years, and the team had every right to feel
good about its performance. But now, Gassner wanted to guard against the company
becoming a victim of its own success. He knew that they would have to monitor carefully
the economics of the business and maintain their agility in order to meet their future
challenges. In light of these concerns, he felt that the managing directors should be held
accountable for the savings. The executive committee, however, seemed unwilling even
to entertain this possibility.
The (A) case describes the discussion during the quarterly meeting as well as the
evolution of the executive committee from its inception. A short (B) case describes how
Gassner decided to handle the issue of the reduced manufacturing price: when he sensed
that the executive committee was not going to consider the possibility of changing bonus
targets, he asked the group at least to agree to use the adjusted calculations as a reference
for internally monitoring performance during the year, and then he tabled the discussion.
The (B) case explains Gassner’s rationale for his actions and his ultimate decision not to
base bonuses on the adjusted targets.
To accompany the cases, we have prepared a video (HBS No. 494-524,13:09 minutes) to
be shown at he end of the class discussion. The video shows excerpts from a discussion
with Rudi Gassner in an MBA classroom in February 1994. He elaborates on his decision
and discusses the challenges and opportunities he faces in managing the top management
on his decision and global enterprise and the impact of his style on the team’s culture.
This note (#5-494-122; Rev. October 20, 1995) was prepared by Professor Linda A. Hill with the assistance of Research Associate
Katherine Seger Weber for the sole purpose of aiding classroom instructors in the use of Rudi Gassner & the Executive Committee of
BMG International, HBS No. 494-095 and video 494-524. Copyright © 1994 by the President and Fellows of Harvard College.
Reprinted by permission of Harvard Business School.
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LEARNING OBJECTIVES
This case was designed for the “Managing Your Team” module of the MBA second-year
elective course Power and Influence. It highlights the role of the manager in designing
and building an effective team1 and the impact of the manager’s style on the team’s
process and outcomes. These lessons are critical ones for MBA students. I found in my
research that many new managers fail to recognize, much less address, their teambuilding responsibilities; they rarely understand the impact of their style on their team’s
process and outcomes.2 In particular, this case provides an opportunity to analyze the
issues of delegation and empowerment within the special context of a senior management
team in a complex global organization.3
There are two levels of analysis to be considered in this case: (1) the specific question of
how Gassner should handle the team meeting in which the group seems resistant to
changing the bonus targets, and (2) the “bigger picture” analysis of the team’s design,
culture, and effectiveness. In teaching the case, I focus on the impact of Gassner’s style
on the evolution of the team over time. I use the instance of the executive committee
meeting and the bonus question as one specific event that illustrates Gassner’s options as
the team manager and the impact of his actions on the team’s process and outcomes.
The case is best used in conjunction with the note “Managing Your Team” (HBS No.
494-081), which identifies criteria for evaluating team effectiveness and outlines the key
ingredients for creating the effective team.
The specific learning objectives for the case are:
1. To understand what an effective team is.
2. To consider the roles and responsibilities of the team manager and the impact of
his or her style on the team’s process and outcomes.
3. To explore the challenges of managing diversity—both interfunctional and
international diversity—in a team context.
By managing a team, we mean managing the group performance of one’s direct reports as opposed to
managing their individual performances. Groups cannot be understood solely in terms of their collective
individual member characteristics. Groups have their own dynamics (e.g., stages of development, problemsolving process, norms, cohesiveness), which have an impact—positive or negative—on group
performance.
2
See Linda A. Hill, Becoming a Manager: Mastery of a New Identity Boston: Harvard Business School
Press, 1992, pp. 229-231.
3
Although I use this case to study the role of the team manager, it is a rich case and could also be used
effectively as a case on leadership in the special context of a large, highly decentralized, global
organization. It could also be used to highlight the specific nature of top management teams, transnational
teams and cross-cultural management, or performance measurement and incentives in a team context.
1
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ASSIGNMENT QUESTIONS
1. What should Gassner and the executive committee do about modifying the
business plan and bonus targets of each country?
2. How effective has Gassner been in managing the executive committee?
3. What challenges lie ahead for Gassner and the executive committee?
CASE ANALYSIS
As discussed above, this teaching note focuses primarily on the role of the team leader
and the impact of his or her style on the team. In managing the team, the leader has two
sets of responsibilities: designing the team and facilitating the team’s process (see Exhibit
1).4 The analysis below addresses each of these roles, examining how Gassner designed
the team (set the agenda, decided what type of teamwork was needed, and defined the
team’s composition and structure) and his impact on the team’s process and evolution.
After this “big picture” diagnostic analysis, we then turn to the specific action questions
of what Gassner should do in the future to improve the effectiveness of the team, and
specifically, what he should do in the deadlocked executive committee meeting.
In order to fully understand the team and Gassner’s role, it is useful to study the context
within which they operated. The analysis below therefore begins with a brief overview of
the company context and the associated political dynamics.
COMPANY CONTEXT
BMG International was a complex transnational organization composed of 37 local
operating companies spread through the world and a corporate headquarters located in
New York. From Bertelsmann, the company inherited a strong tradition of
decentralization and delegation of operating responsibility and authority to local
management. This culture was further supported by Gassner’s own personal style of
delegating authority (he noted, “I liked the Bertelsmann style. It was very close to my
own personal style.”) As well as his strategy for the company, which emphasized the
development of local repertoire (“made it clear to the local managers that their foremost
responsibility was developing domestic talent”).
For more elaboration on these responsibilities, see “Managing Your Team”, HBS No. 494-081. Another
responsibility of the team manager is managing the team’s boundaries and relationships with external
constituencies. For their teams to be effective, managers must understand the power dynamics of the larger
organization, build relationships with those on whom the team is dependent, and negotiate their team’s
interests with others (see “Managing Your Team,” p. 4). As manager of the executive committee, one area
in which Gassner must manage the team’s external relationships is with regard to the business targets and
expectations of senior management (his boss, Michael Dornemann). The case does not contain much
information with regard to Gassner’s actions in this arena, but it is important for students to remember the
team’s external constituencies and Gassner’s role in managing them as well as in managing the team itself.
4
254
Gassner’s strategy, however, was not based solely on he development of local repertoire.
Citing the global success of Whitney Houston as the ideal, his strategy was to develop
acts locally and then launch them worldwide. He noted, “globalization allows you to
serve a bigger market. Every time we add a new country, we would increase our revenue
accordingly…There’s more money to be made outside the borders if you do it right.” As
Henn emphasized, the success of the strategy depend on the global coordination of the
dispersed operating companies:
You have to have coordination between the regions as far as marketing
and promotion activities are concerned because recording and marketing
expenses are far too great these days for any one (local) company to be
able to earn back its investment in one country only.
BMG International, therefore, embodied a complex mix of decentralization and
autonomy among the diverse operating units, combined with a centralized strategy, which
created interdependence among them.5 In addition, the company was facing an
environment of change that heightened the need for global coordination. In its short
lifetime of six years, BMG International had achieved tremendous success and growth
(revenues increasing 20% annually), but now there was evidence that some markets had
matured and growth was leveling off. In this environment, efficiency and cost control
were becoming highly important, and Gassner believed that “a regional focus alone
would no longer be enough to guide BMG International through the uncertain and everchanging terrain of the next five years.” (Indeed, Gassner had begun to articulate a
strategy for BMG International to serve as Bertelsmann that is really global; we have
something Bertelsmann can build on.”)6 The new emphasis on cost control was
frustrating for local managers; they were skeptical about their ability to aggressively
develop and market repertoire also reducing costs.
These factors together—diversity, interdependence, resource scarcity, and a changing
business environment—can heighten the potential for political conflict in an
organization.7 It is important to keep this context in mind when analyzing the goals,
5
For more on the complexities of establishing organizational forms and strategies for global companies,
see, for example: J. A. Alexander, “Adaptive Change in Corporate Control Practices,” Academy of
Management Journal, Vol. 34, No. 1, 1991, pp. 162-193; M. Goold and A. Campbell, Strategies and Styles:
The Role of the Center in Managing Diversified Corporations (Oxford: Basil Blackwell, Ltd., 1987); S.
Goshal, and N. Nohria, “Horses for Courses: Organizational Forms for Multinational Corporations,” Sloan
Management Review, Vol. 34, No. 2, Winter 1993, pp. 23-35; and W. C. Kim and R. A. Mauborgne,
”Effectively Conceiving and Executing Multinationals’ Worldwide Strategies,” Journal of International
Business Studies, Third Quarter, 1993, pp. 419-448.
6
Indeed, in April 1994, BMG International moved ahead in this direction by agreeing to market and
distribute multimedia CD-ROM products internationally for U.S—based Crystal Dynamics. Gassner
commented on the deal: “This agreement represents an exciting first step on BMG Internationals’ effort to
develop new multimedia markets throughout the world.” Crystal Dynamics’ CEO added, “BMG makes
available to us their direct distribution system in 37 countries around the world, which overnight gives us
one of the most powerful distribution systems in the business.” See M. A. Gillen, “BMG Moves Into
Multimedia with Pair of New Pacts,” Billboard, April 9, 1994, p. 6.
7
See J. P. Kotter, Power and Influence: Beyond Formal Authority (New York: The Free Press, 1985). For
more on political conflict in organizations, see “Power Dynamics in Organizations,” HBS No. 494-083.
255
stakes, and pressures that Gassner and the executive committee faced in working together
to lead BMG International and their individual regions.
Designing the Executive Committee
Setting the agenda. One of the first tasks a manager must address in designing his or her
team is setting the team’s agenda. Members need a clear and compelling sense of what is
expected of the team. If the team does not know where it is going, its efforts will be
fragmented, and the team members will waste much of their energy trying to figure out
how to spend their time. If team members do not know how their efforts fit into the
broader organizational mission, they will not appreciate why their work in important. The
agenda should be doable but challenging if it is to be engaging to team members.8
Moreover, the manager needs to ensure that the members understand and perceive that
they are in fact a “team”—that they share a common agenda and will benefit from their
collective action. Simply because individuals are members of the same work unit or even
share a joint task does not mean that they perceive themselves as interdependent or part
of a team.
Gassner introduced his vision of the executive committee to the members as “the group
which will lead MBG International.” He described his agenda for the team:
I always wanted to run a business on the bases of a European board
system, like a vorstand:9 although one person chairs it and members have
their own portfolios [regions], the committee decides business issues
jointly.
The way I see it, the board should decide about important issues
strategically or from an investment point of view. And I wanted everybody
to be involved in the process, despite the fact that some issues may not
have a direct consequence for their region.
Gassner’s description of how he wanted his executive team to operate included
substantial delegation of authority and decision rights to the team. (On the continuum
presented in Exhibit 2, his vision was of a team that operated with almost full delegation
of decision-making authority by the leader.) In reality, however, the team did not operate
in exactly this manner. Both Gassner and the team members recognized that the team did
not have as much authority and control as his vision suggested.
Gassner’s perspective was that the team members were not taking enough initiative at
first. He commented, “everybody’s too nice,” and according to Gorman, desired more
“strong dissenting opinions.” Many of the team members, however, perceived that in fact,
8
See the sections on managing teams in R. L. Hughes, R. C. Ginnet, and G. J. Curphy, Leadership:
Enhancing the Lessons of Experience (Boston: Irwin, 1993).
9
The case notes that a vorstand was a German managing board consisting of full-time executive members
who carried out the day-to-day operation of a company.
256
Gassner was not open to their opinions and that he did not delegate much authority. They
described his style as “essentially autocratic” and like that of ”a dictator.” Although
Gassner said he wanted the group as a whole to decide on strategic issues and
investments even if they did not have direct consequences for some regions, some team
members felt that in reality, he was not open to such broad-based decision-making. One
RD noted:
Rudi usually does not allow himself in any way to be influenced by people
who are not speaking directly about the areas for which they are
responsible. In other words, he’ll be very receptive to me for everything
within my area, but when I stray into areas of the general good, I find him
very unreceptive.
Indeed, there was some disparity between Gassner’s stated agenda and the function of the
team in the eyes of its members. (This issue of how much authority was delegated to the
team is analyzed in greater detail blow.) It is questionable, therefore, whether the team
members felt bound to a common agenda or perceived themselves to be a team that
benefited from collective action.10
Deciding what type of teamwork is needed. Closely related to defining the team
agenda is the manager’s decision about what type of teamwork is needed to fulfill which
agenda. As Drucker points out, teams often fail because their managers are confused
about which type of team they desire.11 In an editorial in the Wall Street Journal, he
makes a useful distinction between three kinds of teams: baseball-type teams, footballtype teams, and tennis doubles-type teams. Each type of team requires distinct behavior
from the manager and its members each have different strengths and limitations.
Drucker compares the baseball to the surgical team performing and open-heart operation.
He notes that on such teams the players “play on the team;” they do not “play as a team.”
They each have fixed positions that they rarely leave. The second baseman never pitches;
the surgical nurse never does the anesthesiologist’s job. Drucker notes that some of the
advantages of such teams are that individual members can be clearly held accountable for
their performance and trained and developed to the fullest extent of their individual
potential. Each position can be staffed with a “star, no matter how temperamental, jealous
or limelight-hogging each of them might be.” The baseball team is inflexible, however, it
only works well when the game has been played multiple times and when the sequences
of its actions are thoroughly understood by everyone—circumstances seldom found in
business today.
Drucker compares the football team to a symphony orchestra. Like those on the baseball
team, the members of these teams have fixed positions. As Drucker puts it, “the oboe
never comes to the aid of the violas, however badly they flounder.” However, on these
teams, players do play as a team. There is a common “score of music” which must be
10
The individual performance-based incentive plan Gassner created supported this attitude (see discussion
below).
11
P. Drucker, “There’s More than One Kind of team,” Wall Street Journal, February 11, 1992, p.16.
257
followed. If there are stars on the team, they are featured only if the score calls for a solo.
Otherwise, team members must subordinate themselves to the team.
Finally, there is the tennis-doubles team, which Drucker compares to an improvisational
jazz ensemble. On these teams, the players have a primary rather than a fixed position. As
Drucker observes, in this kind of team “only the team performs; individual members
contribute.” Team members cover their teammates, adjusting as necessary to their
teammates’ talents and weaknesses and to the changing demands of the game. The
requirements dot the tennis-doubles-type teams are quite stringent. They acquire intense
commitment, trust, and collaboration on the part of the team. Members have to be trained
together and work together for some time before they can fully function according to this
model. The managers of such teams must be quite comfortable with and skilled at
empowering others; the members also have to be comfortable being empowered and must
have substantial team management expertise.12
Gassner’s vision for the executive committee team seemed to be closest to the “football”
type team, in that each member would have his own portfolio (his “fixed position”) but
the group would work together to decide issues jointly (would “play as a team”). From
the descriptions of the team members, however, it appeared that the group in fact
functioned more as a “baseball” type team, composed of individual “stars” who were
successful in their own regions and played on the team, rather than as a team. The
European subcommittee, however, was evidence that team members were moving more
toward the model of the “football team,” in that this small group did decide certain issues
jointly and they were largely self-managed.
Composition. Gassner composed the executive committee of the five Regional Directors
and four senior staff members whom he had already placed in the senior positions of
leadership at the company (see Exhibit 2 of the case). Several aspects of the team
composition are relevant for our analysis of the executive committee: that it is a senior
team, and that it is a functionally and internationally diverse team.
Special characteristics of senior teams. As a team of senior managers, the executive
committee had special characteristics that are unique to top management teams; in
particular, Ancona and Nadler13 identify the following characteristics of senior teams:14
12
For a discussion of the characteristics of self-managed work teams, see for example K. Fisher, Leading
Self-Directed Work Teams: A Guide to Developing New Leadership Skills (New York: McGraw-Hill,
1993) and C. C. Manz and H. P. Sims, Jr., Super leadership: Leading Others to Lead Themselves (New
York: Prentice Hall Press, 1989).
13
D. G. Ancona and D. A. Nadler, “Top Hats and Executive Tales: Designing the Senior Team,” Sloan
Management Review, Fall, 1989.
14
Hambrick also offers a thorough analysis of senior groups and the “centrifugal forces” that tend to
diminish their integration and team-like behavior. See D. C. Hambrick, “Top Management Groups: ASA
Conceptual Integration and Reconsideration on the ‘Team’ Label,” Columbia University Graduate School
of Business Working Paper, January 1993.
258

Salience of the external environment. External forces such as customers,
suppliers, competitors, financial markets, the board of directors, and shareholders
uniquely influence the executive team.
With responsibility for the operational success and strategic direction of their own
region (or staff function) as well as for the strategic direction of the company as a
whole, the executive committee members were highly focused on managing
external forces the issue of the reduced manufacturing price is just one example of
an external event (albeit Sonopress was internal to Bertelsmann as a whole) to
which the team had to respond.

Complexity of the task. Executive teams must cope simultaneously with internal
operations management, external relationship management, institutional
leadership, and strategic decision-making; these add up to more interrelated
elements and higher levels of uncertainty than most teams face.
With responsibility for their own “portfolios,” special assignments (such as
Bahlmann as head of central manufacturing), as well as for the company as a
whole, executive committee members wore many “hats” and juggled many
responsibilities simultaneously. Hambrick notes that the danger with such
multiple commitments is that the team members could identify more strongly with
the success of their individual region than with the executive team as a unit.

Intensified political behavior. While there are many rewards for the executive
team members, the ultimate reward is succession to CEO. By definition,
succession created a zero-sum game, and thus a perception of a fixed pie of
rewards. The question of succession may cause competition among team
members that is detrimental to their working together effectively.
As one team member noted, “there is a certain amount of jockeying for position
within the executive that Gassner could move on to other assignments within the
company even before his retirement. The team members also wondered whether a
non-German could ever be chosen to run the company—a question that
presumably would be especially sensitive for the non-Germans on the team. The
competition, however, did not appear to have a significant impact on the team’s
effective functioning to date, perhaps because Gassner’s departure was not
imminent.

Previous experience of members. Executive team members tend to have histories
of distinguishing themselves through individual achievement rather than through
teamwork. Thus, they may be less prepared to participate effectively as team
members. In addition, as Hambrick points out, individuals who have
demonstrated significant and sustained accomplishments in their careers often
expect a considerable degree of autonomy and discretion on the conduct of their
affairs.
259
Indeed, Gassner selected his committee members based on their track record of
success in their regions (for the RDs) or for their functional expertise (for staff
members). Bahlmann was the one exception, being selected as a regional director
without previous experience in an operating company. Gassner chose him for his
strategic experience and “because he had very good people skills.” It is not known
whether these individuals had much experience with teamwork, but presumably
they did not. In terms of the expectation of autonomy and discretion on the part of
senior individuals, the executive committee did display some of these attitudes.
Gassner noted that the team members were somewhat resistant when he first
formed the executive committee: “They had not been organized before in a way
that had these limitations [to their autonomy], and they didn’t like it.”

CEO as team leader. Because the leader of executive teams is typically the CEO,
here may be more social distance between the leader and members of top teams
than in other settings. The CEO determines rewards, including succession, and
there is usually no recourse beyond the CEO if problems arise.
There was no question who was the boss in the executive committee—Gassner
was clearly in charge, and had the ultimate authority. At the same time, however,
there was a strong sense of camaraderie among Gassner and the team members.
He promoted a culture in which the group frequently socialized and played sports
when they were together. Their comfortable manner is evident on the group
photograph, Exhibit 7 of the case.
Functional diversity.
The team comprised five regional directors who were line
managers in charge of diverse regions, and four staff members responsible for different
functional areas (finance, A&R marketing, human resources, and legal). Because of their
responsibilities, the line managers and staff members each had different priorities,
interests and stakes. In addition, their physical locations helped to create a division
between them. As is typical of many large organizations, the staff was located in New
York headquarters with the CEO (Gassner), and the line managers were “in the field”
spread throughout the world. To some extent, this structure created a natural connection
between the senior staff executives and Gassner, which could potentially frustrate the
RDs.
There was diversity within the line and staff groups as well. Certainly, for example, as
head of A&R marketing, Henn had different priorities and concerns tan CFO Gorman.
And the RDs had different interests and priorities from one another because of their own
different areas of expertise and the wide variations among their regions. As the case
describes, Preston was seen as the “repertoire expert,” Bahlmann was the “strategy
expert,” Stein was trying to carve out market share in a mature market, while Segura and
Jamieson were concerned with establishing companies and developing talent in their
relatively undeveloped markets.
260
As discussed above, the more diversity and interdependence in an organization, the more
the potential for political conflict. (Just as diversity and interdependence were realities for
BMG International on a company-wide basis, they were factors within the executive
committee as well.) In terms of the line versus staff distinction, for example, Gassner
noted that there was some political dissonance between the two groups in the initial
executive committee meetings (ECMs). According to the RDs, they felt that “at first there
was no role for the RDs… The staff went into the meetings very well prepared and tried
to establish a couple of policies with the help of Rudi in order to structure the business.”
The RDs were wary of the role of the staff, according to Gassner, and he had to explain to
them: “You’ve got to see the staff as somebody helping you; it is not some governing
body who tells you what to do.”
For the most part, however, the executive committee did not seem to suffer from much
destructive political conflict. A number of prevention factors were in place that
ameliorated conflict, such as strong leadership by Gassner and a corporate culture that
provided shared goals and values.15 For example, Bertelsmann’s deeply rooted culture of
decentralization and empowerment combined with team norms of “healthy competition”
and mutual respect allowed each team member to be a “star” without the others feeling
compromised. As Henn described it:
Everybody in that room is the best at what he does. The absolute best, and
we all know it…We’re also total egomaniacs, the whole group of us. But
in this company, we still work as a team because we give each other the
space to be the fool that everyone can be sometimes.
In addition, the executive committee had not been operating in an environment of
financial resource scarcity. As Bahlmann insightfully noted, the group had been able to
avoid a certain amount of political conflict because ample funding has been available to
all of them: “There has always been money there to do what we wanted. So, the group
has never been tested to see whether we can really work as a team under pressure when it
comes to a fight over who will get funds for what investment.”
International diversity. The executive committee was internationally diverse as well
as functionally diverse. Including Gassner, the group comprised four Germans, three
Americans, two from the U.K. (one Scottish, one English), and one Spaniard. (See
Exhibit 7 in the case for more demographic data about the team members.)
Nationality has been found to influence individuals’ cognitive schema (e.g., assumptions,
perceptions, knowledge), values and demeanor (e.g., preferred nonverbal communication
patterns), and language—consequently, their behavior on transnational teams. There is
considerable debate, however, about the relative impact nationality plays in determining
an individual’s behavior and the group dynamics of a transnational team.
For more on political conflict and prevention factors, see “Power Dynamics in Organizations,” HBS No.
494-083, especially pp. 3-4.
15
261
Indeed, an individual’s behavior on a team may be affected by a number of factors
including his or her nationality, business/organizational experiences, and other, nonworkrelated life experiences.16 For example, it appears that organizational culture can reinforce
or reduce the impact of nationality on an individual’s behavior. In addition, there is some
evidence that the more individuals have been exposed to other nationalities, the less
likely they are to conform to the behavior associated with their own nationality. The
careers of most of the executive committee members included extensive international
experience, which, combined with Bertelsmann’s corporate culture of “respect for the
traditions of each country in which it operated,” likely reduced the impact of each
member’s nationality on his interactions with the team.
Current research suggests that teams composed of individuals with diverse national
backgrounds can face special challenges in functioning effectively on the one hand, since
misperception and miscommunication can abound in such teams. On the other hand, they
also have particular advantages that can enrich their performance, since more breadth of
perspectives and experience can be brought to bear in culturally diverse teams and their
diversity allows team members to avoid the trap of “groupthink.” The common language
of the group was English17 and the team members seemed comfortable communicating
together effectively. The notable exception was Segura, of whom Gassner noted:
“Segura…is an outstanding executive, but because he thinks his English is limited, he
would rather discuss issues separately with me than in an open meeting.” While Segura
was highly successful in his region, Gassner’s model of the team deciding issues jointly
surely suffered as a result of his reticence.
Structure. Gassner was very clear in defining the structural aspects of the executive
committee. The group met four times per year at the New York headquarters to discuss
current operating issues, and once a year outside of New York to examine long-term
strategy. The agenda for each ECM was decided as follows: before each meeting,
committee members were polled for items, and the Gassner “edited” the suggestions to
create the agenda, which was circulated to the group.
The design of senior executive compensation and incentive systems is an area of much
study and controversy. Certainly, the performance incentive system that a team manager
puts on place has an impact on the behavior of the individual team members and how
they function together as a group. The extent of the impact, however, is a much-debated
16
See for example, D. C. Davison, S. A. Snell, and C. C. Snow, When Groups Consist of Multiple
Nationalities: Toward a New Understanding of the Implications and S. C. Davison, C. C. Snow, S. A.
Snell, and D. C. Hambrick, Creating High Performance Transnational Teams: Process, Phases, and Pitfalls.
Reports sponsored by and available from the International Consortium for Executive Development
Research, Lexington, MA. Also, see R. M. Kanter and R. Corn, “Do Cultural Differences Make a Business
Difference? Contextual Factors Affecting Cross-Cultural Relationship Success,” Journal of Management
Development, Vol. 13, No. 2, pp. 5-23, special issue on cross-cultural management.
17
It is interesting and significant that a German company made it policy to use English as the official
company language. The purpose was to be all-inclusive; according to BMG International employees, if two
German speakers were speaking together in German and a non-German speaker entered the room, “even a
secretary,” they would automatically switch to English. Within the executive committee, English was not
the native tongue for the majority (Gassner and four of the others), and speaking English placed them all
“on equal footing.”
262
subject. Most management theorists agree, however, that shared-fate economic
incentives, in which every member of a team receives the same reward based on the
overall performance of the team, tend to create more collaborative behavior than
arrangements that tie rewards to individual performance. 18
Gassner’s system created individual performance incentives for each manager. 19
Consistent with Bertelsmann tradition, every manager at BMG International was
rewarded with a performance-based bonus. Gassner’s incentive plan was, as he described
it, “very aggressive.” Bonuses were based on each operating unit’s betriebsergebnis, a
German accounting term translated to mean profit adjusted by imputed interest and
imputed inflation to account for cost of capital or opportunity costs. 20 Each year, business
plans were agreed upon between the MDs, RDs, and Gassner, with specific percentage,
they could receive up to half their salary as a bonus.21
For the managing directors in charge of local operating companies, their individual
success in meeting their betriebsergebnis target seemed to be a logical basis on which to
reward them; doing so encouraged them to focus on increasing their profits while using
assets efficiently—just what Gassner, presumably, wanted them to do. The regional
directors, however, were also rewarded by the same system: their bonuses were based on
the achievement of the betriebsergebnis target for their region. The RDs, therefore, had a
strong economic incentive to focus on the success of their individual region; they were
not rewarded financially for their disparity between Gassner’s objectives for the team and
the incentives he created for the team members.
Managing the Executive Committee: Rudi Gassner and the Evolution of the Team
The management style of Rudi Gassner had a significant impact on the development,
culture, and process of the executive committee. In order to understand and evaluate his
impact, however, it is useful first to analyze Gassner—his sources of power and
management style.
Rudi Gassner.
When he was chosen by Dornemann to be the CEO of BMG’s
international division, Gassner possessed many personal sources of power and
See, for example, D. C. Hambrick, “Top Management Groups: A Conceptual Integration and
Reconsideration of ‘Team’ Label,” Columbia University Graduate School of Business Working Paper,
January 1993, p.14.
19
According to the case, all Bertelsmann employees participated in profit sharing, which certainly was a
type of “shared-fate,” group-based performance incentive. It seems, however, that profit sharing amounted
only to a small portion of the manager’s overall compensation; clearly it was the bonuses on their
individual betriebsergebnis target that was foremost in their minds.
20
Using betriebsergebnis as the calculation for bonus criteria (rather than straight profit, for example) is a
way of holding operating managers accountable for the “cost” of the capital and assets they use to generate
profits. Betriebsergebnis makes managers responsible for the use of capital as if they were raising it from
the market (with interest payments) instead of obtaining it from outside Bertelsmann. Accounting for the
costs of these assets encourages managers to use them more efficiently.
21
The specific structure, in terms of how much bonus managers receive based on certain levels of target
achievement, is confidential information that we are not privileged to reveal in this case or teaching note.
18
263
credibility22 that he continued to rely on as the head of the BMG International. From his
days at PolyGram, he had gained extensive expertise in the international music business
and an impressive track record of success. Dornemann noted hat he “had the right
background in the music business and the right international experience. He best fit the
leadership qualities we were looking for.” The fact that he was handpicked buy
Dornemann was another source of power and credibility for Gassner within the
organization.
As CEO of BMG International, Gassner had the most positional power (including formal
authority and centrality in networks both internal and external to BMG International) of
any individual in he organization, but in his role as leader of the executive committee, he
relied heavily on his personal sources of power in order to exercise influence within the
group. His personal resources of power included his:

Track record. Gassner had continued to build his track record of success as CEO
of MBG International. In only six years, he had grown the business from 17 to 37
countries, increased revenues annually 20%, and increased international market
share from 11% to 17%.

Expertise. Gassner arrived at BMG with substantial career expertise in the
international music business and he continued to expand his knowledge within
BMG. According to one MD describing Gassner during the business plan
reviews, “Rudi knows the business inside and out, and he has an amazing grasp of
the details. When he is going through these plans, he will go into particular line
items if he wants to.” Gassner’s knowledge and grasp of the details earned him
credibility with both the MDs and the members of the committee.

Attractiveness. Gassner had an easy, charismatic style that is best displayed in
the group photo (Exhibit 7 of the case) in which he stands smiling, dressed in blue
jeans, arm-in-arm with the members of the executive committee. The video also
reveals this manner. Gassner’s attractiveness allowed him to develop easily
another source of power—his strong network within the organization industry.
The case notes that he had cultivated the trust of managing directors and local
employees and kept in tough with them frequently, “just to double check that my
messages come through.” He nurtured a similar network with artists, agents, and
others throughout the music industry.
In addition to the above sources of power, other aspects of Gassner’s personal style had
an impact on his relationship with the executive committee. Committee members
remarked, for example, that he had strong opinions and that it could be difficult to change
his mind. They noted “to influence Rudi, you have to convince him…You have to be
prepared to stand up for your argument.” Jamieson observed that because Gassner usually
had strong opinions, “I have never had an informal brainstorming session with him.”
Although Gassner’s vision was for team members to share their opinions with the group
22
For more on individual sources of power, see “Power Dynamics in Organizations,” HBS No. 494-083.
264
and make decisions jointly, certain aspects of his personal style undermined his rhetoric,
causing at lead some committee members to feel that “Rudi is not a man who needs or
wants many debates,” and that he was the ultimate decision maker. Moreover, several
committee members noted that it was especially difficult to influence him in a group
setting; as Jamieson commented, his best opportunities to influence Gassner were not
within the context of the team meetings but in separate, private meetings.
For the most part, Gassner’s own influence style could be described as “push”—a style
that earned him the reputation of being “tough.” (“Push” influences strategies include
proposing, reasoning, stating expectations, and using incentives and pressures.)23 He
stated his expectations strongly, for example, throughout the business planning process;
one MD was so motivated by Gassner’s expectations that he felt it was “a moral
imperative to get it done.” Certainly, the performance-based bonus system was an
example of a powerful incentive Gassner used to motivate his team and the organization.
His influence style in team meetings frequently relied on reason and logic (he had to be
“convinced” in order to change his mind). Finally, he often proposed his ideas to the
group as a way of influencing them. Sallen noted, “it is generally clear to all what his
feelings are on most issues;” in the conversation at the May ECM, he alluded the MDs
“to be held accountable for the savings.”
Although Gassner used “push” influence strategies most frequently, he had the ability to
draw on a wide range of styles, and when circumstances called for it, he could also
employ “pull” strategies. (“Pull” strategies include involving, listening, disclosing,
visioning, and finding common ground.)24 Sallen noted that “Rudi does a lot of
consensus-taking” to find common ground within the group. Gassner was versatile in his
use of different styles and was skilled at tailoring his approach to the individual and
situation at hand.25 As one RD explained, “Rudi plays a different role with each MD,
depending on their personality and where he wants their country to go. Sometimes he
plays the good cop, and other times he plays the bad cop. He’s very versatile an very
results-oriented.”
A final strength of Gassner’s that is important to note is high level of self-awareness. He
described aspects of his own style accurately and in detail, for example:
[The team members] have a difficult time convincing me. I am a person
who likes to win arguments…I think I know what is good for us.
Therefore, when I’m convinced that that’s the right way to go, it takes
great effort to get me off that route.
23
See the Influence Style Questionnaire, copyright 1988 by Situation Management Systems, Inc., Hanover,
MA.
24
Ibid.
25
For a discussion of the importance of tailoring one’s influence style to the particular individual and
situation at hand, see “Exercising Influence,” HBS No. 494-080, and “Broadening Your Influence Style
Repertoire,” HBS No. 494-077.
265
Even more significant than his own self-awareness, however, is the fact that Gassner
seemed to understand how others perceived him. His comments in that case demonstrate
that he had an accurate perception of what the executive committee members thought of
his style; for example, he noted, “I think they feel a lot of things are a bit too prepared or
precooked.” He recognized his impact on the team, acknowledging that the way the team
functioned “may very on his personal style and its impact on the team. Self-awareness
and regular introspection are critical ingredients for successful management development
and often distinguish executives like Gassner who reach the highest levels of cooperate
leadership from those who derail or stall in their careers.26
Gassner’s impact on the team. One of the key responsibilities of team leaders is
managing the paradoxes and balancing the tradeoffs inherent in team life (see Exhibit 3).
The most significant tradeoff for Gassner in managing the executive committee team was
in balancing his managerial authority with the team’s discretion and autonomy. Given
that they were a team of senior executives in a highly decentralized and entrepreneurial
organization, it is not surprising that the locus of authority and discretion would be a most
challenging issue for this group.
For teams to function most effectively, authority must be balanced between the manager
and team members in ways best suited to the issue at hand. As the continuum in Exhibit 2
illustrates, there are many ways to manage this tradeoff. Some decisions may be made by
consensus. Some may be made through negotiations between the manager and those team
members most directly affected by the outcome. Others may be made in a consultative
manner; the manager gets input from the team members and discusses different
alternatives with them, but retains the role of ultimate decision maker. And finally, the
manager may make some decisions without consultation with team members. Managers
cannot delegate balance between their authority and the discretion and autonomy of the
team.27
As discussed above, the reality of authority and discretion within the executive
committee team diverged from the initial agenda Gassner outlined. Gassner conceived of
the group deciding business and strategy issues jointly and he was frustrated that at first
the RDs did not offer their opinions readily. Their initial reticence was understandable,
however. Groups are inherently conservative at first, and until they have had time to
establish trust and comfortable way of working together, members tend not to be
outspoken.28 The RDs offered this as one explanation for their initial lack of
26
For more on the importance of self-assessment and introspection for developing a satisfying and
successful career, see “Managing Your Career,” HBS No. 494-082.
27
See for example, D. A. Whetten and K. S. Cameron, Developing Management Skills (New York:
HarperCollins College Publishers, 1993) for a review of the research on how to delegate effectively.
28
There is a large body of research on the evolutionary stages groups go through. Although I have chosen
not to present such a framework here (because I already introduced a number of models in what is a
relatively short case), a “stages” framework may be useful in analyzing the experiences of the executive
committee. See, for example: C. J. Gersick, “Time and Transition in Work Teams: Toward a New Model of
Group Development,” Academy of Management Journal, 31 (1), 1998, pp. 9-41; J. S. Heinen and E.
Jacobson, “A Model of Task Group Development in Complex Organizations and a Strategy of
Implementation,” Academy of Management Review, October 1976, pp. 98-111; or B. W. Tuckman and M.
266
assertiveness; as Preston said, “It took us certain amount of time to find a way of really
working together.” The RDs also noted, however, that during the early ECMs, they were
somewhat overshadowed by Gassner and the staff, who were very active in seizing
control of the meetings. According to Bahlmann, “Rudi needed to establish himself and
the regional structure; it was like him telling us, via the [ECM] agenda, what we’re going
to do. It was our ‘educational process’.”
In time, however, the RDs became more vocal, and according to Preston, their influence
more balanced with that of the staff. Bahlmann explained that this shift in power was a
result of the RDs’ growing confidence and success in running their regions and that it
reflected the realities of the business: “The regional directors and the managing directors
make the decisions about the operating businesses and acquisitions.”29
However, even as the RDs began to assert their opinions more, they discovered that, in
Jamieson’s words, Gassner was “no a man who needs or wants too many debates,” and
was “essentially autocratic.” Henn described Gassner as a “brilliant dictator.” Although
Gassner’s vision for the team seemed to be that of a decision-making body, executive
committee members instead described the team meeting as “an opinion-building
exercise,” and a forum for Gassner to test his ideas on the group. Consistent with the
belief of several team members that they could influence Gassner more in a private
meeting, they found that “real decisions” occurred outside of the ECMs.
Overall, the executive committee team seemed to work together effectively, agree on
basic strategic goals, and avoid destructive political conflict. They successfully managed
most of the paradoxes inherent in team life, including the need to embrace individual
differences as well as collective goals, and the need to foster support as well as
confrontation among members. In terms of their personal relationships with each other,
team members seemed to like each other and be cohesive and comfortable working
together. The question of balancing authority and discretion with Gassner, however,
remained a challenge to be ironed out.
How Could Gassner Improve the Team’s Effectiveness in the Future?
As discussed above, at the time of the case, BMG International was facing an
environment of change. Preciously, the strategic focus had been on growth and the
development of local talent. But as some markets matured and competition intensified,
Gassner had also begun to emphasize cost control, disciplined management, and an
interest in capitalizing on BMG International’s position as Bertelsmann’s premier global
distribution channel for new media and entertainment.
A. C. Jensen, “Stages of Small Group Development Revisited,” Group and Organization Studies, Vol. 2,
1997, pp. 419-427.
29
The distribution of power and influence in organizations is generally aligned with the realities they face;
dominant coalitions tend to be those that have access to resources or control contingences critical to the
organization’s performance. For more information, see “Power Dynamics in Organizations,” HBS No. 494083, especially p. 5.
267
In this new context, the executive committee would have to work even more
interdependently to achieve global operating efficiencies, capitalize worldwide and
locally developed artists, and establish transnational marketing strategies. To meet these
challenges, the team would have to take a more actively collaborative rile in corporate
wide strategic planning and business decisions; they would have to in fact make
important decisions jointly. The type of teamwork the group engaged in would have to
change; in Drucker’s terms, they would have to move more in the direction of a “football
team” or even a “tennis doubles team.”
In order for the executive committee to enter this new phase, Gassner would have to alter
his management style and allow the team more authority, discretion and autonomy. This
style was well suited to turning around the organization and achieving significant growth,
but the company was no longer in the turnaround stage it was in when he first took
leadership. In addition, the organization had grown so large and complex that he could no
longer manage the entire workload of leading the company himself (e.g., raveling to 37
countries on a regular basis to familiarize himself with the local situation and people was
infeasible). Out of necessity and to meet the challenges of the future, Gassner would have
to adjust his style to the new realities by delegating more authority and discretion to the
team. He would have to send strong signals that he was willing to change his approach to
encourage the group to become more of a collaborative decision-making body.
What Should Gassner Do During the Meeting?
There are solid arguments on both sides of the debate that arose during the May ECM
over the question of whether to alter betriebsergebnis bonus targets to reflect the newly
reduced manufacturing price. Gassner was concerned that without adjusting the bonus
targets, the incentive plan he put in place would not have its intended impact; the new
prices created “windfall profits,” and he wanted the managers to be held accountable for
the RDs. However, it was argued that business plans had never before been changed after
being agreed upon, even though many unpredictable events happened during the year that
affected the attainment of the original target.30 They argued on the basis of consistency
that had the bonus criteria were never changed, even when the managers had been
harmed as a result, and that it would be “unfair” to change them now, when the event
could work in heir favor. To alter the targets would be to go against well-established
corporate culture and operating norms.
It is important to note that this issue affected not all of the RDs. The new manufacturing
price applied only to those RDs who sourced their products from the European vendor
(Bahlmann, Preston, Stein and to a tiny—virtually insignificant—extent, Segura).
However, they all agreed that the bonus targets should not be altered. Their consensus on
this issue is an excellent example of their cohesion and lack of competitiveness. If they
had been competing aggressively with one another, those who were not going to receive
the “windfall” would presumably want the targets of the others to be adjusted accordingly
30
Indeed, the record industry was notoriously unpredictable. If a key artist did not release an album on
time, for example, the entire year’s business plan could be thrown off, and for smaller record labels, the
financial viability of the operating company could even be jeopardized.
268
so that the group would remain on “equal footing,” and no one would have an “unfairly
easy” time meeting their bonus target. It is highly significant, therefore, that no such
suggestion even arose.
During the meeting, Gassner became frustrated by the RDs’ attitude, which to him
seemed parochial—more like that of an MD than of a senior executive thinking about the
good of the whole company. During the discussion at the end of the (A) case, he was
considering two options for how to handle the RDs’ resistance to his perspective: (1) he
could table the issue for now, or (2) he could provoke them by saying what was on his
mind.
Toward the end of the class, I usually take a vote (see the teaching plan below), asking
students what they think the team should do. The class is usually split fairly evenly on
changing versus not changing the bonus targets. In terms of how Gassner should handle
the impasse in the team meeting, some feel that this issue is an important one, and given
his usual assertive style, he should tell the group what is on his mind, propose his plan,
and lobby for buy-in. Others, however, believe that given the new direction Gassner and
the team must set in order to meet the challenges of the future and authority to the group
by backing down.
Students should note that Gassner’s dilemma is an example of another paradox of the
management that team leaders must balance and negotiate (see Exhibit 3): they must
focus both on performance and on the learning and development of the team. They must
allow for the tradeoffs between making a particular decision “correctly” or using it as a
developmental experience. “Mistakes” should be treated as sources of learning rather
than reasons for punishment if risk-taking (and thereby, development and innovation) is
to be encouraged. Even if Gassner believed the team was making a sub optimal decision
in leaving the bonus targets unaltered, he still might decide to let them have final
discretion-making body.
Analyzing the (B) Case: Gassner’s Decision
To the surprise of many students31 (especially those who feel that Gassner was autocratic
and unable to share power with others) that is exactly what he decided to do. As the (B)
case reveals, he proposed that the group at least agree to use the adjusted calculations as a
reference for internally monitoring performance during the year (no one opposed
suggestion), and then he tabled the discussion by asking the RDs to share the situation
with their MDs and report back to him afterwards. In doing so, he effectively turned over
control for his decision to the committee members, as he later found out, in their various
ways, they communicated to their MDs that despite the “windfall profits” for some, the
original bonus targets would remain.
31
Students often believe that managers cannot grow, develop, and change their management style later in
their careers. In fact, however, many managers report that their styles do evolve over time. Furthermore,
research shows that continuous growth and development through on-the-job learning experiences is a
critical ingredient for managerial success.
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Teaching Plan
This teaching plan is designed for one 80-minute class session. There are many issues to
discuss in this case, and with the video at the end, I find that it is a tightly packed class
that moves very quickly.
Although the primary focus of the class is on the long-term evolution of the team and the
impact of Gassner’s style on the team’s process and outcomes, I first pose the question of
what Gassner should do in the meeting as a way of opening discussion.
I. Introduction (5 minutes)
This case offers is the chance to study the challenges and opportunities of designing and
leading the senior executive committee of a complex global enterprise.
Our task today is twofold: (1) We want to step into Gassner’s shoes to address his
immediate concern: the committee has a delicate and important decision to make, and
Gassner is not pleased with the way the discussion is going. What are his options for how
to handle this situation? (2) We want to think more long term. How effective is the
executive committee? What is working? What is not? What, if anything, should Gassner
do to improve the effectiveness of the team?
II. What should Gassner do in the meeting? (10 minutes)
A. Should he table the discussion? Should he tell them what is on his mind?
What are the pros and cons of each approach?
B. What does he want? What is the purpose of the discussion?
C. Why is the discussion going the way it is?
D. Why is he frustrated?
III. How effective is the executive committee? (20 minutes)
A. Why did Gassner create the executive committee?
B. What are the potential sources of political conflict?
1. What are the natural tensions among the team members?
2. What are the factors in place that prevent political conflict from
disrupting the effectiveness of the team?
C. What works well about the team?
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1. Why does the team work together as well as it does?
2. How does the team design affect how the team functions?
D. What does not work so well about the team?
E. What are the team’s norms for dealing with conflict?
IV. How would you describe Gassner’s influence style? (10 minutes)
A. What sources of power does he rely on?
B. What is the impact of his style on the team and its development?
V. What could Gassner do to improve the effectiveness of the team? (10 minutes)
A. What challenges will the team face in the future?
B. Will Gassner need to change his style in managing the team in the future?
If so, will Gassner be willing and/or able to change?
VI. Let’s find out what he did in the (B) case. (5 minutes)
A. Before reading the (B) case, how many of you think the team should
change the bonus targets? (Take a vote.)
B. Take a few minutes to read the (B) case, which describes Gassner’s
decision and his perspective on how the executive committee members
approached the situation.
VII. Let’s hear from Gassner himself by watching the video. (13 minutes)
VIII. Conclusion (5 minutes)
Because this class session is so tightly packed, there is no time at he end for formal
conclusion or even a “min-lecture.” I simply ask students to identify and reflect on the
key lessons they can take from this case about (1) the critical ingredients for the team
effectiveness and (2) the balance between managerial control and delegating authority. In
the subsequent class, I provide the students with an opportunity to share with each other
any observations that they have about the Gassner video and what they have learned thus
far about team management.
271
Exhibit 1 Managing Your Team
The Manager’s Responsibilities:
Managing the Team’s Boundaries:


Scanning the competitive environment
Managing external relationships
Managing the Team Itself:
 Designing the team
o Setting the agenda
o What type of team is needed?
o Team composition and
structure
 Facilitating the team process
o Shaping the team’s culture
o Coaching the team
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Team Effectiveness:
 Team’s output metes the
standards of those who have to
use it
 Team experience contributes to
the members’ personal wellbeing and development
 Team experience enhances the
capability of members to work
an learn together in the future
Exhibit 2 Delegating Decision-Making Authority to the Team: A Continuum32
Least delegation of authority to team

The manager solves the problem or makes the decision using the information
available at the present time.

The manager obtains the necessary information from subordinates, and then
decides on the solution to the problem. The input provided by subordinates is
clearly in response to the manager’s request for specific information. The
subordinates do not play a role in the definition of the problem or in generating or
evaluating possible solutions.

The manager shares the problem with the relevant subordinates individually,
collecting their ideas and suggestions without bringing them together as a group.
Then the manager makes the decision, which may or may not reflect subordinate
influence.

The manager shares the problem with the subordinates in a group meeting. In the
meeting, subordinate ideas and suggestions are collected and perhaps evaluated.
Then the manager makes the decisions, which may or may not reflect subordinate
influence.
Most delegation of authority to team

The manager shares the problem with the subordinates as a group. Together the
manager and subordinates define the problem, generate and evaluate possible
solutions, and attempt to reach agreement on a solution. The role of the manager
is to act as “chairperson,” coordinating the discussion and facilitating the group
process. The manager may share his or her ideas with the group, but does not try
to force the group to accept them. Instead, the manager is willing to accept and
implement the solution supported by the entire group.
Adapted from V. H. Vroom and A. G. Jago, “Decision Making as a Social Process: Normative and
Descriptive Models of Leader Behavior,” Decision Sciences, 1974, 5, pp. 743-769. The Decision Sciences
Institute, located at Georgia State University, publishes the Decision Sciences journal.
32
273
Exhibit 3 Managing the Paradoxes Inherent in Team Life
274

Embrace individual differences and collective identity and goals.

Foster support and confrontation among team members.

Focus on performance and learning and development.

Balance managerial authority and team member discretion and autonomy.

Attend to the triangle of relationships.
CASE 5: ARISTA RECORDS
The case is an instance of executive succession, and retaining valuable intangible (such as
reputation) and human resources in the context of this. Davis, the founder-manager of
Arista (which for some years has been part of Bertelsmann Music Group) views himself
as having been forced out of the position of president; BMG views it as a case of
managing executive succession to safe-guard the long-term interests of the label. Like
many founder-managed companies, however, Arista had been molded very much in
Davis’s image: that he is the only non-performer to be inducted into the Rock and Roll
Hall of Fame is indicative of his hands-on involvement in the nurturing, production and
promotion of highly-successful artists across a range of musical genres.
Under Davis, Arista had become a major label based on a distinctive strategy focused on
a relatively small group of artists, and continually replenished by a remarkable string of
successes with breaking new acts. This strategy had been supplemented with
diversification across musical genres through joint ventures where Arista concentrated on
promotion, marketing, and distribution.
That Arista has for some time been a part of BMG suggests that Davis’s significance to
the future of the label is less that it might have been under a stand-alone operation. This
probability is further reinforced by the reliance on joint ventures and by the success of the
likes of Tim DuBois in building up the Nashville division. The key for Reid (Davis’s
successor) therefore, will be in persuading Arista’s top executives and artists to stay. The
following factors should help Reid in this regard: BMG’s concerns about succession were
reasonable (Davis is 66), the established strategy will remain in place, BMG had granted
Davis a very rich contract only 6 years previously and could hardly be side to be dealing
him short, and finally that starting a new label would be a formidable task even for
someone of Reid’s reputation.
275
CASE 6: ALGODONERA DEL PLATA
Synopsis
The case covers the design of a marketing plan for Algodonera del Plata, a family-owned
company, coming out from the severe economic recession that characterized the
economic environment of Argentina in the late 80‘s and early 90‘s. Although Algodonera
del Plata was able to survive the hyperinflation crisis of the last years, it had to cope with
the new stable, open and competitive environment to which the environment had shifted.
For this purpose the company has hired a new marketing manager, Mr. Sanchez, who has
given the responsibility of designing and implementing a marketing plan, that turns to be
the first in the history of the company.
After decades of coping with constant inflation, Algodonera del Plata proved to survive
through hyperinflationary times. But for that very same reason, they didn’t know how to
address times considered normal elsewhere, when the key success factor isn’t anymore
financial smartness to cope with inflation—the financial bicycle or “la bicicleta
fianciera”—but real marketing skills to survive in a competitive environment. The case
uncovers the tricky financial schema prevailing under inflationary times, where managing
inventory, cash and tax breaks were key to surviving.
The company is running its business with negative results, but these are being covered by
financial procedures only admissible under inflationary conditions. Inventory revaluation
leads to distorted manufacturing objectives, turning profitable inventory holding. Thus,
efficiency is achieved by financial gambits rather than by traditional manufacturing and
marketing skills, distorting the whole company’s culture. But the opening and
deregulation of the economy changes the market, demanding dramatic change in the
management framework.
The problem Mr. Sanchez faces is not his apparent task, but to change the manufacturing
oriented culture to a new marketing-oriented one.
Teaching Objectives
The case provides a vehicle for introducing students to the basic marketing framework—
the 4 P’s, and on a broader basis, covers the roles of marketing as a driver of a company’s
culture.
The case teaches students how to cope with the dramatic cultural and economic changes,
very usual in Latin America and Third World Countries in the 90’s, and the issues
involved in turning a traditional family business, manufacturing oriented company, into a
competitive marketing-oriented business.
Professor Guillermo D´Andrea, with the assistance of Professor Iñigo Echeveste, of I.A.E., Universidad Austral, Argentina, prepared
this note, for the sole purpose of aiding classroom instructors in the use of case MK-C-40-1-020. It provides analysis and questions
that are intended to present alternative approaches to deepening student’s comprehension of business and energizing classroom
discussion. © 2000 by IAE, Universidad Austral.
276
First World students are usually impressed and surprised to realize how sustained
inflation alters the whole business game, and sometimes deceived because they find it
hard to understand “how it works and what are the implications for the management of
the system.”
Latin-American students will be able to analyze the way companies are changing their
way of doing business when market conditions are going through dramatic changes in
short periods of time. Working in stable, open and competitive environments require a
totally different mindset.
The case is suited to showing students the evolution of the role of marketing, from
moving goods to the market of driving the culture towards customer orientation.
Marketing managers are required not only for effectively applying their specific skills,
but also to influence the organization behavior and culture.
Specific Teaching Objectives Are to:
-
Introduce the basic marketing framework,
Understand the broadened concept of marketing,
Analyze how marketing can change the company culture, and
Reflect on the changing path of developing a marketing-oriented culture.
Algodonera del Plata was written as an introductory case for a Marketing I course, to
introduce MBA students to the marketing framework. Its regional specific problems,
makes it suitable as a forerunner for an international marketing MBA course. For its
rather simple and straightforward setting, it has been used at the senior undergraduate
level, but students will need some help to grasp the fundamentals of the international
environment.
Teaching Guidelines
The assignment questions and analysis have been laid out in a sequence that has proved
to be an effective teaching plan.
Starting with Mr. Sanchez’s situation, analyze the company evolution, its origins, culture,
successes, and failures. Using the 4 P’s framework analyze the company offer prior to
Mr. Sanchez’s hiring, and his proposed changes.
Finally, move into a broader role of marketing, by confronting the class with the fact that,
in spite of the demonstrated skills, Sanchez is on the verge of failure and will probably be
dismissed from the company in the near future.
Three critical elements for achieving these goals are:
o Early in the class, students must understand Algodonera del Plata strategy
and processes designed to cope with an inflationary environment, and the
problems this mindset causes in the new economic setting. Some insights
277
of the financial problems the company is facing will help to understand
how dramatic the situation is.
o Following the 4 P’s framework, analyze the company offer, the proposed
changes by Sanchez, and the rationale behind them. The before and after
analysis has proved a helpful mean to present this basic framework.
o Finally, move into the problems Sanchez is facing in spite of his apparent
success. Enough time should be left for this part of the session, in order to
help to understand the role of marketing, broader than merely applying a
set of technical tools. What has gone wrong, what has Sanchez missed,
and what should he have done differently are questions that will help to
achieve this goal.
Assignment Questions
1. Analyze Algodonera del Plata’s performance and strategy before
hiring Sanchez. How were they doing?
2. How would you grade Mr. Sanchez proposed marketing plan?
3. What should Sanchez do In front of the problems he is facing?
4. Would you have done anything different?
Analysis
We usually start the session where the text does: Mr. Sanchez is wondering what has
gone wrong. He presented a sound marketing plan, which was approved by the company
owner and CEO. Positive results are starting to show, and even though he has just been
strongly alerted by the CEO.
At this very early stage in the course, it is not hard to drive students into putting
themselves in Sanchez place, perhaps as future MBA graduates hired by Algodonera.
From that standpoint, some mislead opinions are usual.
Some students think that his first mistake was accepting an offer from a small, family
owned company, with all the traditional problems these kind of companies portray. As if
family owned companies were doomed to disappear.
Further on this line of reasoning, some students may sustain that he should have asked
about the company policies, and a clear commitment from top management, which seems
lacking at this stage, but rather too late.
Others will say that Sanchez should have asked for a written approval of his proposed
changes that would now clearly state how they were welcomed at their time, besides
being badly needed.
278
These rather naive arguments are not hard to dismiss. Family companies have their
problems, as do publicly owned ones, only different. And they have their virtues, besides
being the majority of the organizations, even among the big ones.
Regarding the demands of policies and demonstrated commitment, just thinking of a
placement interview will quickly cool down these arguments. Asking how many of them
are asking for written approval before moving ahead in their plans. And even then, if the
plan goes wrong, who will be the first to being blamed for, the CEO or the marketing
manager? The first statement of the session will be clear at this point: Sanchez is in deep
trouble, and something serious should be done if he wants to keep his position.
One final reflection closing this stage should reflect the paradox he is in: in spite of being
a sound marketer, he is on the verge of being fired. This kind of success record is hard to
defend when looking for new positions.
Moving further in the session, the class should be focused on analyzing the company:
- Family-owned company
- SME culture
- Manufacturing oriented, technology-driven
- High quality, amply recognized as the best in the market
- Well-known brand: Cottone
- The market is growing at a high path
- Promotes from within
- Gennaro never worked/studied outside Algodonera del Plata. He took charge of the
company after his father retired at the age of 83 years. Some signs of a vertical style
may be rooted here.
Financial Analysis:
-Overhead: $400,000 x 12 = $4,800,000 K$/year
-Sales: $6,000,000 sales/employee: 6,000,000/200 = 30,000 $/employee
-Inventory: 315,000 items, up from 200,000 traditionally
-Inventory at $35 average selling price: $11,000,000
-Cash deficit of $800.000
-High debt
-Why not sell once for all the stock accumulated? Because value is close to
nothing.
The issue of the inventory deserves special consideration, for it will help to understand
the management mindset. The total amount of inventory is of 315,000 pieces, at the end
of the summer season, where 300,000 had been produced. By season’s end one would
expect to find an empty warehouse, and not more garments than the ones produced!
Either they haven’t sold a piece, or they are holding inventories from past season(s). As
for the decisions Sanchez is taking, one would be more inclined on this option, reflecting
the inability of the company to sell. But if the quality is uncontested, then selling
shouldn’t be a problem, unless the garment design is wrong.
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With this point clear, why aren’t they more worried about the amount of inventory? Here,
the instructor will have to lead the reasoning, reflecting accounting procedures during
inflation.
In an inflationary environment, inventories were appreciated following the inflation
index, in order to preempt from creating taxable fictitious benefits. Later inflated prices
were higher than earlier costs. So for companies it was better to hold inventories as a
means of not loosing value, rather than holding cash. In other words, selling was pushed
only to cover costs. The inventory worked as a piggy bank. Furthermore, tax breaks and
payments delay—with depreciation—added economic value to the equation. In
summary, manufacturing at large scale, as fast as they could, and selling at the possible
latest, created “wealth.” Cash in hand should be held as short as possible, and reinvested
in the production process, creating a never-ending wheel. As the wheel turns faster and
faster, inflation grows with everybody turning “his or her wheel.” This scheme was
named as the financial bicycle (“bicicleta fianciera”).
This point is at the center of the management’s mindset, and from this standpoint,
everything else becomes distorted. Lost sales are not badly regarded, and other errors
such as wrong designs remain uncovered in the well-kept inventory.
After these reflections, the instructor will need to bring the class back to the case. An
examination of what must be in the inventory may help the group to refocus on the
company. It will be apparent at this point, that the inventories must be formed of aging
merchandise, due to wrong design. The case writer visited the company, and was shown
the inventory warehouse, a huge room full of shelves, keeping all kinds of merchandise
from various years and styles.
The case notes that 20% of the items were sold at the factory discount store, which calls
for a high number of errors. Another source of inventory was late orders that couldn’t be
sold in time. This speaks of poor communication between sales and manufacturing, in a
relatively small group.
One last concern, and not a minor one, is that the company is suffering of poor sales and
increasing inventories at a time when the market is experimenting a strong growth.
Sweaters were fashionable, every apparel brand had developed a line, and Cottone’s
quality was highly regarded!
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Manufacturing:
 San Juan—with tax promotion—plus Buenos Aires
 High quality
 Exclusive stores chain—Raffael
-
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Market:
 Growing demand
 Product widely accepted
- Customer use and perception:
 Easy to wash
 Very warm
 Less expensive
 No itching as opposed to cheap wool garments
 Kids love it, keep them on, and stay warm: mothers love them
 Fashionable, used by young segment
 University sweat shirts
Problems
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Too many items with small sales = a factory of samples?
Classic brand: white, gray and blue selling well. 80% of sales
Poor fashion design
Salesmen are selling late and poorly
Weak supervision and control
Late orders, late partial deliveries—incomplete orders produce inventory growth
Poor sales control—one sales person hasn’t been in touch for months
Cash deficit
Poor marketing understanding
Decreased winter volume
4 P’s
Product advantages:
- Diverse looking
- Different shapes
- Easy printing
Cottone:
- Thick, strong
- Firm Color
- Long lasting
- Poor design
- Classic
Price:
- Selling price: 16$
- Recommended average retail price: 35$
- Range: from 22 to 50 $
- Cost: increasing 50% sales, no more overhead
Distribution (place):
Exclusive shops under Raffael brand (25% total sales, 9 stores)
-Popular areas
-Wholly-owned
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-Provides image—in popular areas? Is that the image wanted?
Factory outlet (20% total sales—rather high)
-Second quality garments. If 20% is second quality, what’s happening in the factory?
(Probably late orders/late delivery is producing these errors.)
Sports stores (30% total sales)
-Sports garments/not fashioned
Other stores (25% total sales)
Communications (promotion):
 Sales people—without pattern or condition
 Advertising—close to nothing
At this point the instructor will lead the class to compare the described situation with the
proposed changes by Sanchez. After this section, it will become apparent that Sanchez
has strong marketing skills, and in one month he has designed a sound marketing plan,
with strong chances of taking the company back to a well regarded positioning.
Actually, Sanchez’s plan is quite simple: downsizing the product line without losing
many sales, manufacturing will be more efficient, producing fewer inventories. A
designer will add the necessary updating.
Transferring the stores to better neighborhoods will improve the image, and bring the
products closer to target. Realistically, no advertising campaign is included, as the
company is not in any condition to afford one.
It is a simple and affordable plan, for a company in deep difficulties and very short of
resources.
Sanchez Marketing Plan
Product
 Design, color, etc. (fashion)
 Cotton + cotton campus (new)
 Broader product line
 80% sales, 12% models: fewer models
Sales
 Introduce clear criteria in sales commissions
 Same for geographic assigning (17 salesmen for 600 clients)
Promotion (to increase and improve Cottone brand equity)
 Only in certain, stores, not in all
 In-store and window displays to stimulate and back sales at stores
Distribution
 Close several Raffael stores
 Open in better quarters
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Other actions
 Push up some new clients
 New possible distribution (second quality garments)
 Franchised chains in the inland (not yet, could harm brand image—first strengthen
brand)
 Exporting garments (this is larger term, left in the hand of management)
Inventory ordering
 By class criteria
 Rest of the classics: 25% discount to the inland
 Non branded to hypermarkets
Using the 4P’s and a before and after scheme, the board should clearly show the
soundness of Sanchez rationale and his marketing skills. Very probably, it’s the first
marketing plan in the history of the company.
At this point the session enters into its final part. What has gone wrong? Part of the
audience with the “naive” earlier arguments will feel encouraged. Management hasn’t
understood Sanchez rationale. He should move to somewhere else, where his skills are
better valued. But if this is the point, then these companies are doomed to disappearing,
and people like him don’t fit. But the paradox of this line of reasoning is that these
companies badly need people like Sanchez.
Obviously, management wasn’t ready to understanding these changes. Who is
responsible? Sanchez knows more about marketing, and shouldn’t devote himself just to
fixing the marketing side of the company. Gennaro resents Sanchez intervention in the
other functional areas, but this is just a consequence of the proposed changes. If Sanchez
wants to succeed, he needs not only to sell soundly to the market, but also to win
commitment among his peers within the company.
How could he achieve this? Building commitment will need a strong effort of sharing his
view with the rest of the company. This is at the center of his task: he has to lead a
change, helping the company to change its paradigm from top to down. For this,
marketing planning will prove a powerful tool, sharing a common market assessment and
commitment around the proposed action plan.
This discussion will allow presenting the concept of marketing and its responsibility as
larger than only administering the 4 P’s tools. It will drive the company’s culture towards
being more market oriented, and less focused on the manufacturing side exclusively, if it
wants to enjoy the benefits of selling branded, updated products. Sanchez has totally
missed this point, he is more the kind of technical marketer, dedicated to its tools, and
leaving the cultural change in the hands of Gennaro, who has hints of a needed change,
but lacks the skills. If marketing fails to recognize the necessary drive, then Sanchez
efforts will prove worthless, as he is discovering.
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At this early stage in a marketing course, some students get surprised of this assessment.
The instructor will have to explain the shift in the concept of marketing in the final
summary.
Summary
Sanchez was hired as marketing manager, but didn’t realize that the culture of the
company needed to be changed. There were an old and a new concept of marketing:
Product + Sales push = Revenues through sales volume. Sanchez’s new concept: Clients
needs + Market-driven organization = Benefits x satisfied customers. This will bring
loyalty, sustained sales and future growth. If Sanchez wants to keep his job, he needs to
stimulate an enriching dialogue with the rest of the company, starting with Gennaro.
Probably go slower, but with the commitment of the rest of his peers. Without it, he will
remain an outsider to the organization, failing to help them change in the direction they
want. After all, they have hired him for that reason, but without a clear understanding of
the needed process and how dramatic a change it portrays.
Postscript
The story has a rather sad ending. Three months later, Sanchez was fired because he was
regarded as a “troublemaker.” He couldn’t come to a compromise with Gennaro, as he
failed to understand the big change that he was trying to achieve. Sanchez worked
correctly the 4 P's model, but failed to recognize that he had to help to change the
company culture to a market-driven organization. Algodonera del Plata has continued its
business, mainly in the school gym’s segment, and failed to enter into the more profitable
fashion segment. The sad ending may mislead some students. The instructor must make
state clear the difference between the marketing tools and the function of marketing. One
is a technical set; the other is the managing side of the function. Staying with the
framework fails to recognize management responsibilities.
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CASE 7: HBO
The case is one of several TV/film/music cases in the collection. And like the others,
there is a heavy emphasis on sustaining creativity as a basis for differentiation. HBO
stands out in its ability to attract critical praise for its series, also achieving considerable
commercial success with these. Its business model exploits good returns at both the backend (top writers ask for less in return for the cachet and creative freedom HBO affords
them) and at the front-end (a great deal of its revenues are subscription based). Like NBC
(Case 15), the significance of hit shows is emphasized, with the rest of the schedule being
filled out around these with more imitable content (in HBO’s case, mostly movies).
HBO’s key selling point, “It’s not TV, it’s HBO” very consciously distinguishes the
content of its hit series from series on broadcast networks: there’s more nudity, violence,
and profanity, and topics that the broadcast networks typically avoid (such as death). In
doing so, HBO has clearly anticipated an increasingly significant phenomenon in a multichannel, multi-media universe: implanting in people’s minds where to go for shows that
they cannot find elsewhere. HBO draws on established strategy in the industry—for
example, its emphasis on highly respected creative sources draws on a “star system”
concept (see Case 38, Warner Bros.)—but molds it to this choice of very distinctive
topics. This unique blend of the established and the novel has its roots in the experience
of HBO’s two key programming executives, Albrecht and Strauss, in the stand-up
comedy industry (a focal “star” who succeeds by pushing boundaries in the content that’s
delivered).
The case demonstrates that the power of differentiation in consumer goods industries
crucially resides in making the product a lifestyle choice (see also Case 16, LVMH).
Those targeting a very broad market, such as the networks do, have an uphill struggle in
this regard.
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CASE 8: IMPSAT
Synopsis
The case covers the options for international growth facing Impsat, a small Argentinean
telecommunication company, based in Latin-America at a time when the
telecommunications market becomes one of the fastest growing in the world, attracting
virtually all the major global players. In face of the deregulation of the Argentinean
telecom market, Mr. Vivo has spotted the satellite market niche and, proposing a different
technological approach, intends to create a new business. Approaching Impsat, a metal
working industry already expanded internationally, they founded Impsat and started
developing the local market with relative success. At the same time the opportunity for
expanding into the region becomes apparent, as the region enters a strong deregulation
trend. The new venture then intends to establish a regional network while building the
company from scratch in a totally new business. The company considers its options for
growth based on the global network of the Impsat Group, and in particular, its expansion
to Latin-America. Options include strategic alliances and partnerships with one or several
big players. Implementation and organizational issues and the path for international
expansion are considered during the case.
Teaching Objectives
To analyze the strategic challenges of a company entering an industry
dominated by global players.
To examine the process of internationalization of a service company in a
market growing at high speed.
To examine the options for growth and survival available for local players,
while becoming regional.
To examine the development of telecommunication markets in Latin
America, and highlight the different maturity and regulations of different
country-markets.
The case provides a vehicle for analyzing the building of an international company in a
new and dynamic industry. At the same time it has to solve technological issues, while
building capabilities and expanding regionally.
The case allows students to analyze the challenges faced by a company intending to insert
itself into a new business that opens regionally. While the company is building its
regional business, it is entering the global arena at the same time, confronting global
players without intending to.
The sense of urgency that is present in the case helps students measure the degree of
reality of such urgency, and design a strategy for developing internationally under more
realistic assumptions.
Professor Guillermo D´Andrea, with the assistance of Professor Iñigo Echeveste, of I.A.E., Universidad Austral, Argentina, prepared
this note, for the sole purpose of aiding classroom instructors in the use of case MK-C-40-1-018. It provides analysis and questions
that are intended to present alternative approaches to deepening student’s comprehension of business and energizing classroom
discussion. © 2000 by IAE, Universidad Austral.
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Competing in the telecommunications industry in Latin America places the case in a very
dynamic setting where several formats of telecom operations and market regulations are
present: from fully deregulated—Chile—to various degrees of deregulation—Argentina,
Venezuela, Mexico—to strongly regulated—Brazil, Uruguay, Paraguay, Peru. This
makes the case suitable for a general discussion of the internationalization of services in a
high tech sector, as well as the strategic implications for a small company based in an
emerging market, to enter this highly competitive industry.
Students from developed countries will find a chance to handle regulated environments,
understanding national (and nationalistic) regulated environments where government
intervention is more the rule than the exception. PEST analytical tool (Political,
Economical, Social and Technological) could help to analyze this international case in
order to cope with the different national environments.
Students will learn how deregulation has crated opportunities for the creation of new
players from developing countries, offering a wide range of quality, hi-tech value-added
services as the ones provided by Impsat, competing in sectors traditionally reserved to big
global players. Not only National PTT have been privatized but it is remarkable, the
degree of intense private competition increasingly available in the region. European
students could find reference in this case to events close to happen in their national
markets, under the new degrees of market deregulation being introduced in the European
Union.
The case is suitable for graduate students—advanced MBA. It was written for an
international marketing or strategy course as an illustration of key issues in globalization.
It could also be suitable for covering issues on entrepreneurship or of specialized services
or in a Telecommunication Services course.
Teaching Guidelines
The following assignment questions and analysis have been laid out in a sequence, which
has been proven to provide an effective teaching plan. Usually I divide the session into
four segments:
1. Devote the first third to understanding the company background and, being a
case with a strong technological component, understand its options and how it
helps to build a strategic advantage.
2. Once the background is set, it should become clear that there is an attractive
market niche for the new company, and that the niche is present in the whole
Latin American region, and how the company advantages will help enhance
this opportunity. The need for becoming regional should become clear.
3. Assess the organizational and management challenges for building the
required regional network.
4. As the company is scarce of resources not only financial, but also
technological, marketing and management wise, the issue of selecting one or
several strategic partners becomes relevant.
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The session should start with analyzing Impsat skills and Impsat strategy. It is necessary
to understand how the technological choice becomes a strategic advantage, analyzing the
advantages and disadvantages of each option (VSAT/SCPC). By this the class should be
in position to assess the opportunity of the niche proposed by Mr. Vivo.
Usually participants are familiar up to a certain point with telecommunication services
and institutional users needs. Therefore the instructor will need to guide this part of the
initial setting of the session, helping the class become comfortable with these issues. Not
doing so may present the risk of ending discussing the case only with some “experts”
who will exclude the rest of the group of sharing its opinions, pre-empted by their lack of
technological knowledge, driving the analysis into irrelevant technological issues.
Assignment Questions
1. What is the nature of the market opportunity?
2. Which are Impsat strengths and weaknesses?
3. Which should be their strategic targets and what strategy should they
follow achieve them?
4. To what extent are allies needed?
Analysis
Starting the analysis with the Impsat Group helps understand the matching
between them and IMPSAT, a new company formed by young and ambitious
entrepreneurs but with little experience in the specific business. It must be noted that
Mr. Vivo had visited other economic groups before, where his project wasn’t
appreciated. This will help later in the case when the profile of new partners is
discussed.
Impsat
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Family owned
Entrepreneurial
Experience in large project management
Complex industrial products
Expanded into other countries
Network of international offices and contacts
Diversified (Turbines, Waste Management, Load transportation)
300 MM$ sales
Public projects diminishing in the future (Therefore, looking for diversification)
Young, entrepreneurial, visionary
High growth
Small leading team: Vivo + Verdaguer
Supported by Mr. Pescamona
Early “C” band license—1988
Optic fiber network in downtown Buenos Aires
Lack of technical resources


few available
few sources
Technology
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More efficient shared hub structure

Permanent real time connection, bi-directional
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Easy installation
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Bi-directional, reliable, data safe
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Unlimited transmitting capacity
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Untested under “C” band
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Developed by Hughes Network Systems (reliable? leading edge?)

Inexperienced Customers
At this point it should become clear that this is an entrepreneurial team entering a
business where they ignore much more than they know. Mr. Vivo is proposing a more
efficient but untested scheme, that even the supplier has to develop, while the market is
embryonic at this stage. Evaluating the needed effort is turning elusive: the initial $4M
rapidly climbed to $20M and then to $100M. Assessing the market opportunity should
then be the following step in the discussion.
Telecom Market

Deregulation and privatization

Growing demand
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Unsatisfied and inexperienced customers
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Undersupplied with out of date technology
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Explosive growth –17% year the next 10 years
But
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Customers not showing great interest—telecom satellite with large spare
capacity
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Declining tariffs—Japan, US: 50% decline

Markets are entire countries
At this point the class should realize the opportunity but also its magnitude. The
market is emerging rapidly by the hand of the deregulation process, but it is
constituted of entire countries. Competition is not a minor issue: national PTTs, joint
ventures, cable TV suppliers, cellular phones and other satellite projects by companies
such as Motorola or Bill Gates investing huge amounts—$4B and $9B respectively—
constitute a major concern. Up to what point is it realistic to think of an entrepreneur
based in a country not characterized by its technological development to enter this
arena and challenge companies of this size? But many of these competitors are the
same state run companies focused on the more attractive basic telephone services, and
that disregarded customers during decades. By the same token, unsophisticated clients
unaware of technological advancements aren’t placing strong demand. This is a
typical marketing issue for emerging markets and new product introduction. It allows
discussion of the path and stages for market development, selecting segments
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accordingly. This is a relevant analysis, for shaping the first marketing strategy will
help when facing other country markets, as all are in a similar stage.
Market Segmentation
a) Knowledgeable (23%)
- Proprietary network
- Large banks/companies
- Activities spread across countries
- Own technicians
b) Using Specialized Consultants (17% interviews)
- Large companies/medium sized banks
- Limited knowledge
c) Other MNC (28% interviews)
- Low knowledge
- Own technicians
d) Pessimistic (32% interviews)
- Low Telecom consumption
- No Technicians
- No consultants
- No sensible need
Selecting segments initially should be limited to the first two. The instructor could help
the class to reason how hi-tech markets evolve more rapidly than consumer products, and
that a cascade effect could be expected in a relatively short period of time. This also
addresses the issue of path of evolution. Students may realize that expecting a market
explosion may not be realistic, but also the importance of positioning the company
among the early adopters may not be that hard at this stage, and of the utmost importance
in later stages. The technological advantage and lack of aggressiveness of current
competition favors the company in this regard. Leasing hardware rather than selling it to
clients not only works as a factor for differentiation, but also lowers a barrier for adopting
this service. Other issues regarding the marketing strategy should be covered, such as
product/service range, whether limiting to data or including voice; pricing according to
distance or other criteria, at a competitive level or premium pricing, and flat fee or
according to consumption.
Competition
Satelnet and Satelital

SCPC Technology
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Point-to-point networks
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Selling equipments to industrial clients
Once the strategy for Argentina is set, the instructor should move the class to regarding
the rest of the region, which presents the same pattern of deregulation and privatization.
To the advantage of being a first mover and the technological design, a certain comfort in
working in emerging markets, unstable, less structured and therefore with a wider degree
of unpredictability could be added. Then the instructor could challenge the class asking
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whether the scope should be limited to the Latin American region, or cover other regions
in similar stage, namely Asia. Usually some students are eager to take this challenge,
while others show more worries for the implications, which poses the issue of
organizational development the company needs to address upon expanding
internationally, whether regional or global. Its only enunciation may drive the more
enthusiastic to a more prudent position, addressing first the region, and then moving into
other more distant regions. In any case, the class should devote some attention to
assessing country markets similarities and differences, in order to define a strategy and
realize up to which degree it should be localized or a regional standard could be set.
Regulatory environment
-Argentina
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Open to long/local distance carriers
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7 or 10 years franchise
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Total deregulation by year 2000
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Long distance carriers (national) 3 under “C” band
-Chile
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Much more deregulated than Argentina
-Venezuela
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Entering into process of deregulation process
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At a higher path than Argentina
-Brazil
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Deregulation announced
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No clear program
-Uruguay
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Popular ballot against privatization
It should become clear that government policies in the region regarding communications
are converging towards a deregulated and privately run setting, and from this point, that a
window of opportunity is open for Impsat. Some considerations derive from here: What
should Impsat do in order to profit from this opportunity? And for how long it will be
open?
The first issue refers to the initial analysis of Impsat difficulties in developing skills, and
the marketing mix decisions that will have to be taken in each new market. How can the
company open new markets and furnish them, when it has been hard to develop in its
own domestic market. This is an issue that usually the class finds hard to solve. After
realizing the technological advantage of VSAT, and the size of the opportunity open in
the region, the group becomes enthusiastic for going fast after the new market before
other major global players start moving in. The issue of developing skills becomes a
significant impediment. The instructor will have to guide the class through this issue,
analyzing the kind and amount of skills that need to be built, and how this could be
achieved. Two main skills are needed to run the operations: technical and
marketing/sales. The first will probably be as hard to find as it was in Argentina,
therefore a training scheme will have to be set forth in order to cope with this issue.
Alternatives appear from setting a “school” at headquarters where foreign operators will
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be trained during some time, to developing a training group that will move from one
country to another training the local operators. While marketing may be shaped standard
for the region, sales will need to be tailored to each market conditions. The sales force
will be local, leaded by local managers with the proper contacts and market knowledge.
The class could be driven even deeper into details, as to designing entry strategies and
selecting segments. Here I usually ask the class regarding control of the operation, how
would they assure that things are properly run? One possibility is to name Argentinean
CEO’s, another is having a proper control system.
In any case, at this point the class enthusiasm usually cools down, realizing the amount of
effort needed, especially being the case of a small company created recently. To
dramatize even more the situation the instructor should raise the regional issue, and how
it should be addressed, reminding the class of the window of opportunity. This question
helps unlocking the previous situation. After suggesting various creative schemes
devoted to coping with this problem, a question referred to the different path of
deregulation helps putting things back in place. As each country is following a different
path, this gives the company time for moving country by country, and at the same time
leveraging on the experience it gains in each previous country.
After this discussion is settled, one last issue could be raised. Will Impsat be able to cope
with all this effort? Should they start thinking of joining partners, and if so, under which
criteria selection should be done?
Money is usually the first issue raised, and technological skills come right after. Then
how will Impsat be able to win bids in the new markets? From these considerations any
partner should not only provide funds and technology, but the experience to offer brand
support that will enhance the Impsat image. How would the class negotiate with such a
partner? What does Impsat have to offer to this alliance? Besides its local presence, its
understanding and comfort in working through the usually complex business, legal and
regulatory environment is not a minor contribution.
Final Summary
Out of this last issue, the instructor could introduce a final question: If this is the case,
shouldn’t Impsat be regarding more carefully at other emerging regions rather than
concentrating only in Latin America? The instructor could wrap up the session, by
pointing out that once all the issues considered in the discussion have been properly
solved, the company may be in shape of addressing a major challenge that should to
much at the beginning of the session.
Postscript
The company followed a paused path, entering markets in phases—market research,
bidding process, training, segmenting and selling, marketing, and setting a full operation.
The varying path of deregulation gave time for building skills for each new market.
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In 1994 it was joined by Italy’s STET, who was looking for local partners in other
regions that would add synergy. STET provided the technical credibility that the new
borne company was lacking when facing major global competition at the bidding
processes.
Markets and revenues had the following evolution (in millions $US):
1990
Argentina
0.2
Other countries*
Total
0.2
1991
8.4
1992
21
8.4
21
1993
37.1
3.1
40.1
1994
63.3
14.3
77.6
1995 1996
84
27.1
111.1 120
1997
1998
1999
155
205
220
*Colombia, Venezuela, Mexico, EU
In 1996 offices were opened in India, China and Indonesia, but with little success.
In 1998 Brazil deregulated its market, and Impsat quickly moved in, but to conquer a
small share.
In 2000 it started building a network of 10,000 kms to connect Latin America in a move
from satellite to ground communications.
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CASE 9: CANON: COMPETING ON CAPABILITIES
The case is on the Japanese company, Canon, which from a base originally only in
cameras diversified into copiers and printers, and now holds a top-tier position globally in
a broad range of product markets. This case fits hand-in-glove with the Hamel and
Prahalad reading in this Chapter 3 and the Mair reading in Chapter 5, and can usefully
serve to pull these together by giving a focused elaboration ideas to both readings.
Canon began as a high-end camera company, seeking to compete against the wellestablished German firm, Leica. However, growth through diversification was always
encouraged and it came early with Canon’s wartime development of X-ray technology.
By the 1950s Canon was Japan’s largest camera manufacturer, and had developed a range
of products using optics technology. In 1962, with the establishment of its new- products
R&D unit—under a mandate to explore fields ranging from copiers to calculators—the
development of core competencies really began to take off. The electronic calculator was
the first fruit of this effort, developed by committed engineers in defiance of top
management. Canon soon dominated the Japanese market for this product. From this
developed a competency in microelectronics, which was leveraged into the huge success
of its AE-1 camera over a decade later in 1976.
Emulation, Not Imitation
Also in 1962, Canon began to focus in earnest on the copier business, challenging its
people to develop a Plain Paper Copier to compete with that of Xerox, whose product
was protected by a thicket of patents. Licensing inferior Coated Paper Copier technology
from RCA, Canon became experienced with the business, but did not sell copiers under
its own name until 1970, having developed the New Process technology in 1968. The
first generation of this product came out in 1970, and the second generation of this
product came out in 1972. In the late seventies Canon challenged its people to emulate
the success of its AE-1 camera, and the personal-copy segment was discovered—this
segment (“E” in Exhibit 3) had hitherto been ignored as the product was defined as
“centralized copying.” Again, a large cross-functional team was charged with the task.
Within three years, the product was ready, along with a patented cartridge technology.
And as part of the redefinition of copying as a consumer good, distribution was redefined
to include mass merchandisers. By 1982 copiers were Canon’s biggest business. Thus do
we see how emulation—whether of internal or external referents—is a central dynamic in
the development of core competencies?
How Did Canon Do It?
The company’s success informs the Prahalad and Hamel ‘strategic intent’ reading, which
states: “Playing by the industry leader’s rules is competitive suicide.” It describes how
both Kodak and IBM tried to enter the hugely profitable copier business in the early ‘70s,
with the expiration of Xerox’s patents. And they did so by trying to match Xerox’s
business system. By contrast, Canon sought not to imitate—the rival was too
formidable—but rather based its entry strategy on “changing the rules of engagement.”
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Thus:
“While Xerox built a wide range of copiers, Canon standardized machines and
components to reduce costs. Canon chose to distribute through office-product dealers
rather than try to match Xerox’s huge direct sales force. It also avoided the need to create
a national service network by designing reliability and serviceability into its product and
then delegating service responsibility to the dealers. Canon copiers were sold rather than
leased, freeing Canon from the burden of financing the lease base. Finally, instead of
selling to the heads of corporate duplicating departments, Canon appealed to secretaries
and department managers who wanted distributed copying. At each stage, Canon neatly
side-stepped a potential barrier to entry.”
Not only did this devalue Xerox’s business system, but it also made it extremely difficult
for Xerox to respond—its system wasn’t designed to deal with this sort of redefinition.
As Xerox found to its cost, every barrier to imitation has its evil twin: a barrier to
retaliation.
What Are Canon’s Competencies?
These include capabilities in precision mechanics, fine optics, and microelectronics.
Precision mechanics and fine chemicals underpin a huge range of products—for example
the basic camera, fax, bubble jet printer, and laser images. Fine optics informs the first
and last of these examples, and microelectronics informs all but the first (but is vital to
advanced cameras). Their value depends on their being available to any SBU manager
who can demonstrate their potential yield. The sense of possibility that this opens before
managers is exemplified in the case in the development of the bubble-jet printer: invented
by accident, this combined fine chemicals, semi-conductors and electronics, and
threatened the cannibalization of the laser printer.
How Do We Generalize from Canon’s Experience?
The case describes Canon’s marketing, technology, and manufacturing in detail. We can
see the role of challenging objectives: beat Leica, diversify (yielding the electronic
calculator), exploit interrelationships (AE-1 camera), and match the AE-1 success
(personal copier). Extensive outsourcing, focused internal development, use of crossfunctional teams (including for a program to reduce time to market), the inculcation of
“creative destruction”—all served to accelerate organizational learning. The entry into
copying was predicated on devaluing Xerox’s advantages. The entry into Integrated
Circuits in 1980, based on a vision of an industry called “opto-electronics,” illustrates yet
again Canon’s emphasis on taking out options on technology, of building up an
advantage portfolio. And the powerful functional committees, standing between core
competency development and the business units, ensure integration across the multiproduct company. In general terms, the case strikingly bears out the “Model #2” variant
of strategy making discussed in the ‘strategic intent’ reading.
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CASE 10: MP3.COM
The case focuses on a much-publicized instance of innovation: the digitised distribution
of recorded music. MP3.com is a young start-up that has shaken the foundations of an
industry that hasn’t significantly changed its business model in decades. This is a
powerful case of a “disruptive innovation” (see also the Day and Schoemaker discussion
of emerging technologies in Chapter 9). That is, a start-up from outside the industry takes
largely existing technology (search engine, MP3, CD burning, servers) and uses them to
deliver a marketing innovation with a much lower cost structure: distributed access to
recorded music and (but this is really what got MP3.com into trouble) customized
production of a CD.
In contrast, the incumbents are clearly “over-performing:” consumers are restricted to
access in a significantly non-distributed way and forced to buy a whole CD even if they
wish to listen to only one track. The incumbent recording firms also require artists to
give up ownership of their recordings and artists typically receive less than 10% of the
price of the CD dollar sales. Nevertheless, the recording firms still lose money on 85% of
their artists.
In contrast, with MP3.com the artists set the price, get 50% of the revenues, and retain
ownership; manufacturing, distribution, and promotion are also all much cheaper.
Though the case does not discuss this, recording technology is now sufficiently advanced
that good quality music can be produced with an outlay of only $20-30,000 on
equipment, further undermining the value-added contribution of incumbents in the
industry.
While critics counter that MP3.com can only succeed with artists that either already have
or can quickly achieve visibility—and very modestly at that (no new MP3 artist has sold
more than 10,000 CDs). Robertson, MP3.com founder and CEO, argues that what he is
doing is as inevitable in its consequences as Xerox was for documents and document
copyright. The key to success in this new world, he argues, is to get consumers to pay in
an instantaneous transaction and to give up on trying to secure digital music. The key
insights of the case, therefore, are that success comes not from a technology but from
figuring out a business model in which to embed that technology, and that finding such a
business model is very much a process of trial and error.
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CASE 11: WFNX-101.7 FM AND BOSTON’S RADIO WARS
Synopsis
WFNX is a small rock radio station located in Lynn, Massachusetts, and owned by the
same company that publishes The Boston Phoenix—Boston’s leading alternative weekly
newspaper. Historically, ’FNX’s market share goals (at least those publicly stated) have
been modest—this based on the hard reality that the station operates with only 3,000
watts of power, whereas many competitors are 50,000 watts (thus limiting ’FNX effective
signal area); and the fact that from the beginning ’FNX has chosen a “new music” format
which prefers to break new artists/feature experimental sounds which typically do not
appeal to a mainstream audience. ’FNX’s ratings peaked at 2.5 in 1995, have trended
down since, and are now below what is considered by the company to be a minimum
rating share of 2.0. Will ratings continue to fall? What can management do to reverse the
trend?
’FNX’s most immediate problem is that its “alternative” music format (as it is now
called) has been creeping into the mainstream. This increasing market acceptance has
caused two large competitors, WAAF and WBCN, to mix more alternative into their play
lists, thus intruding on ’FNX’s traditional musical arena. Worse yet, WBCN, now owned
by a large media conglomerate, is employing “marketing warfare” tactics to wrest away
additional ratings. Specifically, there is evidence that ’BCN is pressuring artists and their
record companies to effectively boycott WFNX. The situation has become so bad that
record companies have demonstrated a willingness to take a hit in sales of certain
alternative groups in order not to incur the wrath of WBCN and its parent company.
Record companies desperately need radio airplay to “sample” their product, and thus they
must curry favor with the major radio stations. To compound the basic marketing
problem, WFNX has experienced fairly high turnover in the position of Program Director
(the person who guides and adjusts the station’s play list), and in its sales force which
sells media time (radio spots) to advertisers. And, ’FNX’s morning show (6-10 a.m.) has
been somewhat in disarray since long-time DJ, Tai, left to pursue a talk radio career.
Despite all this, ’FNX appears to have a loyal core following among listeners, and even
among industry observers, who admire the station having stayed true to its mission of
exposing innovative, cutting edge artists. These groups may also respect the fact that
’FNX has broadened its mission to include causes such as freedom of speech and AIDS.
Recently ’FNX management has done an analysis and has outlined a number of possible
strategies/tactics for reversing the ratings decline. These are clearly outlined in the case
based on an internal company memo. Students must analyze ’FNX’s “problem,” evaluate
the alternatives, and come to a decision.
This teaching note was written by Associate Professor Robb Kopp and Brad Mindich (MBA ’98), both of Babson College, Babson
Park MA 02157 to guide instructors in preparing the “WFNX–101.7 FM” case study. Copyright © 1998 by Robert J. Kopp and
Bradley M. Mindich.
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Case Objectives
1. To provide a platform for a cross-disciplinary analysis of a business situation
(Marketing, Management, Operations, Finance, MIS, and Strategy).
2. To demonstrate the ravages of the product life cycle as competitors swoop in to
replicate the pioneer’s original insights.
3. To depict a situation in which the marketing environment—marked by industry
concentration and hardball competitive tactics—has turned hostile.
4. To give students a business “workout” in an unusual market place. Many students will
have considerable knowledge of the end product: rock CD’s and concerts. But they may
surprise at the complexity of the business that lies behind the “cool sounds.”
5. To provide a detailed illustration of the concept of “marketing warfare;” to alert
students to be more sensitive to competitive vulnerability and lead them to distinguish
between proactive and reactive strategies.
Use of the Case
This case was first used in a cross-disciplinary course in the undergraduate program at
Babson College. The course—the Intermediate Management Core (IMC)—covers a
number of management and foundational disciplines in an integrative manner over three
semesters. The semesters are themed respectively: description, analysis and synthesis.
“WFNX 101.7-FM” has been used as the kick off case in IMC3. As part of the theme of
synthesis, IMC3 sets out to establish a basic problem solving approach that students can
use across myriad situations. The specific framework is proprietary to Babson and may
not be of broad interest, but it basically follows a problem solving heuristic encompassing
the following basic steps: problem definition, building a model of the phenomenon, get
data, analyze, decide, implement, and review results/feedback lessons learned. The case
can be used in the following more traditional applications: marketing, strategy/strategic
tools, and competitive strategy. The case would also function in an entrepreneurship/
small business course—WFNX and its parent company Phoenix Media/Communications
was founded by Stephen Mindich in 1982 and is still wholly owned by him.
Teaching Suggestions
The case study, while a bit lengthy, teaches well partly due to the unconventional and
student-relevant nature of the material. Instructors can decide for themselves the relative
balance between analysis and identifying/choosing options.
Assignment questions:
1. Describe the music industry value chain—where does radio fit? Describe the radio
industry and the Boston radio market in particular. What is this industry like—and how
does this bear on WFNX’s situation? [Hint: In describing the radio industry be sure to
employ frameworks such as Porter’s Five Forces Analysis, the Product Life Cycle, and
an evaluation of market structure (e.g., monopoly, oligopoly, monopolistic competition,
etc.].
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Analyzing Customer Needs: Can we readily understand customer needs or are
these a moving target? What stage of the lifecycle is WFNX in? What is
WFNX’s overall market situation?
2. What are the key elements driving a radio station’s profitability? What does a station
need to break even in the marketplace? Why would radio listenership grow or decline?
Is it possible to lose market share and grow sales at the same time?
3. So given the above analysis of profit, what is WFNX’s business problem? What is the
root of the problem?
4. What does the Radio Anarchy situation tell us about decision-making at WFNX?
5. What are the possible options? A number of these are outlined in Exhibit 6 of the case
study based on an actual memo written by ’FNX management. Do these options
adequately address core problems? Are there additional options that have not been
considered? What is the likely impact of each option? What are constraints?
6. What should WFNX do?
7. (Optional question) What steps have already been implemented? What is your
evaluation of the progress made thus far? Has WFNX taken the situation seriously and
reacted appropriately?
8. (Optional question) You are the general manager of WFNX. You need to call a
meeting to discuss the current problem. Which management functions do you invite to
the meeting?
Students will want to rush to a discussion of WFNX’s positioning based on the choice of
music and artists on the play list. But the instructor must resist this approach. The initial
assignment questions regarding the business situation and particularly the question “how
do you make money in radio?” will bring students up short—i.e., will signal that radio is
a serious business—it’s glamorous to a degree, but it can be frustrating and unprofitable
when ratings fall. The discussion of the business model as well as concepts such as value
chain and five forces sets a more measured tone for discussion of the case.
When the discussion does come around to musical formats and positioning, the instructor
will find that the students probably have superior knowledge in this area. In a recent class
that we observed, one of the students declared after listening to some discussion, “The
basic problem is that WFNX staked out a position as alternative and cutting edge. This
positioning has now gone to the mainstream but that's not only where the big market is
it’s also where the big competitors will flock. So ‘FNX is caught in a position similar to
that when it was founded—it can remain cutting edge only by playing evermore avantgarde sounds—but this strategy always has the risk of alienating listeners.” This
observation was insightful and was propelled by the student’s intimate knowledge of the
musical terrain. This is all a way of saying that the instructor should be sensitive to
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harness this knowledge within the classroom while at the same time moving the
discussion along properly.
Case Analysis
1. Describe the music industry value chain—where does radio fit? Describe the radio
industry and the Boston radio market in particular. What is this industry like—and
how does this bear on WFNX’s situation? [Hint: In describing the radio industry be sure
to employ frameworks such as Porter’s Five Forces Analysis, the Product Life Cycle, and
an evaluation of market structure (e.g., monopoly, oligopoly, monopolistic competition,
etc.). What is WFNX’s overall situation?
•Music industry value chain—draw this out to the class (see below). Noteworthy is the
fact that radio station revenues are (at least nominally) almost entirely based upon selling
media time—radio spots—to advertisers. At the same time radio functions as the primary
sampling vehicle for record companies, a role for which it is uncompensated. (In fact,
although “pay for play” is technically forbidden by law, some industry observers
maintain that this practice is rampant. If it is, then radio stations may have a second key
source of revenue of an undetermined magnitude. A book referenced in the case study
that discusses “pay for play” is Hit Men: Power Brokers and Fast Money Inside the
Music Business, by Frederick Dannen.)
MUSIC INDUSTRY VALUE CHAIN
$ Advertisers
Artists
Record Company
Radio Station
Consumers
Record Retailer
Concerts
Porter Five Forces Analysis (this is shown below)
•Barriers to entry are very high to enter the industry as no new FCC licenses are being
issued; barriers to switching formats are very low however. (Each format can be viewed
as a separate sub-market.)
•Suppliers (record companies) have historically had low bargaining power. However,
under pressure from a consolidating radio industry, suppliers have demonstrated a
willingness to reduce support for small stations (like WFNX).
•Consumers generally have very high bargaining power as they can easily “station surf”
in response to any type of boring or displeasing programming such as a bad song, too
much talk or unwanted information such as news. On the other hand, some musical
formats such as “country” in the urban east tend to be underserved, and format loyalists
are likely to have much less choice/bargaining power.”
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•Substitutes are at two levels: within the media world, advertisers see radio within the
competitive set of other media such as TV, magazines, newspapers, outdoor, Internet and
even event/sports sponsorships. This source of substitution results in cross media price
competition thereby reducing the radio industry’s ability to raise price. Secondly, from
the consumer’s standpoint, radio as an entertainment source has competitors in CDs and
cassettes, particularly as these media are becoming more portable through automobile
units and Walkmen. Overall, rivalry in the radio industry tends to be high, but
particularly it seems within the most popular formats. Industry consolidation appears to
be permitting the conglomerates to play “hard ball” with smaller competitors.
RADIO INDUSTRY—PORTER FIVE FORCES ANALYSIS
Barriers
• Hi: Entry
• Lo: Format Entry
Suppliers
•low power
•growing
Rivalry:
High
Customers
• hi power
• switch stations
• exc. “loyal niches”
Substitutes
• other media (TV)
• other entertain
(car, CDs,Walkman)
Analyzing Customer Needs: Can we readily understand customer needs or are these
a moving target?
•At any point in time the nature of customer tastes is captured by “format share”
especially if we let others experiment and we play a follower role.
•Moving target if we aspire to lead the market.
•Also, formats “cross over:” e.g., country hits go mainstream; now alternative bands are
crossing over to “Top 40.”
Contrast the above with the toothpaste market where the attributes of taste and cavity
prevention have been invariant needs for decades.
What stage of the lifecycle is WFNX in?
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The overall radio industry is probably in the mature phase—meaning that total
listenership is neither rising nor falling very fast—but has stabilized. WFNX, however,
appears to be in a growth segment of the market: alternative music.
Market structure: is this an oligopoly or monopolistic competition? Exhibits 4 and 5 point
toward a trend to oligopoly.
What is WFNX’s overall market situation?
WFNX is a relatively small player in a marketplace which is rapidly evolving via mergers
and acquisitions to a market dominated by large players. This means that ’FNX has
competed successfully (some might say—have they really?) against the “big boys” based
on a customer value proposition and operating system which has been extremely
consistent over the station’s 15-year life-span. Now competition has intensified along two
avenues:
•The musical format pioneered by ’FNX—alternative, a.k.a. “modern” rock—has grown
in popularity and has attracted the attention of some of the large competitive stations.
Since it is impossible to totally differentiate one’s play list—i.e., the same records are
available to any station for airplay—the addition of “alternative” to competitor’s play
lists has intruded on ’FNX’s franchise. This has happened in much the same way as
competition intensified in the mini-van market as lots of car companies copied Chrysler’s
original idea.
•Ratings (share of market measure) drive revenues and profits, and competition for
ratings points is becoming more rapacious than in the past as the large players flex their
muscles. In addition, WBCN—’FNX’s arch rival—is employing what can best be termed
“marketing warfare” techniques that have the effect of tilting the playing field. (A “level
playing field” is where competitors compete on the basis of attempting to provide a
superior overall offering to the customer—i.e., the “consumer is sovereign,” chooses the
best value, and both the consumer and society benefit by rewarding companies which are
most efficient, and provide the best value to the end user. A “tilted playing field” is
competition based not on customer value, but rather on competitive warfare actions such
as restricting rivals’ access to key resources.) For example, in this case WBCN has
switched its reporting status with Billboard, thus knocking ’FNX out of the listings (and
thereby reducing its industry credibility and visibility), and ’BCN is pressuring record
companies and artists to withdraw their support—e.g., promotional support—of ’FNX.
Market Share: The result of the above is that ’FNX market share as measured by ratings,
which peaked in 1994 at 2.5 is now down to 1.2 in 1997—this being below what the
company considers to be a minimum viable market share of 2.0. Remember that each
ratings point stands for approximately $1 million in profits (see note in case), at some
point low ratings threaten the very viability of the radio property.
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2. What are the key elements driving a radio station’s profitability? What does a
station need to break even in the marketplace?
Here develop Exhibit TN-1 on the board. Maybe start with PBT = Revenue – Costs, then
explode Revenue as shown in the Exhibit.
EXHIBIT TN-1
Drivers of Profit-Before-Tax for a Radio Station
PBT = (Total Radio Audience) x (Station Share) x (Price/Spot/Listener) – (Costs)
(Station Share = Format Share x Station Share of Format)
Total number of radio listeners. Very often, and may be true in this case, we take the
total market “pie” to be a given quantity. It is true that in mature markets, primary
demand tends to be stable and predictable from year to year. For example, the number of
units sold in the toothpaste category is rock steady from year to year; the key force
affecting primary demand is population, a driver that in itself is very predictable.
What drives the total number of radio listeners? Factors such as: total population,
employment which drives commuting which in turn drives car radio listening during the
all important morning and afternoon “drive times.”
Is there cross media competition? This is probably true for non-commuting radio
occasions. People of an evening who want to be entertained are faced with a broad array
of options including broadcast media such as radio and television, as well as home
entertainment media such as CDs, cassettes, video games and the like. We should get
some information on relative audience size during the “day parts.” Since we don’t have
an answer for this question, and it is not discussed in the case, let’s finesse this/downplay
it and go on to the next topic.
Why would radio listenership grow or decline?
Answer: More commuters—the move toward public transportation, i.e., more trains and
buses would appear to militate against this. Overall growth in economic activity would
grow the market.
Share of listeners/“station share.” This quantity is decomposed into “format share” X
“station-share-of-format.” This implies that listeners’ station choice forms a hierarchy
where format choice is primary. That is, the listener decides first what type of
programming he/she is interested in and then selects a station within this programming
type.
Format share. The various radio formats are well presented in this case as well as their
evolution over time. Exhibit 5 does an excellent job of showing formats in their
evolution. One can observe formats grow and decline—there appears to be a real life
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cycle; what complicates the matter is that formats split off and become redefined. For
example, “alternative” which commanded a plurality ratings share in 1996 of 8.9, was
redefined as modern/active rock and alternative so that “alternative” appears to have
declined precipitously. This is not the case; as Bruce Mittman of WAAF says in the case,
definitions of music are very difficult, and this breakup of the two categories is a good
example of Mittman’s point. Radio format trends are difficult to predict. Some formats,
such as alternative, reflect the swirling trends in contemporary music itself—i.e., what
music is currently in vogue and selling—and this is difficult to predict on its own. Other
radio formats are nostalgic—such as “classic rock—and others have no music at all such
as all sports or all talk.
So format share probably is best described by the economists’ term—“consumer
tastes”—and in something as subjective as radio this is difficult to pin down. However, at
any point in time, format shares—at least as defined by industry oracles such as Billboard
Magazine—are fairly well pinned down as a share of the total pie.
Is format share affected by promotion? That is, if entrepreneurs decide to launch talk
radio formats and many of them promote this simultaneously, does talk radio grow in
share as a consequence? In marketing, promotion is mostly assumed to affect selective
demand (market share), but can also influence primary demand. This of course is one of
the big issues in the tobacco situation where tobacco companies steadfastly have
maintained they are simply fighting for share of puffs and are not inducing new smokers
to enter the market. As this claim is totally incredible for tobacco, we should probably
conclude that radio promotion can have some effect on format share—if not total pie of
listeners—as well as station share.
Share of format. The ratings in the case study are not expressed as share of format, but
we are defining this term as one being meaningful for decision-making purposes
assuming there is a hierarchy in the customer station choice process. The implication is
that our primary decision as a radio marketer is to select a format and next to compete for
listeners within this arena. In any event, driving forces of share-of-format are signal
strength, programming, and promotion.
•Signal strength that places an absolute limit on the potential proportion of total listeners
available to the station. We know that in WFNX’s case its 3,000-watt capacity compared
with competitors at 50,000 comprises a major constraint. The key means of overcoming
this constraint is to acquire an existing frequency, which has already been approved at a
higher wattage. This option appears amongst the strategic choices. Short of this, “fixes”
such as moving the antenna and setting up translators are available to WFNX and have
been pursued.
•Programming and its appeal—for alternative/modern rock, this involves setting up the
play list, and filling out the rest of the format such as on-air personalities and features
such as news, interviews, live broadcasts, and concert reviews (also weather, traffic, etc.).
Over the years, Charles Laquidara of WBCN has defined the importance of on-air radio
personality in Boston. For twenty years, Laquidara has been a tremendous force with his
’BCN morning show “The Big Mattress.” His popularity in driving ratings has been
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rewarded with a $1 million salary. Only Howard Stern—the wildly popular if segmented
“shock jock”—could have supplanted Laquidara and he has. WFNX cannot afford the
“big buck” talent, but it appears that the station is realizing the importance of this variable
and the key role of salary in retaining DJs. Currently, the important morning show is in
flux because of long-time DJ Tai’s departure. It is implied in the case that WFNX is now
more willing to pay for its key positions at PD and DJ—not to mention station manager.
•Promotion—as in any other product, promotion can move customers down the “buying
process hierarchy” as follows:
AwarenessKnowledgeAttitude/LikingPreferenceIntentionTrialAdoption
Advertising does a great job of producing the results at the top of the hierarchy
(awareness and knowledge) and sales promotion such as give-away's, coupons and
discounts is traditionally strong at the bottom—i.e., in driving behavior such as trial and
on-going adoption.
Is it possible to lose market share and grow sales at the same time?
The answer is yes, in a high growth market. Unfortunately, the “alternative” market is not
growing fast enough to compensate for FNX ratings loss.
Price per listener per spot—since we don’t have a lot of information about this, let’s
assume in this case that this number is determined by a number of exogenous forces—the
price of comparable media such as television and print being one—and that this price
once established is fairly invariable across the entire marketplace. When this will not be
true is when a particular audience composition, as defined by demographics (i.e., 18-34
men, 25-54 men and women, etc.), is in great demand and there is not sufficient supply of
promotional vehicles to meet this demand. We know from the case that one of the reasons
WBCN has held to its AOR/classic rock format for so long is because: “That’s where the
money is.” This all means that there are big audiences, attractive to advertisers, who tune
in to this format style. Let’s not get into this variable so much, as the case focuses really
on format share and share of format as the key variables driving total revenue.
Costs—these are well enumerated in Exhibit 1 of the case study—key costs are personnel
in the form of sales force, on-air talent (programming), and promotions/marketing. In
addition there is administration and corporate overhead to be paid out. In any case, this
income statement is quite different from a product, which would have a high variable cost
of sales as a component. Here the radio station looks like an airline company in which
most costs are fixed. Within costs, a radio station faces the same conundrum as any
marketing organization: that is, product quality (programming) and promotion (sales
force and promotions/marketing) drive demand, but also drive costs. So if we model the
situation, there is some optimum point of spending on these demand drivers for
maximum profitability. If margins are known, and some sort of curve can conceptualize
sales response—such as S shaped—these things can be figured out analytically. When
most costs are fixed, then market share—i.e., share of format—has an almost one-to-one
effect on profits. In addition, note that all allocated fixed costs such as internal
management fees ($800K) and maybe part of corporate overhead, comprise a much larger
percent of each sales dollar as sales revenue declines. (This situation is illustrated by
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Euro Disney: when the park after two years of operation was on the verge of bankruptcy,
Walt Disney Company, 49% owner, suspended all licensing and royalty fees totaling
roughly 10% of sales dollars, in order to enable the park to regain its financial footing.)
3. So given the above analysis of profit, what is WFNX’s business problem? What is
the root of the problem?
The most glaring problem is a declining share-of-market. The format share is exploding
as WBCN and WAAF enter the category; but it is not expanding fast enough to prevent
WFNX from losing overall market share. Ratings have declined from a peak of 2.5 in
1994 to 1.2 in 1997. If each annual ratings point represents $1 million profits as stated in
the case, the station has lost over half its revenue or $1.3 million. This is even more of a
problem if WFNX recognizes that it must boost salaries/compensation in order to reduce
turnover in key on-air, management and marketing positions.
What is WFNX’s business problem? Try to express this in a single sentence:
“WFNX is losing ratings which in turn leads to lower revenue and profits.” “WFNX
ratings in 1997 are on-half of its peak in 1994; big competitors are attacking WFNX and
the station needs to fight back.”
What is the root of the problem?
New entrants are crowding WFNX in “format space”—barriers to entry are virtually
non-existent to stations that desire to “flip” formats. Simply put, the benefits that listeners
once received primarily by tuning to ’FNX, are now available on other stations.
The intruders have a power (i.e., wattage) advantage over ’FNX—a chronic problem
which has now become more of an Achilles’ heel as it competes toe-to-toe within-format.
In the past, ’FNX had format exclusivity and therefore if as a listener you wanted
“alternative,” you had to tune to 101.7—or possibly some of the college radio stations.
Marketing warfare tactics on the part of WBCN are cutting the legs out from beneath
some of WFNX’s historically effective promotional tactics. ’FNX does little media
advertising other than 11. In the Phoenix publications, but spreads the gospel of
alternative by sponsoring frequent concert events featuring cutting edge alternative
artists. In a Boston Globe article (May 30, 1997) titled “Static on Rock Radio: Rivals
Accuse ’BCN’s Oedipus’ Powerplay” by Jim Sullivan, Stephen Mindich, owner of the
Boston Phoenix and WFNX, said “Why does this man [WBCN PD Oedipus] have to
squish and squash us?” Dave Douglas, PD of WAAF said: “In some cases the bands and
more so than management are being completely manipulated [by WBCN].” Bill Glasser,
former PD of WFNX, said Oedipus’ reach and clout go well beyond his job at ’BCN.
Because the station is part of the Westinghouse/CBS chain—which owns other similarly
styled stations in New York, LA and other cities, “He can play a power game using the
whole chain.”
Oedipus responded to the WAAF and WFNX charges by saying: “This is paranoia.”
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Jim Sullivan asks: “If a radio station does make a threat to a band’s management or
record company to secure exclusivity and band cooperation with another station, is that
illegal?”
Replied Bill Berkowitz, an antitrust attorney at Bingham Dana and Gould: “I couldn’t say
there’s anything illegal in what they’re doing. They can demand what the market will
bear.” Berkowitz says that if he had to pick among illegal, unethical or hardball, he’d opt
for the last as a description of the tactic.
“If the defense is ‘hardball’,” said Tim Dacey, an antitrust attorney with Hill and Barlow,
“it would, morally, be a kind of a wretched defense.” [Later insert quote from page 4 of
this article]
Industry consolidation—what advantages specifically accrue toward multi-station radio
organizations? Possible answers are:
Negotiating power with suppliers—i.e., record companies and artists. WBCN has
already employed this advantage in spades. Is what they are doing legal? Ethical? Or is
this just normal “industry hardball?”
Marketing clout with customers, i.e. advertisers who buy radio time—one of the
disadvantages of radio as an advertising medium is that a media buyer (often part of the
advertising agency) must negotiate with lots of individual radio stations across several
markets in order to put together a total package of radio coverage which achieves the
client’s goals of reach and frequency. The newly consolidated radio conglomerates will
be able to offer the media buyer a broad array of individual station/vehicles on an easyto-purchase one stop-shopping basis. WBCN as part of Infinity and now CBS, will
benefit from this advantage.
Financial benefits—a media conglomerate presumably has deeper pockets to drive
capital investments. Tangibly, this means that the larger company, which operates a
portfolio of stations, can better match station power to requirements of reaching the target
audience. WFNX is virtually hamstrung by its low power rating (3,000 watts) which
produces a weak/deteriorating signal quality in places such as the south and west of
Boston where WBCN can be heard loud and clear based on its 50,000 watts of power.
Systems—part of the management decision system in the radio world is being able to
gauge the acceptability of your format—as well as individual artists/songs within this—to
the target customer. WBCN spends considerably more on “call out” research, for
example, and thus appears to have an advantage in overall control. For example, if a
major artist happens to produce a poor song for current release, call out research should
be able to uncover this such that the “clunker” can be pulled from the play list prior to
having customers punch the “switch channel” button in disgust.
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4. What does the Radio Anarchy situation tell us about decision-making at WFNX?
Radio Anarchy was “creative solution” to what was perceived as a purely artistic
programming problem. That is, in addition to establishing their format, programming
vehicles, and personalities, stations usually create tag lines, which convey their basic
positioning/philosophy to the audience. WBCN used “the rock of Boston” for years; this
was a seemingly generic phrase, but in the hands of a market share leader with a history
of setting the trends in the Boston market, the phrase took on real meaning for many
years. While it is not explained in the case, the term “radio anarchy” clearly is an attempt
to position WFNX as the “rebellious,” independent minded, not-afraid-to-break new
sounds station in the marketplace. Unfortunately, “anarchy” is probably too strong a term
for the 1990s when the 1960s tactics of Abby Hoffman have been denounced by most,
including the Hippies, Yippees and Weathermen themselves. Worse yet, is the possibility
that listeners may not truly understand what anarchy is! The fact that the radio anarchy
theme was continued so long, despite serious doubts at the station and despite listener
research to the contrary, points to a possible weakness in WFNX’s decision-making
model. That is, while other stations were attempting to get greater listener feedback into
their decision-making process—e.g., WBCN’s extensive “call-out” research—‘FNX
appears to be managing more in a “shooting from the hip” mode.
Again, this mindset is justified to some extent by the station’s expressed goal of setting
trends and not following them. On the other hand, Radio Anarchy has taught the station
that you ignore customer feedback—at your own peril—even if it is painfully
contradictory of your “great idea.”
Here we can moderate a very productive discussion of what the “core problem” is. In
order of priority, what should WFNX management address first? Possible answers to this
question are as follows:
5. What are the possible options? These are outlined in Exhibit 6 of the case study
based on an actual memo written by ’FNX management. Do these options
adequately address core problems? Are there additional options that have not been
considered? What is the likely impact of each option? What are constraints?
Key constraints facing WFNX are:
•More signal strength is constrained by immutable FCC rules, which are unlikely to
change. Acquiring a stronger signal is possible but is constrained by cost. WFNX is
considering a $2M acquisition but a major Boston station would cost much more –e.g., to
purchase a station like WBCN would cost approximately $80-$100 million.
•Better programming is constrained by budget although WFNX implies that its morning
show is a priority; replacing Tai may not be cheap.
6. What should WFNX do?
Sorting through the decision of “what should WFNX do?” provides a good forum for
teaching basic decision analysis. A standard format we often use is as follows:
Identify the problem, enumerate alternatives, set up decision criteria and constraints, sort
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alternatives, and select/decide.
One approach might be: do everything that is easy and cheap, remove these alternatives
from the set, and then sweat over the hard stuff.
Another approach might be to simply rank order the alternatives according to “largest
impact” and concentrate on the top of this list.
Certainly, criteria such as importance (impact), feasibility, absolute cost, upfront cost,
risk (a blend of criteria), and uniqueness/sustainability could be employed as decision
criteria. In fact, all of the criteria could be combined into a standard multi-attribute model
where all alternatives were rated on all criteria with the “best” choice being the highest
total score, or highest score weighted by the relative importance of individual criteria.
If this seems too daunting or complicated, the multi-attribute approach could be
simplified by considering only the two most important criteria and weighting them
equally. To illustrate, Exhibit TN-2 contains a plausible result of this approach using the
criteria of “importance” of the action (upside potential of the financial gain or minimizing
opportunity loss) and “feasibility,” this being the likelihood that the management
program could in itself be carried out successfully. Ratings in the table were based on the
“best judgment” of one of the case writers. The ratings in the table are plotted in the
second half of Exhibit TN-2. Based on this, the “translator to improve signal strength in
central Boston” emerges as the highest priority action.
7. (Optional question) What steps have already been implemented? What is your
evaluation of the progress made thus far? Has WFNX taken the situation seriously
and reacted appropriately?
The case outlines a number of actions already taken as follows:
Reduce turnover—we trust that turnover at the PD level will be reduced by our
assumption that Cruze will be compensated and motivated properly. A new sales force
compensation package has been put into the works which features increased commissions
and requires that new people sign a limited, “non-compete contract.” (This has also been
applied to air staff.)
Improve operations—signal strength—a “translator” has been installed in the city center
in order to improve the product and reception.
Retaliation against supplier favoritism—WFNX has taken a stand against record
companies who renege on support by refusing to play records from the artists involved.
Unfortunately, to date, while the artists themselves have suffered reduced sales, the
record companies are more concerned with potential counter-retaliation by WBCN and
have failed to come across with increased support.
Product offering/programming—WFNX is nudging its play list slightly toward the
alternative mainstream by playing fewer experimental/untried cuts and trying to balance
each quarter hour with music that has proven audience appeal. While to some degree this
decision controverts the station’s original raison d’être, it is viewed by management as an
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essential step in regaining ratings share, particularly in an era where listeners possessing
digital radios can switch stations with great ease.
8. (Optional question) You are the general manager of WFNX. You need to call a
meeting to discuss the current problem. Which management functions do you invite
to the meeting?
Answer: Marketing, MIS Operations, Human Resources, Legal, and Financial.
Marketing—when a loss of customers (ratings decline) occurs, marketing must be
presumed to be a problem area. But can WFNX’s marketing efforts be faulted for the key
problem—i.e., intrusion by other stations into the “alternative” format? In Porter above,
we showed that barriers to format entry are virtually nothing. On the other hand, now
WFNX must strive to redouble its marketing efforts—possibly by doing the following:
•Push to develop a new hybrid format, i.e., alternative +
•Intensify promotional efforts
•Improve programming
•Improve MIS to gain more customer knowledge (see below)
Management Information Systems—customers have radios with “preset buttons”
which allow them to quickly “tune out” when undesirable programming comes on air.
But what do customers like and what don’t they like? Other stations are investing more in
costly call out research to fine-tune their play lists, while ‘FNX does less of this. Does
WFNX need more customer feedback on its programming? On its image—e.g., radio
anarchy?
Finance—the ratings decline influences revenues and profitability (I haven’t had time to
do this analysis); many of the strategic options identified in the case have financial
implications—how much will implementing this option cost? What will be the results in
terms of sales and profits? Will these results happen short-term or long-term—what is the
time frame?
Operations—there are two aspects of this: In a service business such as radio, the people
are a great part of the “operating system.” This means that operations and OB are
inextricably linked. Also, ’FNX is operating at an operations disadvantage in terms of
signal strength limits upon which are mandated by the original FCC license (which is
apparently not changeable).
Management—’FNX is part of a larger media organization—is it important within the
overall Phoenix group? Is it receiving stepchild treatment? From an OB/personnel
standpoint, ’FNX has suffered from what appears to be fairly high turnover in its program
director, on air personality, and sales force positions. Is this normal and to be expected—
or does remedial action need to be taken?
WFNX has suffered to some degree from turnover and turmoil within its personnel.
Radio station program directors, station managers, and DJs are a unique “breed of
animal” who must combine raw competence—e.g., good “ears” in recognizing hot
trends—as well as having a pleasing “radio personality” in getting the message across to
the listener. Listeners are increasingly fickle as they switch stations easily on push button
radios, and station programming must be geared to obtaining and then holding listeners.
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The case implies that it has been WFNX policy not to pay the “big bucks,” but it appears
that the station is willing to invest in talent where they think they can get a return.
Postscript
WFNX proceeded to implement many of the strategic options identified in the case study,
but the station found that Arbitron ratings were very difficult to move.
The new Program Director, Cruze, worked hard to bring a brighter, more professional
sound to the station. Cruze had great “ears” and excellent radio instincts. He followed
through on the strategy outlined in the case in providing any given quarter hour slot with
something familiar mixed in with newer more cutting edge sounds.
The morning show turned out probably better than anyone had expected at the time of the
case study. In April 1998 Neal Robert, who had left WFNX for WBCN, returned to host
the morning show. In one of his first broadcasts, Robert told listeners: “It’s great to be
back playing the kind of music I enjoy and believe in instead of observing from afar.”
To regain the “street,” WFNX put forth a tremendous array of local concerts and
promotions. Summer of 1998 witnessed a return to concerts at the Hatch shell in Boston’s
famed Esplanade located in the heart of downtown on the Charles River. Free concerts
were held featuring such groups as They Might Be Giants, Super Flash, Soul Coughing,
and Gigolo Aunts. The concerts met with good weather and attracted lively crowds.
A fifteenth anniversary promotion was staged over the summer of 1998 featuring bumper
stickers, lots of free giveaways (CDs, T-Shirts, posters), DJ appearances at all types of
retailers around Boston and sound bites of famous rock artists congratulating WFNX on
fifteen years on the air.
The Boston translator was installed in the form of an extra transmitter that is used to
enhance the signal, which is sometimes blocked by tall buildings. Therefore, WFNX
began to broadcast on 103.3 FM in the Back Bay and south end.
To extend WFNX signal two new stations were acquired in Maine and New Hampshire.
They were built as the first step toward forming “the ‘FNX radio network.” One of the
stations, a classic rocker WCDQ 92.1 FM changed its call letters to WPHX and
simulcasts WFNX’s alternative music programming.
For the Spring and Summer 1998 Arbitron’s WFNX got an overall rating of 1.2 and 1.6
respectively, not quite what the station wanted, but still a definite reversal of the
declining trend experienced previously.
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Exhibit TN–2
Summary of Strategic Alternatives (from Exhibit 6)
Alt. No.
Strategy/Tactic
1
Acquire Worcester
Station. Cost: $2 million
2
Protect WFNX artistic,
political, and social
values
3
Attract and retain nine
well-trained sales
representatives. Change
commission structure
from 15 to 20% on new
business. Add noncompete agreements
Develop new categories
of and revenue to lessen
impact of possible loss of
alcohol ads
Invest in more “call-out”
research. BCN spends
$2,200 per week
4
5
6
7
8
Discussion
Importance Feasibility
What is approximate
7
5
ratings effect? Would
simulcast make sense?
Reinforces differentiation
5
7
vs. ‘BCN, ‘AAF. But is
this what the customer
wants?
Should directly affect
6
9
spot sales, revenues,
profits
Not even a current
problem; this could
negatively impact the
entire radio industry
Enhances managerial
control. Avoid problems
such as radio anarchy,
music too avant-garde.
Compromise—‘FNX risk
taking posture. ‘FNX
historically “leads the
listener”
Translator in Boston
Increase signal strength
in most populous market.
If expensive, this is a
“must do”
Develop unique attention- Affects share-of-format.
getting morning show
Morning drive-time is
peak audience size; most
competitive day part—
e.g., Howard Stern and
Laquidara
Develop more aggressive A no-brainer that crossjoint sales and marketing sell given similar
with Phoenix
audience targets
5
6
7
10
10
8
9
7
5
9
Importance and feasibility are rated on a 10-point scale with 1=low (as in “low
importance”) and 10=high; to be read: “Alternative #1—Acquiring a Worcester Station—
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is important, but not very important (or crucial), and is feasible at only about a 50-50
probability of actually happening.”
WFNX Strategic Alternatives Classified by Importance/Feasibility
(Plot of judgments given in prior table)
Importance
Hi
Lo
Research
Joint sales w/Phoenix
Translator
Sales force
Hi
Protect values
Feasibility
Morn.
show
Acquire
station
New ad
rev. source
Lo
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WFNX–101.7 FM
Case Discussion Outline
1. Describe the music industry value chain—where does radio fit? Describe the radio
industry and the Boston radio market in particular. What is the industry like—and
how does this bear on WFNX’s situation? [Hint: In describing the radio industry be
sure to employ frameworks such as Porter’s Five Forces Analysis, the Product Life
Cycle, and an evaluation of market structure (e.g., monopoly, oligopoly, monopolistic
competition, etc.).

What is WFNX’s overall market situation?
a) Music industry value chain showing radio role (draw this)
 Revenues from advertising
 Sampling vehicle of record companies
b) Porter five forces (draw this)
 Competitive industry
 Market structure consolidating
c) Analyzing Customer Needs: Can we really understand customer
needs or are these a moving target?
 Music tastes can change quickly
 What’s “in” is moving target especially if you try to
lead
d) Product life cycle—What stage of the lifecycle is WFNX in?
 Radio is mature
 “Alternative” is growing, headed for maturity?
e) Market structure
 Moving toward oligopoly—See Exhibit 4 and 5
f) WFNX overall situation
 Competitors invaded format
 Ratings down, below 2.0 threshold
 Competitive warfare, not level playing field
 Options identified (cover later in detail)
2. What are the key elements driving a radio station’s profitability? What does a station
need to break even in the market place?


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Why would radio listenership grow or decline?
Is it possible to lose market share and grow sales at the same time?
a) What drives radio profits?
 Total audience
 Revenue
- Station share
o Format share
o Station share of format
- Price/spot/listener
 Costs
b) What drives total listeners?
 Cross media competition
 Auto listening opportunities
 Other entertainment options (CD players)
c) Share of listeners
 Format share
- Changing tastes
- Format changing
- See Exhibit 5
- Barriers to entry low

Share of format (3 factors)
- Signal strength
- Programming
o Music
o Personalities
o Non-music features
o Overall “sound”
- Promotion
o Ads
o Concerts
o Promo’s
d) Price per listener/spot
 Cross media competition
 Supply/demand, re: desirable demographic groups
e) Costs


Almost all fixed
See Exhibit 1 in case
f) What is WFNX business problem?
 Ratings down—revenue down—profits down
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3. So given the above analysis of profit, what is the WFNX’s business problem? What is
the root of the problem?
a) Business problem: FNX is losing share-of-market
 Ratings down from 2.5 in ’94 to 1.2 in ’97
 If one point = $1M in profit, WFNX has opportunity to
loss of $1.3M ongoing
 All this at time when station may need to invest to do
turn-around
b) What is the root of the problem?
 Competitors intrude in format space
 Wattage/power
 Marketing warfare by ‘BCN
 Industry consolidation
- Negotiating power w/suppliers
- Clout with advertisers
- Financial deep pockets
- Better systems like market research
4. What does Radio Anarchy say about decision-making style at ‘FNX?


Intuitive, shoot from the hip
“Ready, aim, fire!”
5. What are the possible options? A number of these are outlined in Exhibit 6 of the case
study based on actual memo written by ‘FNX management. Do these options
adequately address core problems? Are there additional options that have not been
considered? What is the likely impact of each option? What are constraints? What
are the options?
a) Buy Worcester stations, broadening the signal west; does alternative market
extend out there?
b) Protect artistic, political, social values
 Does customer care?
c) Add/retain sales force
 Will “bigger guys” be able to outbid ‘FNX for sales talent?
d) New categories of revenue
 More long term?
 Does this bear on current problem?
 Maybe new problems on the horizon: e.g., no alcohol ads—reduced
revenues
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e) More call-out research
 Cost
 Reactive—won’t allow ‘FNX to lead the market
f) Translator in Boston
 Probably a “no brainer”
 Just do it!
g) Improve “morning show”
 Tough to find on-air personality who fits WFNX in taste, style, and
“culture”
 Tough to compete with Howard Stern
 Cost
h) Do options address problems?
 To regain the “street” maybe need to simply redouble in-market
promotions appearances, concerts, and events.
i) Other options? (Students get creative!)
6. What should WFNX do?
a) Develop framework for prioritizing options (see Exhibit TN-2)
b) Make and defend choices
7. (Optional question) What steps have already been implemented? What is your
evaluation of the progress made thus far? Has WFNX taken the situation seriously
and reacted appropriately?
a) Reduce turnover: change commission structure
b) Signal strength: translator scheduled
c) Programming: balance the “new and untried” with popular songs/artists
d) Retaliate against WBCN warfare

Taking artists off the air doesn’t seem to work
317
8. (Optional question) You are the general manager of WFNX. You need to call a
meeting to discuss the current problem. Which management functions do you invite
to the meeting?

Marketing
a) Promotional efforts
b) New hybrid format, i.e., alternative +
c) Improve programming
d) More research on customer tastes

Management info systems
a) Customer feedback on programming
b) Themes/images

Finance: involved since many actions will require investment (upfront) spend

Perceptions: signal strength and people

Management
a) Reduce turnover
b) Examine compensation
318
CASE 12: BEIJING MIRROR CORPORATION
Synopsis
Beijing Mirror had invented a new type of rear-view mirror, which could effectively
eliminate the blind spots in driving. But the company did not have the necessary
resources to market the product on its own. Many domestic and overseas companies
have made proposals to cooperate with Beijing Mirror in developing and marketing the
product. Mr. Ming Tian, Manager of the Strategic Management Department at Beijing
Mirror, must prepare an action plan with his recommendations regarding how to enter
domestic and international markets. This decision involves where, when, and how to
make market entries.
Position in the Course
Beijing Mirror is intended for early use in the Internationalization Section of an
International Business course. It introduces issues concerning the selection of markets,
entry mode, and speed of entry. In addition, it illustrates how to value technology
contribution to a company.
This case is written from the perspective of a firm in a developing country. This is
opposite to the traditional direction of technology transfer and market expansion from
developed countries to developing countries.
Teaching Approach
The Beijing Mirror case can be effectively taught front to back (i.e., from analysis to
action), or it can begin with the action question: What should Beijing Mirror do? If
following the latter approach, we let the students “solve” the problems at the beginning of
the class and press them for the rationale underlying their recommendations. Here the
analysis focuses on the key issues of what market(s) to enter, which mode to use, how
fast to expand, and which partner to select and how much equity to trade. We spend
much of the class developing both general and case-specific criteria for approaching these
questions. By the end of the discussion, students should be able to make defensible
recommendations as Ming Tian.
The case is also suited to a role-play situation where Beijing Mirror and potential JV
partner(s) engage in JV contract negotiations.
Assignment Question
As a consultant to Mr. Tian, what will you recommend to him? Why?
Jane Lu prepared this teaching note under the supervision of Professor Paul W. Beamish and Professor Chen Xiao Yue as an aid to
instructors in the classroom use of the case Beijing Mirror Corp. No. 9A98M033. This teaching note should not be used in any way
that would prejudice the future use of the case. Ivey Management Services prohibits any form of reproduction, storage or transmittal
without its written permission. This material is not covered under authorization from CanCopy or any reproduction rights
organization. To order copies or request permission to reproduce materials, contact Ivey Publishing, Ivey Management Services, c/o
Richard Ivey School of Business, The University of Western Ontario, London, Ontario, Canada, N6A 3K7; email: cases@ivey.uwo.ca.
Copyright (c) Ivey Management Services. Version: 1999-03-25.
319
Analysis
1. Can Beijing Mirror develop the market by itself? What should Ming Tian do? Why?
Beijing Mirror has developed a new technology, but, as the case makes clear, its financial
woes and restricted resources render it unable to exploit the product in domestic and
international markets. A JV is one way of building the resources required for successful
market entry.
We intentionally start class discussion with open-ended questions to solicit opinions from
students and to record their responses on the blackboard. Some controversy in
recommendations is expected.
We do not look for closure on any of the
recommendations during this part of the class (approximately 10 minutes).
Having established a range of possible responses, we now begin to probe their underlying
rationale via detailed analysis of the questions that follow. We leave space on the board
to consider each in turn.
(A) What criteria would you use to rank foreign market attractiveness? Which markets
make the most sense to enter first?
(B) What criteria would you use to decide the timing of foreign market entries?
(C) What criteria would you use to decide between modes of involvement?
(D) What criteria would you use for partner selection?
(E) How much equity/control will you trade?
We raise these questions to point out the complexity of an international market entry
strategy and to build some degree of tension in the class discussion. We then proceed
with a board-based class discussion to address the specific points for each question.
(A) What criteria would you use to rank foreign market attractiveness? Which markets
make the most sense to enter first?
General Criteria:
 Population
 Economy: total GNP/per capita GNP
 Infrastructure
 Geographic proximity
 Political/economic stability
 Legal system
 Historical ties
Specific Criteria:
 Potential market size for the product
 Competing products
 National regulations and standards regarding the product
 Distribution channels
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(B) What criteria would you use to decide the timing of foreign market entries?



How quickly can you move?
How quickly do you need to move?
- What is the risk of technology loss?
- How important is it for this product to achieve standardization in different
markets? Usually, the first product on the market is the standard.
The need for prioritizing to balance the need to quickly expand and the constraints
imposed by limited resources.
In the case of Beijing Mirror, there is heavy reliance on patents as protection against
competitive pressures. But patent rights offer only limited protection. After all, other
producers, given time, can copy most technology. Therefore, there is a high risk of
technology loss. Consequently, there is a need to expand quickly to fully exploit the
market potential of the product. However, Beijing Mirror is also seriously constrained by
its limited resources. Some prioritizing regarding which market(s) to enter first is
needed.
(C) What criteria would you use to decide between modes of involvement?
For this part of the class, we suggest you develop a chart on the board comparable to
what is in Exhibits 2 and 3 of this teaching note. These exhibits have been adapted from
R. Vernon and L.T. Wells, Manager in the International Economy, 1991, and F.R. Root,
Entry Strategy for International Markets, 1987.
It is quite clear that Beijing Mirror does not have the resources to enter the international
market by itself, i.e., via exporting or wholly owned subsidiaries. Some kind of alliance
is needed. In the choice between licensing and JV, we recommend JV because the
product is still in the production trial stage and Beijing Mirror has an urgent need for
capital. The former makes it difficult for Beijing Mirror to find licensees, because the
potential market acceptance of the product (the drivers and national standards) is
unknown and the costs of developing marketable applications are too uncertain. The
latter also makes licensing a less attractive choice, because licensing will not be able to
generate cash quickly enough to meet Beijing Mirror’s need for immediate cash
injections.
(D) What criteria would you use for partner selection?
In P.W. Beamish, et al’s, International Management Text and Cases, 4th Edition, 2000,
Chapter 7 (McGraw-Hill), the following four questions are suggested for management
consideration in choosing a partner.
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



Does the partner share your objectives for the venture?
Does the partner have the necessary skills and resources? Will you get access to
them?
Will you be compatible?
Can you arrange an “engagement period?”
Evaluating the two JV candidates in the case along these four dimensions, we find that
Cantise is a more appropriate partner for Beijing Mirror than PAC. First, while its
ultimate objective is profit, Cantise shares Beijing Mirror’s goal of swift market entry and
high market share. Second, Cantise has extensive knowledge about the international
markets and has established a worldwide network. Hence, it is able to provide not only
capital but also marketing resources, which are critical to Beijing Mirror’s entry into
international markets. Third, another valuable resource Cantise has is the management
skills that are much needed in Beijing Mirror, a newly established company. In terms of
compatibility, Cantise management was originally Mainland Chinese and should not have
serious cultural conflicts with Beijing Mirror. Ideally, it would be best for Beijing Mirror
to arrange an “engagement period” to get to know its potential partner better before the
JV commitment. However, this stage could be omitted in this case, since it is critical for
Beijing Mirror to expand quickly to exploit the market potential of its invention.
(E) How much equity/control will you trade?
While the technical evaluation of the value of a technology is beyond the scope of this
class, we wish to provide students with some general framework to address the
contribution of technology to a strategy.
Beijing Mirror’s strategy is one of swift market entry to exploit the potential market value
of its invention. Ford and Ryan (Harvard Business Review, March-April 1981, vol. 59,
no. 2) suggest that the market value of a technology depends on its technology life cycle.
Equivalent to product life cycle, technology life cycle traces the evolution of a
technology from the idea stage through development to exploitation by direct sale. A
technology life cycle includes technology development, technology application,
application launch, application growth, technology maturity, and degraded technology.
Along the technology life cycle, the market value of technology displays an inverted U
curve, increasing from technology development, to technology application and
application launch, reaching the highest at application growth, then declining from
technology maturity to degraded technology.
Applying this framework to the case of Beijing Mirror, we can see that its invention is
still at the stage of application launch and has not reached its highest market value yet.
The estimated demand and sales are promising in its pro-forma income statement. But to
realize the market potential of its innovative product, Beijing Mirror is likely to face
heavy costs and risks in developing associated process and product technologies, in
adapting the products for different markets and in marketing the products. The proposed
30% JV ownership by Cantise is reasonable, given the considerable costs and risks that it
will have to share with Beijing Mirror.
322
2. As Ming Tian, what would you now recommend to your company?
By this point, it should be clear to most students that it is necessary for Beijing Mirror to
move fast and to market the product with a partner. Ming Tian needs to resolve a variety
of assumptions to make specific recommendations.
For instructors who wish to move into a mini role-play of JV negotiation (20 minutes),
additional analysis is provided below.
3. What are the key issues in a JV negotiation?
Split the class into two sections. One section represents Beijing Mirror, and the other
Cantise. Let the students representing Beijing Mirror present its response to Cantise’s JV
proposal. Let the negotiation run for about 15 minutes, and then proceed to discuss the
key issues in the negotiation.
The principal issue is the equity ownership and the control of the JV. From analysis
question 1E, it should be clear to Beijing Mirror that there is still a long way to go to get
the most out of the technology it has developed. In return for a share of the huge costs
and risks in developing and marketing the product, Cantise should have a reasonable
amount of equity ownership as well as some say in the management of the JV. On the
other hand, Cantise should also fully understand the costs and risks of this investment as
well as the expectations of Beijing Mirror before any agreement is reached.
Royalty is always an issue in technology-related JVs. Beijing Mirror is not sure whether
the proposed 4% royalty is fair. There should be some industry norm to refer to. To
motivate sales, a decreasing rate of royalty can be counter-proposed, for example, 5% if
sales are less than two million pieces per year, and 4% for sales beyond two million
pieces.
Another issue is Beijing Mirror’s potential equity ownership of Cantise Co.’s overseas
rearview mirror business unit. It can be a bargaining point in the negotiation. But again,
it is a matter of the evaluation of the contribution of each partner to the mutual goal of
exploiting the market potential of the new technology.
An issue that is not raised in the proposal, but is important to the JV, is the transfer price
for the product between the JV and Cantise. This issue is directly related to the financial
returns for each party and thus should be included in JV negotiation to avoid future
problems.
4. What happened?
In the traditional Chinese culture, it is “better to be the beak of a cock than the rump of an
ox.” Beijing Mirror is one typical model of this behavior. Due to its fear of trading “too
323
much” equity and losing control of Beijing Mirror to any outsiders (potential partners),
the decision maker of Beijing Mirror chose the worst option: it didn’t go with anyone.
What actually happened was there was no new funding. As a result, there was no
improvement in the production process and the production cost remained high. There
was no capital to increase the production scale to achieve any production efficiency
either. The marketing was also poor. Struggling by itself with very limited financial
resources and marketing capabilities, Beijing Mirror had slow domestic market
penetration and was unable to develop any international markets. At the same time, the
creditor tightened the terms and Beijing Mirror had problems in paying back the loan.
Now, Beijing Mirror is in a very difficult situation and the patent will soon expire.
5.
Some summary points

There are three key elements in an international expansion strategy: the selection of
markets, entry mode, and speed of entry. Each requires detailed analysis following
the criteria provided above.

With a patent, there is a clear sense of urgency in the timing of actions. The longer
you do nothing, do not maximize your opportunities by going alone, or do not have
the resources, the greater the long-term negative implications. A patent is like a time
bomb; when it expires, you have almost instant competition.
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EXHIBIT 1
COMPARISON OF ENTERING INTO DIFFERENT MARKETS
Pros
Domestic




USA



Cons
Product certified by national
authority that will also act as the
sole domestic agent for the
product.
Familiar with market.
High percentage of large- and
medium-sized vehicles.
Favorable tax treatment.

Big market size.
Stable market growth rate.
Product price competitive
compared to international
competing products.









Japan





Combination of
domestic and
international
markets





Big market size.
Stable market growth rate.
Product price competitive
compared to international
competing products.
Geographic proximity.
Less cultural distance compared
to USA.

Big market size.
Spread out market risk.
Possibility of price
discrimination in different
markets to achieve overall price
competitiveness.
Early adaptation of product for
more markets.
More sources of information for
product improvement.





Expensive compared to domestic
products.
High receivables.
Small market size compared to
USA and Japan.
Declining market growth rate.
Product not qualified by US
national standard yet.
Not familiar with US market.
Lower percentage of large- and
medium-sized vehicles.
Big cultural distance.
Geographically remote.
Exchange rate risk.
Product not qualified by Japanese
national standard yet.
Not familiar with Japan market.
Lower percentage of large- and
medium-sized vehicles.
Exchange rate risk.
Higher costs to cover more
markets.
Require more human resources.
325
EXHIBIT 2
VERNON AND WELLS COST AND BENEFIT TABLE
(1 is the lowest and 4 the highest cost or benefit)
COSTS:
Capital commitment
Management commitment
Restraint on strategic and
operational flexibility
Enforcing terms of arrangement
BENEFITS:
Amount of payment to parent
Stability of payment to parent
Political security for parent
Contribution to parent’s store of
knowledge
Contribution to value of parent’s
trademark and trade name
Future availability of local outlet to
parent
*
Export*
License
Joint
Venture
Wholly Owned
Subsidiary
1
2
1
2
1
3
3
3
2
4
4
1
3
3
2
1
?
?
3
2
?
4
3
1
?
?
2
3
?
?
1
4
2
1
3
4
1
1
2
3
The Vernon and Wells table examines foreign investment modes; thus, export is not included. This exhibit
modifies their table by assuming that, in general, export has the lowest costs and (except for security and
knowledge potential) the lowest benefits.
326
EXHIBIT 3
EVALUATING FIRM FACTORS FOR VARIOUS ENTRY MODES
(1 is the worst and 4 the best fit to Beijing Mirror)
Export
License
Joint
Venture
Wholly
Owned
Subsidiary
1
2
3
4
1
2
4
3
Resources:
Financial resources
Human resources
Business network
2
2
2
4
4
3
3
3
4
1
1
1
Organization–Structure
Culture
Systems
3
3
2
4
1
4
2
2
3
1
4
1
Management preferences
?
?
?
?
Goals of Beijing Mirror:
Growth and high market share
Strategy:
Swift entry into domestic and
international markets
327
CASE 13: LUFTHANSA
Case Characterization:
This case traces the steps of Lufthansa's change process and the logic of the on-going
change by focusing on 5 aspects:
 Pure survival- and crisis-management during the turnaround (addresses issues of
transformational management)
 Strategic cost savings and restructuring (addresses issues of change implementation
and restructuring)
 Building and managing the STAR ALLIANCE as a strategic network (addresses
issues of strategic alliances and network management)
 Lufthansa in 2000—on it's way to a leading aviation group with strong internal and
external partnerships (addresses issues of decentralization strategy and its critical
implications such as identity problems, managing heterogeneity, and coordinating
conflicting logics of value creation)
 Present and future challenges in 2000 (addresses questions of maintaining
momentum, preventing organizational inertia, and learning from crises)
CASE SUMMARY
The Turnaround
Lufthansa’s strategy of growth from within was changed fairly late to one of growth
through partnerships. Jürgen Weber was the driving force of the transformation. He
realized that change could only be achieved through commitment and consensus with
employees and unions. He chooses to play with open cards and yet concerning goals, no
compromises were made.
Rationalization had to occur in two areas: downsizing the fleet and reduction of
personnel. At the same time, growth was essential. In 1993 the first effects of the change
effort were noticeable. The turnaround was the outcome of a pure fight for survival.
After the turnaround, Lufthansa was aware that the change had just begun and that a
much more fundamental revitalization had to follow to assure the company's future.
Important issues in this next phase of sustainable renewal were strategic cost savings,
restructuring, and a mental change to reshape peoples' behaviors.
Strategic Cost Savings
In a next step, a strategic cost saving program “Program 15” was established.
It aimed at dealing with issues such as:
 Improving the competitive position through sustainable cost reduction and
 Making staff at every level highly cost conscious and cost-effective in their daily
work
It included an overall cost reduction goal of 20% within five years (between 1996-2001;
4% annual reduction) all over the Lufthansa Group.
© London Business School January 2001 LBS-TN01-001
328
Corporate Restructuring
The functional structure of Lufthansa at the beginning of the 90's turned out to be
inefficient, showing symptoms such as:
 inefficiency through high involvement of top management
 slow decisions processes
 lack of accountability
 low transparency
 insufficient market proximity
In the change process, several waves of decentralization took place. In 2000, seven
strategic units were in operation. All of them, except the airline that was restructured as a
Profit Center, were formally separated as legally autonomous and strategically
independent subsidiaries. In 2000, the Lufthansa Group Management Board directed the
activities of the entire group through three central functions: the Chairman's Office and
the Finance and Human Resource Management groups.
Building a Strategic Network—STAR ALLIANCE
Our key part of the ongoing mental change within Lufthansa was the switch from a logic
of growth, which relied on own strength to a logic that relied on growth through strategic
partnerships. As Lufthansa had this insight very early, it had served as a driver of the
changing rules of competition in the industry. In the late 1990’s, competition was
changing from between airlines to between networks.
Lufthansa was one of the founding members of the STAR ALLIANCE—the oldest and
most comprehensive airlines network—aspiring to become the leading aviation group in
the world.
Traditional advantages of airline alliances were:
 Code sharing
 Important synergies such as joint sales, joint advertising, frequent flyer programs,
joint travel agency contracts, collective marketing, and shared flight facilities such as
lounges and staff exchange
Future competitive factors and emerging challenges of network management:
 Establishing a common global brand
 Developing a shared technology platform
 Joint training and personnel development
These issues demanded a much more intensive integration to manage the deeper strategic
interdependence among the member airlines. A common network strategy and cultural
integration were inevitably connected to critical issues concerning branding and identify
within the Lufthansa Group. Closer integration within the STAR ALLIANCE and
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particularly the planned extension of joint procurement could cause serious economic
problems for some of Lufthansa’s subsidiaries.
Lufthansa in 2000
Simultaneous to the STAR ALLIANCE integration process, Lufthansa aimed to evolve
from an airline company into an aviation group: the explicit goal was to become the
leading provider of air transport services in the world. Lufthansa had identified seven
major business areas (the situations of the seven strategic units are briefly described in
the case) and each of them was supposed to aim at achieving profitable, sustainable
growth and a leading position in its world market segment. In terms of their competitive
positions, most of the business areas were already in leadership roles. Nevertheless their
strategies for growth and globalization varied significantly. This had implications for the
common Lufthansa identity and caused several strategic conflicts.
Present and Future Challenges (in 2000)
In 2000 two of the major challenges were "Preserving identity" and "Maintaining the
change momentum." How could Lufthansa preserve a consciousness of the crises and
openness for change? How could it preserve its learning from the crises—on a personal
and organizational level? How could it prevent organizational inertia?
POSITIONING AND USE
The case can be used in both Executive programs and in the MBA curriculum, as a part
of a course or module on managing change. In our own use, we position the case
relatively late in the course, so as to make the most of this relatively comprehensive and
complex story.
While time constraint will inevitably force a choice among the various topics that the
case can be used to explore, we have used the case to focus on a variety of issues such as:




The interplay between the so-called “hard” and “soft” aspects of managing change
The need to breakdown the change journey into different phases, with different
demands and challenges in each phase
Recognizing the different levers of change and using them selectively to affect
cognitive, relational, and emotional change
The challenge of creating, aligning, and focusing organizational energy as the main
engine of change
Preparation Questions and Additional Readings
The following questions can be assigned to help students prepare themselves for the class
discussion:
 Why did Lufthansa get into the crisis in 1991/1992? Could it have avoided the crisis
by responding faster to market changes? What prevented it from doing so?
 What has really changed in Lufthansa? How is Lufthansa in 2000 different from
Lufthansa in 1991?
330


How do you evaluate how Lufthansa managed the change process? What was done
well? Poorly? What would you have done differently?
What are your overall learning’s from the Lufthansa transformation story?
For additional readings, instructors may choose different pieces, depending on the issues
they wish to cover. One or more of the following articles can be assigned:

Donald N. Sull, “Why Good Companies Go Bad,”
Harvard Business Review, Boston, July-August, 1999.
This article deals with the discussion around the first assignment question: Why
successful companies get into crisis. In many ways, Lufthansa’s crisis in 1991 is a classic
illustration of the concept of “active inertia” that is described in this article.

John Kotter, “Leading Change: Why Transformation Efforts Fail,”
Harvard Business Review, March-April, 1995.
This is a very well known piece, and its great strength lies in its simplicity and directness.
Kotter lays down eight steps for transforming an organization, and the Lufthansa case
clearly illustrates most, if not all of these steps (particularly around creation of a sense of
urgency, communication, empowerment, consolidation and institutionalization)

Michael Beer and Russel A. Eisenstat,
“The Silent Killers of Strategy Implementation and Learning,”
Sloan Management Review, Summer, 2000.
A more complex argument than Kotter’s, this more recent article builds on the older Beer
and Eisenstat HBR article about the pitfalls of top-down programmatic change, and lays
down a set of six simple principles which, again, relate very well to the Lufthansa change
story.
Pedagogical Philosophy
It may be useful, at this stage, to provide a brief clarification of the pedagogical
philosophy on which the following class discussion plan is based.
The stereotypical Harvard approach to Case teaching (see C.R. Christensen, D.A. Garrein
and A. Sweet (eds.), Education for Judgment, HBS Press, Boston, 1991) is premised on
the assumption that “wisdom cannot be told,” and relies entirely on discussions to
generate unique insights for each student. Theories, even concepts or frameworks, are
antithetical to the discussions process since they come in the way of the students’ own
discoveries.
331
At the opposite end of the pedagogical philosophy, instructors often use cases explicitly
as illustrations of a theory or conception framework. In such use, the theory is first
presented, and cases are then used to both elaborate and enrich the theory, and also to
give students some experience of how to use the theory to analyze and interpret concrete
situations.
Our approach to case teaching lies somewhere in the middle of this spectrum. It
combines relatively unstructured discussions with brief lectures that create a structure—
as a “walking stick,” in Rochthisberger’s terms—to help students “walk through the
territory.” Thus, in the discussion plan, we suggest a back-and-forth between
conversation and brief presentations. Depending on their personal pedagogical beliefs,
instructors may choose to combine the presentations at the beginning of class, at the end,
or eliminate them altogether.
Discussion Plan
We find it useful to begin the discussions with a brief (no more than 5 minutes)
instruction to position the Lufthansa story. It is a remarkable tale of a company pulling
itself out from the brink of catastrophe and, in the domain of large, established
companies, there are few more exciting cases of transformation, at least in Europe. In
that sense, it is a tale of “excellence,” from which valuable lessons can be learned. Also,
students in the United States and even elsewhere tend to confront radical transformation
stories mostly for U.S. companies. So, we also highlight in the introduction the European
context of Lufthansa and the comparison and contrast that can be drawn between
American and European approaches to managing change. Instructors may choose to
support the introductory part with the video in order to give a brief impression of the
Lufthansa Aviation Group in 2000 and introduce some core players (particularly the CEO
Jürgen Weber).
Following this brief introduction, class discussions can be structured around the assigned
questions with the following approximate time plan (for a 75 minute session):
332
Discussion Topics
Duration
Total
Duration
5 min.
5 min.
15 min.
15 min.
10 min.
30 min.
15 min.
45 min.
20 min.
65 min.
10 min.
75 min.

Instruction:
The Lufthansa change story
(fundamental, German, ongoing)
 Question Area One:
Why did Lufthansa get into trouble?
(the trap of active inertia)
 Question Area Two:
How has Lufthansa changed?
(LH strategy, relationship, and culture in the year 2000)



Question Area Three:
How did Lufthansa manage this change?
(needs for fundamental change processes)
Question Area Four:
What next?
(maintaining identity and change momentum)
Conclusion:
Lessons from Lufthansa's change
Fig. 1: Time Plan
QUESTION AREA ONE: WHY DID LUFTHANSA GET INTO TROUBLE?
We allow students to highlight various ideas and speculations about why Lufthansa got
into trouble, without imposing any particular structure. Once a list of possible causes has
been built, we question why Lufthansa didn't react earlier. Why did Lufthansa notice the
crisis later than other companies? Why did Lufthansa continue to grow until mid-1992
although the whole industry suffered from a severe crisis and Lufthansa reported an aftertax loss of DM 444 million in 1991?
Student responses all point to one underlying concept: Organizational inertia. Lufthansa's
success orientation and its feeling of immortality were major hindrances and reasons for
its late and terrible awakening. We underline that this phenomenon is far from unique.
Renowned companies such as Laura Ashley, IBM, and Digital Equipment Corporation
(DEC) and even entire industries such as the Swiss watch manufacturers suffered from
the same melody.
333
DEC and watch industry: "I don't see why a private person should have a computer," said
Ken Olsen, founder and CEO of DEC. The next year, Apple sold 100.000 PCs.
"A proper watch will always be mechanistic, have cogwheels and a clockwork.
Alternatives will never be relevant," said a Swiss watch-producer. Two years later one
hundred thousand employees of the Swiss watch industry lost their jobs.
At this stage, we switch to a lecturing mode and explain the concept of organizational
inertia:33
For sustainable success, a company needs to create an effective alignment among three
key elements: its strategy, its internal and external relationships and its culture (see Fig.
2). As this alignment takes shape, the company develops an adequate logic of value
creation, it establishes efficient relationships and structures, and it builds a strong set of
shared values and proven habits and achieves satisfactory business performance.
Strategy
Relationships
Culture
Fig. 2: Elements of the Managerial System
Signals of success and positive feedback lead managers to the belief that they have found
the ideal system and encourage them to strengthen and reinforce the alignment. Over
time, the system starts to harden and guided action of the company becomes perfected
routine. As long as the environment remains largely the same, this tighter alignment only
improves the company’s performance. Danger arises when the environment changes, and
the historically effective success generating system becomes invalid. Then the once
effective alignment becomes a rigidity that, because of the historical reinforcement,
becomes almost impossible to overcome. The formula that had brought success instead
brings failure. Over time, the company becomes a victim of its past success.
This is a phenomenon that is called active inertia. It is an organization’s tendency to
follow established patterns of behavior—even in response to dramatic environmental
shifts. Stuck in the thinking and acting practices that brought success in the past,
companies typically do more of what they have always done, instead of questioning or
challenging the existing management system. Active inertia is important to understand
33
Based on Sull, D. (1999); “Why Good Companies go Bad.”
334
because it is closely linked with former success impeding change and is a common
psychological trap. The dynamic of active inertia includes that strategies become
blinders, relationships become shackles, and cultures become corsets. (Fig. 3)
Strategy
Relationships
Blinders
Culture
Routine
Corset
Fig. 3: The Dynamic of Active Inertia
Strategies Become Blinders
Strategies contain statements about a company's logic of value creation and growth.
Strategies are based on fundamental beliefs and presumptions (mental models) of how
managers see and explain the world. On the one hand, these mental models help
managers/companies reduce the complexity of the world, interpret ambiguous data,
evaluate own practices and performance, and develop activity plans. On the other hand,
mental models or strategic frames prevent them from questioning assumptions,
recognizing alternatives, and noticing weak signals or even massive threats.
Having briefly introduced this idea, we then go back to the Lufthansa case. Students
readily identify the ossification of Lufthansa’s historical strategic approach, which can be
captured in a tabular form as shown below. (Fig. 4)
Key Aspects of Managerial Mental Components of Lufthansa's Mental Model 1991/92
Models
How do we create value?
Lufthansa is an airline company
Lufthansa has a stately order and is responsible for
sovereign duties
How do we grow?
Growth through own strength
Who are we responsible to? Whose The German state
interests must we place first?
We are state owned and this is unchangeable
How strong are we?
Our relation towards competitors
and partners
Lufthansa will never die
We have to be independent
Fig. 4: Selected Components of Lufthansa's Mental Model in 1991/92
335
Relationships Become Shackles
Even though informal relationships emerge, management has to actively invest in
building and developing the company's internal and external networks so as to ensure that
those linkages support and foster its business processes. However, over time, these
relationships—both internal linkages shaped by the company's formal structure, and
external linkages with suppliers, customers, allies etc.—tend to rigidify into shackles.
The need to maintain existing relationships with partners can hinder companies in
changing their strategy, developing new products or investing their energy into building
relationships more productive partnerships. Companies may find themselves constrained
by their relationships with all different stakeholder groups—clients, employees,
shareholders, suppliers, and society.
The same is true for the organizational structure that formally regulates the relationships
among people within the company. On a general level, a company’s organizing principles
represent a set of choices around a few key parameters: autonomy versus synergy, central
control versus decentralized initiative, formalization versus flexibility, and
standardization versus customization. Turning to the relationships within Lufthansa,
students quickly identify the problems:
Key Criteria of a Company's
Relationships
How strong are inter-organizational
network relationships?
How strong are intra-organizational
network relationships?
Autonomy versus synergy
Central control versus decentralized
initiative
Formalization versus flexibility
Standardization versus
customization
Characteristics of Lufthansa's Relationships 1991/92
Need for autonomy and independence are so dominant
that no important inter-organizational networks exists
Formal structures are so dominant that few flexible
intra-organizational networks exist
Dominance of synergy-orientation—functional
organization
Highly centralized organization
Bureaucratic rigidity that diminishes flexibility
Standardization in order to establish efficient processes
Fig. 5: Selected Characteristics of Lufthansa's Relationships in 1991/92
Cultures Become Corsets
Culture includes the commonly shared values and understandings as well as the traditions
and habits of a company. It is the sum of a company's taken-for-granted norms and
routines, which unconsciously guide thinking and action. Values are a set of deeply
rooted beliefs that unify people and guide their behavior. Strong cultures are
characterized through a set of values which members of the company share and with
which they identify to a large extent. As values constitute the basis for corporate identity,
they also provide centripetal forces that hold together a company's decentralized
operations and processes.
336
In the process of maturation, however, a company's values can harden into rigid,
unquestioned thinking schemes or dogmas. When companies develop practices that are
proven through experience, they develop habits and stop experimenting as well as
searching for alternatives. Incentives for continuing with well-tried ways of doing things
are strong because they tend to be time- and energy-saving, comfortable, and seemingly
safe. Well-tried practices become routines. Once they are routines, they hinder
companies’ ability to question them and think of alternatives. They are just matters of
course. Turning again to the specifics of the Lufthansa situation in 91/92:
Key Elements of a Company's
Culture
What are the core values?
What constitutes the company's
self-understanding?
Importance of different
stakeholders
Tradition
Characteristics of Lufthansa's Culture 1991/92
Lufthansa's values can be deduced form its
"Germanness" and are therefore associated with safety,
accuracy, technical correctness, being structured,
punctuality, pride, and hierarchically composed
State owned, responsible for sovereign duties
State as single "shareholder" is dominant, customers, as
“subjects,” are less important
Hierarchy counts a lot, an inner orientation rather than a
market or customer focus; rules matter
Fig. 6: Selected Characteristics of Lufthansa’s Culture in 1991/1992
This discussion around the ossification of Lufthansa’s historical success formula can
finally be brought to a close by summing up the lessons about “active inertia” in a single
transparency. (Fig. 7)
THE TRAP OF "ACTIVE INERTIA"
 Elements of the managerial system of a company are its strategy, relations and
culture.
 Successful organizations usually develop a strong, robust, and resistant managerial
system.
 In case of active inertia, strategies become blinders, relationships become shackles,
and cultures become corsets.
 Active inertia is likely to follow success.
 Active inertia impedes change.
 Active inertia is a severe threat for companies.
Fig. 7: The Trap of Active Inertia
337
QUESTION AREA TWO: HOW HAS LUFTHANSA CHANGED? HOW WILL YOU
DESCRIBE ITS STRATEGY, RELATIONSHIPS AND CULTURE IN THE YEAR
2000?
Having accustomed the students to thinking around these categories, we then guide the
discussions to create the contrasts between 1991/1992 and 1999/2000, so that they can
clearly visualize the nature of the company’s transformation. By the end of the
discussions, that contrasts look something like the tables below:
Components of Lufthansa's Mental Model
1991/92
2000
How do we create value?
Lufthansa is an airline company; Lufthansa is Lufthansa is an aviation group
responsible for sovereign duties
How do we grow?
Growth through won strength
Growth through partnerships
Who are our main clients?
Our main client is the state
Private customers and increasingly other
airlines but also inner customers such as the
other business units
What does your self-understanding include?
We are state owned and this is unchangeable
Everything can be changed
How strong are we?
Lufthansa will never die
Lufthansa must do its best to remain
successful—every minute something can
happen that causes a crisis, avoid arrogance
Our relation towards competitors and partners
We have to be independent
We have to build trust
Fig. 8a: Juxtaposition of Lufthansa's Mental Model in 1991/92 and 2000
Characteristics of Lufthansa's relationships
1991/92
2000
How strong are inter-organizational network relationships?
Strive for autonomy and interdependence are
Very strong, increasingly tight network in the
so dominant that no remarkable interbusiness unit "Passenger Service," only slow
organizational networks exists
emergence of networks in other business units
How strong are intra-organizational network relationships?
Formal structures are so dominant that no
Traditionally grown tight inner relationships
remarkable intra-organizational networks
with decreasing relevance in the newly built
exists
Aviation Group
Autonomy versus synergy
Dominance of synergy-orientation—
Balancing autonomy and synergy-orientation
functional organization
Central control versus decentralized initiative
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Centralization, highly centralized organization
Balancing central control and decentralized
initiative
Formalization versus flexibility
Bureaucratic rigidity that paralysis the
Relatively high flexibility, low degree of
company and diminishes its flexibility
formalization
Standardization versus customization
Standardization in order to establish efficient
Customization as far as possible in a large
processes
international corporation
Fig. 8b: Juxtaposition of Lufthansa's Relationships in 1991/92 and 2000
Characteristics of Lufthansa's Culture
1991/92
2000
What are the core values?
Lufthansa's values can be deduced form its
Values are very much shaped by Lufthansa' s
"Germanness" and are therefore associated
recent past and Jürgen Weber and imply being
with safety, accuracy, technical correctness,
international, partnership, consensus, modesty
being structured, punctuality, pride, and
and not forgetting virtues such as order,
hierarchically composed
righteousness, etc.
What constitutes the company's self-understanding?
State owned, responsible for sovereign duties Privately owned, success of mastering the
change, innovative and lead by Jürgen Weber
Importance of different stakeholders
State as single "shareholder" is the dominant, Employees, customers, and partner companies
employees and customer are less important
are considered as important as the stakeholder
Tradition
Hierarchy counts a lot, an inner orientation
External orientation (market and network
rather than a market or customer focus
focus)
Fig. 8c: Juxtaposition of Lufthansa's Culture in 1991/92 and 2000
QUESTION AREA THREE: HOW DID LUFTHANSA MANAGE THIS CHANGE?
To provide a structure to this very broad question, we start by presenting a framework.
Transformation of an established and aligned management system needs levers that
unfreeze the system and energy that mobilizes cognitive, relational, and emotional forces.
This energy sets free streams of thoughts that question and reconstruct cognitive clichés
of the mental model. Furthermore, the energy creation triggers a relational mobilization:
existing structures and relationships change to become more dynamic and fluid. Last but
not least, energy creation gears an emotional flow, which challenges the existing values,
habits and finally the identity of the company and captures people’s fears, desires and
hopes in the direction of change. (Fig. 9)
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Cognitive
mobilisation
Strategy
Energy creation
Relationships
Relational
mobilisation
Culture
Emotional
mobilisation
Fig. 9: Cognitive, Relational, and Emotional Unfreezing and Mobilization
Without fundamentally unfreezing and mobilizing the head, the scaffold, and the heart of
the company, a transformational process is not possible. But just creating energy is not
enough: unless energy is concentrated and aligned, it can generate incoherent flaying of
arms. So, having created the energy, companies must also put in place mechanisms that
harvest this energy to drive change in a coordinated and disciplined way. (Fig. 10)
Strategy
Relationships
Energy
creation
Energy
concentration
Change
actions
and projects
Culture
Cognitive, relational, and emotional change
Fig. 10: Energy Creation and Concentration for Cognitive, Relational, and
Emotional Change
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Having presented this simple framework34 which students tend to intuitively understand,
we relate it to the readings. Kotter’s ideas of managing change can be readily understood
in terms of energy creation (urgency, vision, communication, and empowerment) and
concentration (coalition, short-term wins, consolidation, and institutionalization). Beer
and Eisenstat’s principles relate to the framework even more directly: “engaged
leadership” explicitly relates to creating both empowerment (energy creation) and
accountability and direction (energy concentration), for example.
Then, once again, we move to a discussion mode around the case. How did Lufthansa
create and concentrate organizational energy?
Students quickly see The Seeheim meetings and the “samurai of change” movement as
the catalyst for energy creation. In executive programs, we draw on experiences of
participants to highlight the dramatic effects that such meetings can often cause, by
drawing on the recollections of some of the participants who have had such experiences.
Even in MBA classrooms, we have found it possible to have brief role plays, asking
student groups to pretend they were participating in the first Seeheim meeting—what
would they say, how would they feel—and helping them vicariously experience the
traumatic power of such a process.
To move the discussions to the issue of energy concentration, it may be useful to ask:
“All right, so you feel very energized after Seeheim, and you have proposed 131
initiatives to achieve radical change. But isn’t 131 projects a recipe for disaster? Isn’t it
too many?”
Students then talk about the discipline that is brought in by structures such as the OPS
team, and the Program 15 team. The “stretch” created by the energy is counterbalanced
by the “discipline” enforced by these teams which administered the ideas and helped their
translation into concrete actions. Supported visibly and consistently by the top
management team (e.g., Program 15 team being given an office next to the CEO’s), these
were the instruments for energy concentration.
It is useful to contrast this approach to managing change—by creating and implementing
a large number of projects that, by definition, must involve a broad cross-section of
people and not just the senior managers—to the more typical top-down cascade process
where the ideas and initiatives are transferred step-by-step down the organizational
hierarchy. One key negative of the cascade process is the long time it takes traveling
down the organizational hierarchy. Also, the very structure of the process tends to
reinforce the hierarchy. In some ways, by adopting a broad-based process of
implementing a large number of projects simultaneously, Lufthansa directly attacks its
historical hierarchical orientation and simulates a new way of working.
34
We owe this framework to Professors Yves Doz and Heinz Thanheizer of INSEAD, who used it in a
presentation several years ago. We have not seen any published material on this framework and cannot,
therefore, provide any citation.
341
The town meetings help make the change process even more broad and inclusive. Here
too, open sharing of reality, by direct discussions, follow-up actions on ideas and
suggestions, and the provision of regular feedback manage energy creation and energy
concentration simultaneously. The overall change architecture, thus, quickly incorporates
all employees and yet does not diffuse into chaos or random movements.
Once again, this discussion can be brought to a close by a quick summary of the lessons.
(Fig. 11)
Needs of Fundamental Change Processes (2)

Sustaining change needs at first a profound questioning or even invalidating of a company's
strategy, relationships, and culture.
Unfreezing and mobilization of the management system build the basis of change.
Strategy change demands a cognitive unfreezing and mobilization.
Change of a company's relationships requires a relational unfreezing and mobilization.
Culture change needs an emotional unfreezing and mobilization.
Fundamental change needs a combination of energy creation and concentration in order to
trigger concrete action.





Fig. 11: Managing the Energy for Change
QUESTION AREA FOUR: WHAT NEXT?
HOW DO YOU EVALUATE
LUFTHANSA’S SITUATION IN 2000? WHAT MUST BE THE NEXT PHASE OF
THE COMPANY’S CHANGE JOURNEY?
We begin by asking the students to stand back from a review of Lufthansa’s history, to
look at its future. Where is it now? What are the challenges and opportunities? What
STAR
Alliance
HIGH
External Integration
with Strategic Allies
and Partners
19952000
Cargo
Partnerships
Functionally
integrated,
monolithic
Lufthansa of
1991
Cargo
Passage
LOW
C&N
1991-1995
Catering
IT
Tech
Services
Globe
Ground
HIGH
LOW
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Internal Integration within Lufthansa’s
Different Businesses
should management do next? Typically, student reflections on this question center around
the two key issues highlighted in the case: What is Lufthansa? And, how does it prevent
another round of failure of success. Fig. 12 helps to clearly visualize this fundamental,
almost existential dilemma the company face:
Fig. 12: What Is Lufthansa?
What is Lufthansa? Students clearly see that the company has become a loose federation
of businesses, which are being pulled even further apart because of their diverse
strategies and external relationships. The passenger airline is being integrated more
tightly within the STAR ALLIANCE—thereby emphasizing its separateness from the
other Lufthansa subsidiaries. Existing management processes are strengthening the
centrifugal force. Will Lufthansa ultimately become a mere holding company of a
portfolio of distinct businesses? Should the businesses be spun off, eliminating the need
for a holding structure or identity? Ultimately, will Lufthansa cease to exist, at least in
the form it has in the past?
In the first part of the change process—between 1991 and 1995—the company focused
on breaking down the monolithic functional structure, to shape the seven relatively
autonomous businesses. Internal integration was reduced. Then, for some businesses—
the passenger businesses, in particular, but also for cargo—external integration was
increased through increasingly strong alliances. What then is the future of this portfolio?
There are no clear answers. Some students believe that STAR ALLIANCE will, over
time, become more like a company than a loose network. The need to manage
strategic inter-dependence, including a common brand, will inevitably lead to first a cross
holding of equity and ultimately, to some form of a joint financial structure. Others argue
that STAR is inherently unstable and will either fall apart or be restructured into a much
smaller group. Either way, that evolution of the passenger business will change the
situation for Lufthansa. Therefore, for the time being, the company should continue with
the existing structure, waiting to see how the chips fall.
There are a few—typically a small minority—who believe that Lufthansa should become
like GE. It must see the businesses as inherently different, and let them act accordingly.
But that does not necessarily imply the management style of a purely financial holding.
Like GE, it can facilitate internal transfer of best practices, manage synergies that are
obvious, and focus on effective resource allocations and world-class people development.
Finally, another small group tends to take the position that Lufthansa should spin off all
the companies fully, floating them in the capital market, and—in essence—dismember
itself like HP or AT&T. They argue that this is the best option for Lufthansa’s
shareholders, employees and customers, though not necessarily to the best interests of its
senior and corporate managers.
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While there is no way to resolve this debate, explicit discussion of these options allow
students to see very different arguments, and to thereby broaden their own perspectives
on each of the alternative scenarios.
The next issue tends to be around a new set of dogmas the company can fall victim to.
Some of the participants start to think about the success of Lufthansa as a potential trap.
We start now to close the loop on the initial question of inertia and present the following
quote:
"Whatever made you successful, won't in the future," Lew Platt, CEO, HP
How can Lufthansa assure that its strength in 2000 doesn't turn into its major weakness?
Which areas of potential conflicts are already noticeable?
This question leads the discussion to issues such as potential blinders, weak signal of
shackles and eventual corsets. Signals of potential blinders, shackles, and corsets are
noticeable too.
Potential Signals of a Dynamic of Active Inertia in Lufthansa 2000
Potential blinders:
Potential shackles:
Potential corsets:











Lufthansa is becoming an aviation group
The Passage strategy is the guiding strategy, the strategies
of the business units follow
Lufthansa is an European carrier
Our strongest competitors are other European carriers
Growth through partnerships
Our main hub is Frankfurt
STAR ALLIANCE as an increasingly institutionalized and
tight network
Tight inner relationships with Lufthansa business units
Lufthansa is one big family
Permanent consensus with all stakeholder groups
Business units are supposed to put the well-being of the
group over their own well-being
Fig. 13: Signals of a Dynamic of Active Inertia in Lufthansa 2000
On this background, we start to sensitize the students to the tightrope walk of stabilizing
and refreezing the management system on the one hand and constant unfreezing and
fostering flexibility on the other hand. For sustaining success, a company must align its
strategy, relationships and culture. But the alignment must not be so strong as to prevent
change. No success formula can last forever; at least not in turbulent environments. A key
challenge for top management in creating sustaining change in dynamic environments is
to continuously remain alert to the problem of ossification, and to challenge the company
into changing the strategy–relationships–culture configuration with changes in the
external environmental demands.
But how?
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There are no simple answers to this question. However, in contrast to most change
models that generally advise "refreezing," participants usually begin to recognize that
refreezing is not the one best way and that it is also necessary to prevent ossification.
Mechanisms of maintaining the change momentum are not a "normal" part of
management systems. The answers, which students give therefore differ immensely.
Some students emphasize the already institutionalized mechanisms of "perpetuating
unfreezedness" such as the Lufthansa School of Business, Town Meetings, and so on.
Other students emphasize the very robust but flexible relationships, which the company is
trying to develop, to ensure a high extent of fluidity.
Again others note the strong and mature feedback culture, the learning competence, and
the influence of the modest and ossification-sensitive CEO. This argument is certainly
important. It can be underlined through further examples:
In 2000, Jürgen Weber—Mr. Lufthansa—was chosen as the most successful German
CEO of the year. His comment was: "At the verge of the glamorous success I am
worried that we loose our modesty and cost consciousness."
CONCLUSION: LESSONS FROM LUFTHANSA'S CHANGE
In the last 10 minutes of class, we prefer to close with a quick review of some of the core
lessons from Lufthansa's transformation.
Lesson 1: Credibility, symbolic action and consistency of the CEO
An important success factor of the change process is Jürgen Weber. His seriousness,
credibility and optimistic but highly disciplined conduct has been of utmost importance in
creating and concentrating the forces of change within Lufthansa.
Lesson 2: Providing space for reflection and dialogue despite pressure of the crisis
Change management requires not only action but also reflection. During the turnaround,
Lufthansa had developed a distinct style of involving people in strategic business
processes and decision-making networks. Furthermore, Town Meetings had become a
fixed element of the Lufthansa dialog culture.
Usually, in the face of crisis, organizations tend to fall into a trap of heroic activism.
Deliberations, thoughtful conversations and reflections are considered a waste of time.
What counts is "doing something." Not so at Lufthansa. Jürgen Weber gave his
management team "time out." The Seeheim top management-workshops allowed thought,
reflection, debate and discussions that led to high-quality action plans as well as wide
spread commitment, instead of chaotic and uncoordinated action.
Lesson 3: Relationship management
The value of creating strong bonds (top-down, bottom-up, and horizontal) with different
stakeholder groups, is another important lesson from Lufthansa's successful change. The
partnership-oriented consensus building with unions and labor representatives was a
345
central feature of the change process. Even in hard times, Lufthansa did not cut back its
relations with the employees.
Actions taken in bad times have a particularly strong symbolic effect. During the
turnaround, Jürgen Weber created a trust-based culture, which proved to be of immense
value over the entire change journey.
Lesson 4: Strong disciplined structures as counterpoint to flexible processes
Effective management of change needs to be supported by disciplined mechanisms,
which constitute a counterpoint to the flexible processes in which actions and initiatives
are triggered. These mechanisms foster the "change of heads and hearts" through
challenging goal agreements, controlling procedures, and transparent responsibilities.
Lesson 5: Lasting platform for emotional mobilization and reflection of action
Emotional mobilization played an important role in initiating Lufthansa's change process.
But, continuing change was built on a conscious process of reflection—to learn from
actions and outcomes. To institutionalize such learning, companies need to create
dedicated mechanisms and structures. It is to this end that Lufthansa established the
Lufthansa School of Business as the first Corporate University in Germany. As a robust
institutionalized platform, it is designed to foster and support such action-based learning
processes.
Lesson 6: Sustaining the change momentum
For a sustainable change, a company has to prevent organizational ossification, which is
quite probable in cases of successful change.
Lufthansa's case shows the required awareness, the difficulties and the demanded
creativity, which are needed for sustaining change momentum.
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CASE 14: LONDON FREE PRESS
Note: only the (A) case has been included in the case collection; notes on the (B) case
have been included as background material for the instructor.
Overview
The London Free Press (LFP) case series illustrates the difficulties faced by an
organization that has to respond to changes in its environment, but must overcome a
surprising amount of organizational inertia to do it. Many of the qualities that have led to
the great success of newspapers, both financially and as an institution in society, must
now be re-examined; some of these qualities may in fact impede progress and contribute
to their decline.
The newspaper industry setting further complicates the situation because the press is seen
by many to have a higher purpose than the mere pursuit of profit. There is a tension
between newspapers’ “service ethic” and their “market ethic,” which could be employed
in the classroom to broaden the scope of the discussion.
A deep economic recession, which is depressing business activity in virtually every
sector, makes it difficult to sort out whether declining revenues result from broad (and
cyclical) economic factors, or if there is indeed a permanent shift in reader loyalty that
spells irreversible decline for daily newspapers.
Outline and Teaching Objectives
The case series as a whole presents an opportunity to work through the problems
involved in trying to build a change plan when it is not at all clear to organization
members that change needs to take place, let alone what the nature of the change should
be. It can be used to introduce a model of organizational change, starting with an
assessment of whether change is necessary, to the urgency of the need for change, and
proceeding to an analysis of organizational and personal readiness to make change
happen.
Assignment Questions
1. Based on your analysis of the newspaper industry, is there a need for change at the
LFP? If so, what are the reasons, and how urgent is it?
2. Assess the organization’s readiness for change and Phil McLeod’s (editor of the LFP)
leadership position to affect change.
3. As Phil McLeod:
(a) what are your priorities for action?
(b) describe your leadership style.
(c) how quickly will you move to make any changes?
4. Come prepared with a two-page action plan, detailing your priorities and actions.
Professor Mary Crossan and Detlev Nitsch prepared this teaching note as an aid to instructors in the classroom use of the case
London Free Press cases (A) and (B), Nos.9A95M016 and 9A95M017. This teaching note should not be used in any way that would
prejudice the future use of the case. Ivey Management Services prohibits any form of reproduction, storage or transmittal without its
written permission. This material is not covered under authorization from CanCopy or any reproduction rights organization. To
order copies or request permission to reproduce materials, contact Ivey Publishing, Ivey Management Services, c/o Richard Ivey
School of Business, The University of Western Ontario, London, Ontario, Canada, N6A 3K7; email: cases@ivey.uwo.ca. Copyright
(c) Ivey Management Services. Version: 1999-04-12.
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TEACHING APPROACH
A Case
The first part of the series presents the situation as it appears to Phil McLeod, the newly
hired editor, in 1987, of the LFP. Industry information suggests a long-term decline in
newspaper readership and revenues across North America, and the LFP is no exception.
The information can be used to perform a strategic size-up of the paper, leading to some
firm conclusions about whether the “do nothing” option is a realistic one.
Having concluded (one hopes) that something needs to change if the trend to shrinking
revenues and profits is to be reversed, students are left with an open-ended question about
what actually should be done. The environmental description includes information about
reporters’ and society’s attitudes about the role of newspapers. The strong tradition of
paternalism at the LFP is also described. These factors influence how key editorial staff
view their work, and may suggest that change will not come easily.
After the initial (Porterian) industry size-up, the discussion can focus in on the LFP itself.
One way to facilitate this may be to structure the debate around three interrelated
dimensions: Organization, Strategy and Awareness, following Fry and Killing, Strategic
Analysis and Action, 3rd edition (Prentice Hall).
B Case
This case is designed for in-class distribution, and presents information about an
organizational change proposal involving the reorganization of the editorial department
into cross-functional work groups (Home Based Clusters or HBC). The A case ends with
the feeling that something should be done, but leaves the matter quite open as to what the
details should be. New information provides an opportunity to assess an organizational
change proposal that was actually implemented, and to evaluate some of the results. The
new “cluster” form of organization meets resistance from many who question not only
whether it is a viable option, but also whether anything needed to be done at all.
Traditional attitudes about newspapers and reporters conflict with what is perceived by
disbelievers as an attempt to compromise the quality of the LFP in order to attract more
readers.
The final section of the class is an update and wrap-up. The issues that surfaced
throughout the discussion are far from settled, and it is still not clear whether the right
thing was done. The “cluster” experiment is still going on, having been only recently
implemented across the whole newsroom. There are deep pockets of ill-feeling among
reporters who oppose the changes, but there is also some strong support, especially from
newer employees.
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Teaching Plan Summary
1.
2.
A Case
A. Is there a need for change at the LFP? Urgency?
1. O-S-E  Profitability
(20 minutes)
B. Change Model
1. Starting Conditions
(a) Crisis Curve
(b) Personal Readiness
(20 minutes)
C. Organization Readiness/Awareness
1. Guidelines for Action
(a) Priorities
(b) Pace
(c) Process
(20 minutes)
D. Action Plans
(20 minutes)
B Case
A. Break and read B case—which option? Obstacles?
B. Discuss Options
3.
Debrief
(30 minutes)
(50 minutes)
(20 minutes)
Case Analysis
A.
Is there a need for change at the LFP? What is the urgency?
Organization-Strategy—Environment Size-Up
Environment/Industry Attractiveness
Market Data:




Circulation growth is lagging population increase
Penetration down
Readership down
Advertising revenue share down
349
These are trends that have been under way for at least 20 years. The decline of daily
newspapers is not a recent or transitory phenomenon. The LFP is no different: numbers
suggest a one percentage point annual decrease in penetration, declining advertising
revenues, greater resources devoted to selling subscriptions, loss of traditional revenue
base in the retail sector, etc.
Despite the extraordinary profitability of newspapers in the 1970s and 1980s, they appear
to be in serious decline as the information source of choice from the point of view of the
typical reader. This is particularly true for international and national levels of
information, and perhaps less so for the regional/local level. The implication for smallcenter papers like the LFP is that their ability to compete in the macro-information arena
is likely to be limited. Because of the high cost of the information-gathering process,
papers have to have a large audience to support them. The Toronto Star, as an example,
can (perhaps) afford this, but the LFP cannot.
Porter’s industry attractiveness (5 forces) model:
Supplier power:
High for raw material (paper accounts for about 20-25% of total
costs, depending on commodity prices).
Medium to high for labor, especially if unionized. Creative
(writing) talent may be unique, transferable, and highly desirable if
they have name recognition; however it could be argued that the
LFP is unlikely to have many (if any) “star” reporters.
Buyer power:
High for readers: many alternatives, both newspapers and nonnewspapers.
Medium to high for advertisers—a lot of other publications, but
few with the local reach of a city daily.
New entrants:
Low barriers to entry, especially with relatively low-cost,
computerized publishing technology widely available.
Substitutes:
In an age dominated by electronic communications, daily
newspapers face threats from cable and broadcast television, radio,
fax, computer network bulletin boards, online services, and many
other forms of information delivery. In the print media, newlydeveloped capabilities to micro-target specific segments with
cheaply-produced special-interest publications pose a threat to
newspapers with their traditional broad, mass-appeal positioning.
Rivalry:
Discussion topic: who is the LFP really in competition with, and
just how do we define the “industry” for the purpose of this
attractiveness assessment?
350
Conclusion
The industry is not hugely attractive, but not a complete loser either. The recent past
suggests that good money can be made, especially if regulatory attention in regard to
monopolization of local markets remains low. The main concern has to do with the large
number of information alternatives available to both classes of buyers (readers and
advertisers). Newspapers’ strength lies in local focus and ties within the community,
both for advertising and for readership, as suggested by the Tables 1, 2, and 3 of the case
that show: (1) long-term shifts in advertiser spending, away from newspapers and toward
television; (2) the trend toward increased credibility of television from the point of view
of consumers; and (3) the results of the readership survey reported in the case.
Organization
Weaknesses of the traditional organizational structure of newspapers, as exemplified by
the LFP:






stories missed
one-dimensional treatments of events, along strict “section” lines
entrenched mentalities of reporters
mystique of journalism
power—writers appear to have it; they are, arguably, the most entrenched in terms of
their traditional attitudes toward the newspaper industry.
over compartmentalization of functional activities, i.e., writing, editing, graphics, etc.
leads to less-than-ideal presentation, readability
Performance


still profitable, but there are danger signals
repackaging, “cosmetic” changes had mixed results—this is clearly not the answer
There are, according to Phil McLeod, some dark clouds on the horizon. Circulation has
not increased in years, and penetration (the percentage of London households who read
the LFP) has been declining by about a percentage point a year for decades. This could
be an example of Senge’s “Parable of the Boiled Frog” (Senge, Peter M. [1990] The Fifth
Discipline, New York: Doubleday; p. 22). In this tale, a frog immersed in a pot of water
is oblivious to a slow rise in temperature and meets its demise, while a fast change would
have prompted an immediate reaction.
Organizational Health/Financial Health Matrix (over time)
The LFP was, arguably, in the plus-plus quadrant on this matrix until the late 1980s when
McLeod arrived. It could now be argued that they are still healthy financially. Although
financial data were not released for this private company, indications were that there was
351
still a small profit, despite a recession overlaid on the general malaise in this industry.
On the other hand, organizational health can be said to have deteriorated, at least in terms
of employee satisfaction. The arrival of McLeod signaled a change in how the
newspaper was run. Paternalism was out, and a more managerial, results-oriented
approach took over. There is also the suggestion that employees are treated more
impersonally.
This is especially true after McLeod shook things up with the packaging/cosmetic
makeover, which many felt led to the subsequent unionization and strike by editorial
workers. Some reporters of long standing speak of a “poisoned atmosphere,” embittered
employees, and high levels of emotional stress. It looks like an organization on the brink
of serious dysfunction, which could contribute to what senior managers see as financial
problems down the road. It should be pointed out that the people who are passionately
opposed to change sincerely feel they are acting in the best interests of the paper—an
organization for which they have a great deal of fondness. They feel that the new
management regime is perverting the purpose and intent of journalism, in the shabby and
unseemly pursuit of profit.
Strategic Options
One way the strategic question for LFP and Blackburn Group Inc. (BGI) can be framed is
in terms of a resource allocation problem: Where, with scarce dollars to spend, do you
devote your attention—to the national, full-coverage level, where you are losing the
battle for both readers and advertisers to television and the richer papers? Is there a way
of effectively mounting a counterattack in this arena? What would it take? Do we have
the resources (financial, managerial, editorial) to do it? Even if we could, what are the
chances for success?
Alternatively, one could try to map the LFP’s strengths onto market opportunities, to see
if a match can be found that would suggest a different strategy. Strengths (for
newspapers generally) seem to be at the local level of news. Since newspapers can
provide cost-effective advertising space for local advertisers—that is, those not interested
in reaching outside the community—it seems like a good fit.
Local Focus Strategy—Detailed Rationale
1. The LFP does not have the population base in the home region to support large-scale
proprietary news gathering activities. How does information get to the newspaper?
The alternatives are detailed in the case, and basically break down into two
categories: purchased news versus internally-generated. In analyzing the costs of
each versus amount of space allocated, it is easy to come to the conclusion that all
information should be purchased, but this conflicts with the local content objective.
Readers can get wire stories from any number of sources, they do not need to buy this
newspaper. Also, note that even wire stories require rewrite, additional graphics,
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local color added, etc. They consume editorial resources. Based on the numbers in
the case, the editorial budget is broken down as follows:
30% of 10 million to purchase wire stories, etc.
30% of the balance to rework this material (.3 x 7)
Total spent on outside material
Balance spent on in-house news gathering activities
Total (estimated) budget
3.0
2.1
5.1
4.9
10.0
While not a perfect match, this is close to the relative proportions of space the two
categories occupy (51-49% versus 60-40%).
2. Look at the consumer numbers (Table 3 of the case): National/International news is
all in favor of television. The only place papers still have a presence is at the local
level.
3. Same for the advertising revenues (Table 1 of the case): Television is dominant for
national advertisers, but papers still do well at the local level.
Simple Strategic Recommendation
Strength in local news matches well with strength in local advertising. Get closer to the
community, sell more papers, and make more money. The changes must be more than
cosmetic, but as a result may be unsuccessful because of organizational resistance. The
discussion needs to shift to the question of whether the organization has the capacity to
deliver the strategy, or if other things have to change.
B.
Change Model
Starting Conditions:
Crisis Curve
Students can use the “anticipatory/reactive/crisis” model to assess the urgency of the need
for change. Using this curve, one can reach the conclusion that the organization is in the
reactive stage, suggesting that:
1. We have not reached the point where an instant turnaround is necessary. There is
time; the wolves are not yet at the door.
2. The need for change may not be clear to all members of the organization.
Performance is still satisfactory, and in fact nonbelievers, on the recessionary
business climate, can easily blame any apparent trend toward a decline in
profitability.
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3. There is a wide range of available alternatives for action. Few options are closed at
this relatively early stage, and it is not at all clear what can be done, let alone what
should be done (or, along with #2 above, if anything needs to be done).
Personal Readiness
It should be apparent that publishers and editors who were, to some extent, insulated have
run the LFP paternalistically from the realities of the marketplace and the changes that
were occurring in their industry. The LFP enjoys monopoly status in London, if the
industry is narrowly defined to include only daily papers. This, it could be argued,
allowed previous managers to focus on the pursuit of what they defined as editorial
excellence, at the expense of market responsiveness. Business as usual was the byword
because, after all, every city has to have a daily paper, and in London, the LFP is it. Until
McLeod’s arrival in 1987, publishers and editors had fit the mould of no-change
managers who acted as custodians of the systems and policies developed by Walter
Blackburn.
McLeod’s position is that of outsider in this happy family. He is not one of them, having
come from the big city environment where competition is much less gentlemanly and
traditions are not as revered. His reliance on trend analyses, surveys, quantitative data
and the like are seen as inappropriate and somehow inhuman in the context of this
venerable institution. Many of the resistors to change talk disparagingly of “MBA-style”
management, meaning a focus on the bottom line at the expense of caring about people,
and what they view as misplaced faith in analytical tools.
It does not help that McLeod openly and perhaps rather insensitively challenges stronglyheld assumptions about what is good journalism. One gets the feeling that reporters’
opinions about what should appear in the paper had never been questioned before.
McLeod’s tendency to pose “in your face” questions about the relevance or level of
interest in a story may have alienated him from at least some of his staff.
On the other hand, one could ask if an insider could possibly lead the kind of change
process that seems to be necessary. Would someone who had grown up in the LFP
environment be able to see the need for change? Would such an individual dare to make
changes even if the need were (dimly) perceived? Remember the reverence felt for the
memory of Walter Blackburn and the traditions he established.
McLeod appears to have the support of upper management in his drive to effect change.
He is also personally committed to change. Phil is not a “status quo guy,” and he knows
he was hired to do precisely what he is doing. Whether he has the personal qualities
necessary to lead the process is an open question, given the data we have. Whether he
can survive the changes, even if successfully implemented, is probably even more open.
C.
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Organizational Readiness
There is clearly no consensus, in 1990, that a change is required. It is also clear that the
group most affected, and thus most likely to resist, will be the reporters. Given the
organizational climate and the personal characteristics of reporters, it should not be
difficult to come up with a list of reasons why they will be opposed:
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change in the pecking order
challenges to their professional judgment
some job losses; this fear is almost a reflex in these situations, but not central to the
issues in this case; cost-cutting is not the main motivation for change
job changes, reassigned responsibilities
realignment of work flow
move to team versus individual work
focus on what the readers want is seen as pandering or selling out
Other parties may also resist—photographers, graphic artists, copy editors, and other
editorial staff will also see their responsibilities change. But they may be more
supportive, since the plan calls for them to be more directly involved in the story-creation
process.
Guidelines for Action
Priorities
The discussion can begin with the question of broad priorities:
1. Strategic Change: Management could simply formulate a new strategy, communicate
it to the employees, and wait for it to take effect. They would share their vision of the
paper’s shift in strategic positioning, as well as pointing out that this change is what
they feel is needed to ensure both short-run performance improvement and long-run
growth. Obviously, this scenario stretches the credibility of all but the most naive
minds, and a different approach must be found.
2. Organizational Change: In order for strategic change to be effectively implemented,
the organization must have the appropriate capabilities, in terms of structure and
resources. The solution thus may be to change the organization of the LFP in such a
way that it can deliver the desired strategy.
3. Readiness/Awareness: In light of the resistance displayed by LFP staff to even
relatively mild change, one might come to the conclusion that more work is needed in
this final area of the change model, before organization and strategy change are
attempted.
Pace
This obviously recycles the discussion back to the crisis curve, since the pace of change
is largely dictated by an assessment of urgency in terms of the near-term survivability of
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the organization. Having decided that speed is not of the essence here, does this mean
there is time to try to build some consensus, to develop a strategy around shared views of
what the future holds? Or would attempts to do this be futile? Some evidence supporting
the futility argument exists: entrenched mentalities of reporters, resistance to minor
changes out of all proportion to the magnitude of the change (e.g., the cosmetic
makeover). However, this does not mean that the LFP might not still have time to move
more slowly, and perhaps less confrontationally.
Process
In terms of style and tactics, the class might suggest that McLeod adopt a consultative
approach, sharing his data with stakeholders, and asking for their suggestions about what
to do. In many ways, he did this, but the data were greeted with skepticism, if not
disbelief. So now what?
It is not completely clear whether McLeod’s style is contrived to achieve the desired
results, or if it is his natural operating mode. Probably a combination of both, but the
point is not to second-guess him, rather to suggest that these are issues that need to be
thought about.
D.
Action Plans
Have the students present their action plans for feedback.
B CASE
The case begins with a description of the Newsroom Reorganization Project: a series of
meetings and self-consultations that resulted in the adoption of the Home Base Cluster
(HBC) idea. The pilot cluster is tried, and seems to work well enough to try on the rest of
the newsroom.
The case goes on to describe how the HBC idea was first implemented: the initial pilot
led to consultation with newsroom staff, complete with task forces and much internal
discussion. This was followed by a listing of some of the potential problems and issues
raised by the pilot, and the need to make a decision on whether it would be worth
proceeding with a larger-scale experiment.
Should McLeod Proceed With The HBC Idea?
The HBC is intended to break the barrier between the paper and the readers, by forcing
reporters, for the first time, to listen to members of the community when they decide
what to write. Changing the way stories are conceived, researched and produced is also
expected to make them more relevant and interesting. For the first time, photographers,
graphic artists, and copy editors will be part of the process from its beginnings, and will
have an influence on both content and style.
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If HBC Is Implemented, How? What Will It Achieve?
Full-scale reorganization looks awfully risky, in light of events in the recent past. But if
the product content must be changed, the process by which it is produced must change as
well. However, the data given in the case should illustrate how difficult this may be. The
following factors make substantial organizational change seem very risky at this time:
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the notion (bought into by many editorial staff) that papers have a higher social
purpose than profit
reporters’ personal characteristics
the recent labor unrest
the evident lack of loyalty of current readers (will they balk at further changes?)
Questions:
1. In light of the problems and employee resistance, is the HBC a good idea?
2. Why will (won’t) it work?
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CASE 15: NBC
This case tells a story of failure following sustained success, remarkable in its similarity
to another media case in the collection, that of Warner Bros. (Case 38). NBC had for
many years held a leadership position in the broadcast television industry but suddenly
slipped to third place in 1999. This slippage was due to several factors, none of which
could be said to be one-offs. Firstly, there are wider industry changes at play: the
increasing popularity of cable has seen overall broadcast-network shares of viewer-ship
drop from 90% to less than 50%, meaning that incumbents are fighting harder to maintain
business volume, a fight intensified by the entry of new broadcast-network players such
as Fox. These pressures are further accentuated by in-roads on viewer time made by the
Internet. Secondly, these pressures have increased the importance of hit shows—both for
simply reaching viewers in an increasingly multi-channel, multi-media marketplace and
as a platform for franchise-type revenues (replays, say, on cable, and merchandising).
These opportunities have made the networks increasingly eager to control the content of
their shows, i.e., to vertically integrate. This has encouraged a legal-financial approach to
programming at NBC (as the only network not linked to a studio) rather than a purely
product-oriented one. And where it couldn’t obtain ownership but still wanted the show,
as with “E.R.,” it ended up paying astronomical sums. Thirdly, there are several
indications of corporate hubris: weakness in its show-development processes (for
example, squandering the opportunity to grow a new hit show in the time slot
immediately following the hugely successful “Seinfeld”); the tardy introduction of reality
programming; and a “cookie-cutter” approach that saw it appeal to the same audience
with every new show in the late ’90s and weight these shows toward cheaper-to-produce
comedies.
While NBC still has strong shows, it seems clear that it is struggling to regain its vitality
in order to better position itself in a maturing industry. Like many firms, and especially
firms targeting a mass consumerist market, NBC needs to keep up with the changing
trends in the marketplace without losing its broad appeal. Thus it needs to continually
manage striking a balance between sticking with what has worked and trying out
something new.
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