MGT320 Change strategies: Critical review and application

Value: 50%

Due date: 01-Jun-2012

Return date: 22-Jun-2012

Length: 2500 words

Submission method options

EASTS (online)

MGT 320 Assignment 3

Assignment Three: Critically review the change strategy that has been used in your example and argue whether or not the change was successful (First stage of assignment). From this review and your diagnosis in Task 2, develop an alternative change strategy that includes recommended intervention(s) and strategies for institutionalising change (Second stage of assignment).

Step 1 is to critically review the change strategy that has been used by the organisation they have been looking at – this would require a discussion of change interventions used in terms of pros. cons, what worked, what didn’t, why not etc as you have highlighted.

Then Step 2 is the cumulative part of the assessment. This is linking back to what they diagnosed in Assignment 2 and based on this (and the critique in step 1) developing an alternative change intervention/strategy.  Similar to assignment two, students have the two parts, i.e. critical review and then application

Rationale (Why are you doing this?)

The aim of this assignment is to:

• Critically review the process of change and specific change strategies used by organisations
• Develop a thorough understanding of different change strategies
• Develop an understanding of alternative change strategies that can be applied to specific

examples of change

• Practice application of theory to a specific change situation.

Task

1. Critically review the change strategy that has been used in your example and argue whether or not the change was successful.

Refer back to your last assignment. Provide a brief summary of the problem and identify and explain the change strategy used. Assess and discuss the organisational change strategy used, was it successful? i.e. did it achieve what it was supposed to?

If this was not apparent in your last assignment, then you will need to review the case organisation you have selected and get to a point where you can provide a brief summary of the problem and identify and explain the change strategy used.

Marking criteria:

Critical evaluation requirements:

• Identification and discussion of organisational change strategy used
• Evidence of analysis of change strategy
• Key merits and limitations highlighted and discussed
• Clear identification of arguments presented
• Student’s judgement based upon critique rather than opinion

1. From this review your diagnosis in Task 2

Revisit your diagnosis

This will form both the conclusion of the first section and the lead-in to the alternative strategy.

The review will require an assessment of how effective or otherwise this strategy might have been.

I suggest at this stage, you go on to outline briefly what some alternative strategies are and why you are selecting an alternative to the one you originally chose.

1. 3.      Develop an alternative change strategy that includes recommended intervention(s) and strategies for institutionalising change.

So this section has three parts:

Firstly you develop an alternative strategy that is not only appropriate for the problem but also the type of organisation. Some depth and detail will be required.

Secondly, recommended interventions means reading chapters 7 & 8 of the textbook and giving a full answer taking the range of elements into account, e.g. individual performance, group and organisational processes, strategy, structure and restructure.

Institutionalising change – what does this mean?

Marking criteria:

Alternative change intervention/Institutionalisation

• Selection/recommendation of alternative change strategy based upon critical evaluation
• Justification and application of alternative change strategy
• Recommended strategies for institutionalising change
• Appropriate blend of theory with organisational example

SOLUTION

Abstract:

The paper identifies the change strategy enforced by Starbucks when it had to face problems in the market due to a variety of factors and evaluates if the change strategy was successful in the light of the organisation’s objectives and brand image. After starting the discussion with industry analysis, using the Five Forces Model and analysing change strategy through McKinsey’s 7S framework, the paper looks at the results of the change strategy and then moves on to a critical evaluation of the change strategy, suggesting a recommended strategy that would better suit the organisation with regard to the factors discussed earlier. The paper concludes that a strategy that focuses on innovation and differentiation would suit Starbucks better than one of rigorous international expansion and grabbing market share.

Section 1 – Industry Analysis, Problems with Starbucks and Change Strategy:

Industry Analysis – The Five Forces Model:

A brief industry analysis is done using The Five Forces Model (Porter, 1980, P. 4) to reveal the state of affairs in the speciality coffee industry as follows:

Potential Entrants – Threat of New Entrants: The threat of new entrants in the retail coffee industry is quite high, but threat of new entrants is to be seen from the perspective of the industry that Starbucks chooses to be in. Considering that Starbucks has had its place in the industry not as just another coffee provider but has created a brand for itself in the specialised coffee industry, threat of new entrants is considered to be low to medium, as it is not in every other business to build an image and create a brand that could provide for the product proposition that Starbucks has managed to create. Entry barriers to the industry could be considered to be medium, though it very much depends, again, on the branding and positioning strategies of Starbucks.

Substitutes – Threat of substitute products: Again, this depends on what the substitute products are. The projected image and the product proposition created by Starbucks is much more than just coffee – Starbucks stands for an experience, catering to the need for the ‘third place’ in terms of leisure needs. If Starbucks is looked upon as just another coffee shop, every other beverage could be considered a threat. However, considering it in terms of the experience that it creates, the threat of substitute products is considered to be low.

Bargaining power of Suppliers – Low to medium: The scale offered by global presence in the large coffee chain would mean that it would have much influence over suppliers of materials that it requires. However, switching costs from one buyer to another may be high for Starbucks, since the brand stand for product quality and consistency, which may be compromised on, if Starbucks were to switch suppliers. In other words, the bargaining power of suppliers is considered to be medium.

Bargaining power of Buyers – Low: Buyers are looking for an experience, which is the key to the very existence of Starbucks. The kind of market that Starbucks caters to is not price sensitive and they would not be the ones looking for bargain deals. And buyers have reasonable high switching costs, since there may not be many other coffee outlets that offer similar ambience and services that would match that of Starbucks. Bargaining power of buyers is, hence, considered low.

Industry rivalry – High: In terms of industry rivalry, existing rivalry was high. When you have an organisation that produces and sells coffee, it would inevitably have to deal with every other coffeemaker and every other café and chain that sells coffee. When Starbucks entered the industry as a generic coffee retailer and a coffee chain, it was, in effect, testing the waters with a new concept. What it finds even now is fierce competition from the likes of McDonald’s and Dunkin’ Donuts, brands that are expanding from their own forte of fast foods and donuts to provide premium coffee targeted towards connoisseurs of the beverage (Businessweek, 2009). And Starbucks is not the only retailer with global ambitions – Dunkin’ Donuts has its plans in place for India, aiming at 100 stores in the country over the next five years, and as many as 500 to 650 outlets around the world in 2012, with a keen eye on Asia Pacific (AFP, The West Australian, 2012).

Problems with Starbucks:

The initial problem with Starbucks was that the company was growing too fast to maintain its focus. There were occasions when profitability was down, income dwindled, and costs were bloated – and the company had to go on a cost-cutting drive amidst a sluggish economy that made consumers think twice before they headed for the coffee shop. Starbucks had to close down most of its shops to curtail costs and to keep up with the lower turnover. In the mean time, there was also the effect of increasing competition from rivals who were eyeing expansion, as in the case of McDonald’s and Dunkin’ Donuts, which Starbucks had to adapt to and take into consideration in its revised strategy.

Change Strategy – McKinsey’s Model:

The strategy employed by Starbucks could be analysed using the McKinsey Framework (McKinsey Quarterly, 2008).

The Experience: Starbucks implemented the concept of the ‘third place’ to perfection around the world, with amenities such as free wi-fi and music being the order of the day, with a focus on making the place inviting and comfortable. As Ray Oldenberg, the original protagonist of the concept of the third place, agrees (Orsini, 2011), it is about the place where people come in just for the experience of it, not necessarily to buy stuff.

Product improvement: Starbucks made its coffee stronger in England and Ireland in specific products – lattes, cappuccinos, mochas and caramel macchiatos.

Expansion: After closing down five stores in 2009, the company is expanding with licensing arrangements in the market, with 26 stores now, as against 22 last year (Irish Times, 2012). The company plans to fuel its expansion by opening own stores rather than go about the licensing route.

Systems: In an effort to pep up its brand value, Starbucks got into the Social media business, promoting its brands through channels such as Facebook, Twitter and YouTube. And its efforts haven’t gone in vain, with Starbucks appearing second among the top 100 social media brands, as per the ranking and report compiled by Brandwatch, the social media monitoring service and publicised in Social Brands 100 (2012).

Shared Values: The company focuses on creating an experience that is equivalent to the ‘third place’, where people would find it convenient, comfortable and inviting to get to the premises for the sake of the experience; a third place apart from home and work for people to hang around.  Sustainable Sourcing was another initiative that was taken to quell the voice of opposition around the world, accusing Starbucks of exploiting third-world farmers through unethical supply chain practices. In one fell swoop, the company decided to “actively cultivate and reward environmentally and socially responsible suppliers”, with the whole idea behind the initiative being all about forming a new paradigm in forging supply chain relationships, which could lead to mending the company’s global branding and drive the company’s growth around the world. Finally, Starbucks found a way to give it back to the community and has made it a wise business decision as well – the company has recruited a good number of veterans and has formed what is called the “Starbucks Armed Forces Network” (Scott, 2012).

Structure: The structure in Starbucks is that of a matrix organisation, where the reporting structures highlight a long hierarchy with a top-down command flow. Further, there is much emphasis on compliance to organisational standards from individual retailer units as well as from the licensed partners.

Section 2 – Results of Change Strategy

The results of the changed strategy was there to be seen in terms of improved sales, larger geographical reach, enhanced brand image, improved supply chain relationships and better products.

Starbucks hit profits in Ireland to the tune of €490,000 in the year to October 2011, as against a loss of €3.3 million the previous year, according to Irish Times (2012). While the company’s turnover actually fell from €16.2 million to €15.4 million from the previous year’s figures, the profits have come from improved margins on account of cost cutting and curtailing of administrative expenses.

The company was on a global expansion spree with a keen eye on China, predicting that China would be its second largest market around the world by 2014, the key to its global expansion (Business & Leadership, 2012).

The initiatives taken by the company in engaging the veteran community for employment, when unemployment rates among the veterans have been much higher than that of the civilian population, has borne fruits in the form of the company being among the select few to have been invited for the Social Innovation Summit 2012 (Scott, 2012), to “analyze innovative approaches and build lasting partnerships . . . to affect positive change” (Social Innovation, 2012). This has resulted in enhanced goodwill in terms of being socially responsible and in being a good corporate citizen.

Internal metrics had improved to show higher levels customer satisfaction, such as employee friendliness, beverage taste and speed of service (Businessweek, 2009), which are key ingredients towards the success of the brand.

However, despite the improved results, there is not much that would suggest that Starbucks has succeeded in its quest for market leadership. Market expansion, improved product quality, increased sales and display of social responsibility may be alright, but there may be more that needs to be done in terms of change strategy, considering the industry that Starbucks is in, the kind of competitive forces at play and the brand that Starbucks would ideally want to build.

Section 3 – Recommended strategy:

Innovation:

When it is a market that has scope for differentiation rather than one that involves price wares, the change strategy should focus more on innovation than on expansion. Management innovation, according to Michelman (2007), “is anything that substantially alters the way in which the work of management is carried out, or significantly modifies customary organisational forms, and, by doing so, advances organisational goals.”

With a focus on innovation, there should be little demarcation as in the case of departments, given that innovation is powered by cross-functional teams – innovations that could bring about lasting change in the organisation and are capable of effecting new business models (Maddock and Viton, 2009). As the authors claim, “What some companies call departments and partners are too often emblems of inefficiency”.

This could be contrasted with the organisational structure of Starbucks. Being a multi-national firm and one that is brand conscious, Starbucks operates through its own stores or through licensed stores – and every one of these stores have to strictly adhere to the standards set by the corporate office at Seattle. Though Starbucks has taken initiatives at structural changes, they have more to do with managing the behemoth poised towards a global strategy (Yahoo, 2012), realigning the retail businesses into three regional groupings, it may not mean much in terms of innovation.

Further, innovation has to be “outside-in” (Maddock and Viton, 2009). That is, it would be harder for someone inside the organisation to be outstandingly innovative, when people in the organisation have got so used to the systems, processes and culture of the organisation. The idea is to stress on learning instead on complying. There have to be questions and challenges to the status quo so that new ideas are borne out of thinking and innovation. A culture of compliance would only go against the principles of innovation.

The problem with the current strategy is that it stresses on global expansion through an organisational structure that emphasises on compliance. The hierarchy in Starbucks flows from top to bottom in ways that authority is delegated and flows downwards, which is only to be expected as the normal way of doing things in an organisation so large and still expanding.

However, expansion should not be at the cost of innovation. It would be déjà vu for Starbucks, when the organisation expanded ruthlessly, only to realise that margins were shrinking and costs were burgeoning, resulting in a rollback of the expansion drive, ending up in urgent cost-cutting measures, closing stores and getting back to focussing on the basics. There are such warning signs already down the horizon – some of the principle driving forces of the Starbucks machinery, such as the ‘third place’ ideology, may be compromised in an overzealous urge to expand and establish in a global market, as is being perceived of Starbucks in Pakistan. Its reported emphasise on ‘traffic management’ by substituting spacious sofas with narrower chairs and bringing in subtle changes to the ambience may send mixed signals to the avid observer, pitting its image against its own brand (Khalid, 2012).

Organisation Transformation and Leadership:

There are two sets of factors involved in organisational transformation – Explicit factors that include Leader’s action, organisation strategies and organisation structures, and implicit factors, which would be organisation values, organisation culture and organisation member spirituality (Min and Santhapparaj, P. 216); and leader’s action proves to be the most significant factor involved in organisational transformation (Min and Santhapparaj, P. 215). While organisational change has to start with the leadership, the influence of the leader is at its weakest point in the initial period after the leader has taken charge, since it takes time for the leader to build credibility in the organisation, a key factor involved in influencing followers (Min and Santhapparaj, P. 220)

The only way that Starbucks could stay ahead of the pack and take the lead in the business is by focussing on innovation and resting the responsibility of change on leadership. While innovation in the organisation could be brought about by decimating departments and differences within the organisation, it would not serve the purpose if the organisational hierarchy remained what it is and leadership did not infuse fresh energy into the business, promoting an environment of change rather than compliance. The organisational hierarchy has to be a flat one that is capable of communicating the organisational goals and values across to the workforce.

If innovation is finalised upon as the key to success, there are three key principles to the art of organisational change, as suggested by Johnson (2000). The reasons why change is necessary should be clarified beyond any doubt and in a compelling fashion, people should be well informed of the need for change, and the change has to be measured and rewarded adequately.

Branding and Positioning:

The increased emphasis on opening of a number of stores around the world is a clear sign that the organisation is in a hurry in its path towards accelerated growth. However, as has been discussed in the initial session of Industry Analysis using the Five Forces Model, speciality coffee is not an industry that is highly price elastic; nor is speciality coffee an industry that would fight it out in the market through price wars. With people being price insensitive when it comes to the ‘experience’ rather than the ‘commodity’, with entry barriers in the speciality coffee industry being high, unlike any other coffee vendor who would sell a product and not the experience, and with competition being hot on the tails, it takes a strategy with a difference rather than one that takes competition head-on, to succeed in the market.

While innovation could lead to any solution in terms of product, price, place, distribution and supply chain management, branding should reflect the core emphasis on innovation. An organisation that focuses on the experience seems to be taking a mass market approach that would be befitting to a commodity manufacturer. Rather, expansion should be compromised for the sake of value addition, and efforts should be on to construct entry barriers that would bar competition and new entrants from entering into the market. There is a risk of Starbucks catering to the generic sector in its quest for market share, one that has to be checked and the right product positioning, pursued.

Conclusion:

The efforts taken by Starbucks at strategic change are welcome in the light of the problems that the company had run into, and with reference to the issues caused by the economic slowdown in an era of increased competition. However, the changes may have been good enough to address the contingencies, but may not go long enough to steer the organisation in the right track over the long term. The ideal strategy for Starbucks would not be to rack up the volumes and grab market share, but would be to differentiate its product offerings in the market through innovation and by carefully selecting its target market, positioning its product offerings and enhancing its brand image. For this, the company would have to go in for structural change, foster a culture of change and innovation, and create entry barriers in the industry to keep competitors at bay through careful branding and market positioning.

References:

AFP, The West Australian (2012, May 31), Dunkin’ Donuts with an Indian Twist. Retrieved from http://au.news.yahoo.com/thewest/lifestyle/a/-/article/13825023/dunkin-donuts-with-an-indian-twist/

Bloomberg Businessweek (2009, 23 July), Is a turnaround brewing for Starbucks? Retrieved from http://www.businessweek.com/investor/content/jul2009/pi20090722_611028.htm

Business & Leadership (2012, May 30), Starbucks’ and McDonald’s’ Chinese expansion, Retrieved from http://www.businessandleadership.com/exporting/item/35374-starbucks-and-mcdonalds/

Irish Times (2012, 31 May), Retrieved from http://www.irishtimes.com/newspaper/finance/2012/0531/1224316988872.html

Johnson, L. (2000, July 24), Three critical steps to implementing organizational change, Retrieved from http://www.thefreelibrary.com/Three+Critical+Steps+to+Implementing+Organizational+Change.-a063904347

Khalid, U. (2012, May 30), Starbucks Coffee manages customer traffic in a unique way at ‘Third Place’ – Part 2, Retrieved from http://www.newspakistan.pk/2012/05/30/starbucks-coffee-manages-customer-traffic-unique-%E2%80%98third-place%E2%80%99-part-2/

Maddock, M, and Viton, R. L. (2009, June 2), The New Rules of Managing Innovation, Bloomberg Businessweek

McKinsey Quarterly (2008, March), Enduring Ideas: The 7-S Framework, Retrieved from http://www.mckinseyquarterly.com/Enduring_ideas_The_7-S_Framework_2123

Michelman, P. (2007, October 3), Harvard Business Review, Retrieved from http://blogs.hbr.org/hbr/hamel/2007/10/management_innovation_defined.html

Orsini, P. (2011, 26 January), Q&A with Ray Oldenberg, author and professor emeritus of sociology, J W T Intelligence, Retrieved from http://www.jwtintelligence.com/2011/01/qa-ray-oldenburg-author-professor-emeritus/

Porter, M. E (1980), Competitive Strategy: Techniques for Analyzing Industries and Competitors, Free Press

Schrage, I (2004), Supply and the Brand, Harvard Business Review, Vol. 82, Issue 6, P. 20

Scott, R. (2012, May 29), Business Backing Veterans: How Starbucks created an Army of Support, Forbes.

Social Brands 100, Retrieved from http://dl.dropbox.com/u/81936449/SB100_2012_the_rankings.pdf

Social Innovation, Retrieved from http://www.socinnovation.com

Yahoo (2012, January 12), Starbucks says implemented realignment of organizational structure, Retrieved from http://finance.yahoo.com/news/Starbucks-says-implemented-theflyonthewall-3769267525.html

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