15.3 Success and Failure in Change

Discuss various ways change has succeeded and failed in contemporary examples and organizations

Change is the only constant that a business can count on. The change management techniques in this book have all been in response to change. And there’s nothing wrong with that! Businesses should be able to respond well to change. But what about the steps that businesses take to make sure they’re ready for change.

Businesses either conquer change or fall. We’re going to take a look at three different examples of businesses facing change management situations and how they fared. Then, we’re going to take a look at some of the prophylactic measures businesses use to prepare themselves for the changes being thrown at them in today’s environment.

Learning Outcomes

  • Discuss crisis management and process improvement
  • Discuss external change management and stimulating innovation
  • Discuss internal change management and learning organizations

Crisis Management

The Volkswagen logo, which is a V on a W within a circle.If you were paying attention to the news in 2015 (or even if you weren’t!), you likely heard about Volkswagen and the scandal surrounding emissions testing. In 1999 the United States announced plans to raise emission standards starting in 2004, setting a new limit of 0.7g/mi, versus 1.0 g/mi of nitrous oxides, which contribute to smog, acid rain and the destruction of the ozone layer. German automaker Volkswagen responded by removing their diesel-powered vehicles from US markets in 2007 while it awaited technology that would bring their engines up to these standards.

In 2008, the company introduced Clean Diesel Cars in the United States. And, wow, were they efficient! So efficient, in fact, that the International Council on Clean Transportation asks the people at VW to help demonstrate the values of US diesel technology, hoping to get Europe to adopt these same regulations. In the process of inviting VW to do this, the International Council on Clean Transportation took a closer look at their Clean Diesel Cars, and what they found wasn’t a high performing, low-emissions engine.

If you read the news, you know this didn’t turn out well for Germany’s largest automaker. Complicated and elaborate “defeat” software, rigged to cheat when it detected emissions testing in progress, had been masking damaging levels of emissions from the company’s diesel engines. The Environmental Protection Agency, on the cue of the International Council’s findings, did their own testing on VW’s engines in 2014 and 2015, and when they told the automaker that their 2016 models would not be welcome on U.S. soil, company leaders confessed to the company’s transgression.

Vehicle recalls, customer restitution and class action lawsuits were just the beginning of Volkswagen’s emissions nightmare. After “Dieselgate” hit newspapers in September of 2015, Volkswagen sales slipped, stocks plunged, and company leaders indicated that the 6.5 billion dollars they’d set aside to deal with the issue would not likely be enough.

Volkswagen found themselves in the midst of crisis management—responding and managing unexpected change.

Two CEOs and three years later, Volkswagen, determined to leave the crisis behind them, invited in a new breed of leader: one that believed in sweeping change company-wide. Dr. Herbert Diess was invited to usher in a new era for Volkswagen and set the company on a more ethical, trustworthy path.

In one of his first tasks as leader of the company, Diess addressed shareholders in Berlin: “Volkswagen has to become more honest, more open and more truthful. Besides abiding by the rules and obeying the law, the key here is always ethics—a clear moral compass.” But how had Volkswagen gone so wrong as to get to the point where leaders determined it was okay to break the law? And what kind of changes needed to be made to get Germany’s largest automaker back on track again?

Process Reengineering and Continuous Process Improvement

Three years post-crisis, Volkswagen is looking to infuse their company culture with honesty and ethics, and simplify processes so decision making comes from those “in the know.” Process reengineering was among the first things Volkswagen leaders considered. And, moving forward, this process reengineering should become a part of their change management strategy.

The idea behind process engineering is that management starts with a clean sheet of paper and rethinks and redesigns the processes by which an organization does work and creates value. Overall, the process reengineering should look at three different areas:

  • Distinctive competencies. These define what the organization does better than its competition: better products, a more efficient distribution system, and so on. Volkswagen leaders needed to review its distinctive competencies to remind themselves of where they wanted to be. In fact, leaders chose to look in another direction for success when they did this—that of electric cars. That’s a far cry from diesel. But this new navigation was definitely going to separate them from past transgressions.
  • Core processes. These are the processes that transform materials, information, and labor into products and services for the customer. Volkswagen immediately began making moves that strengthened their goals for electric cars and recognized a need to put decision making back in the hands of the engineers and managers who run their processes. This resulted in an effort to . . .
  • Reorganize around horizontal processes. Companies in this stage of the process employ cross-functional and self-managed teams, and focus on process rather than on function. Volkswagen made sweeping changes to their organizational structure to put experts in charge of decisions. By doing away with its rigid organizational structure and its top-down hierarchy, it introduced a new corporate culture—one that could uphold the levels of honesty and ethics that VW promised to its customers by introducing better checks and balances.

This leads us to continued process improvement.

Businesses look to achieve customer satisfaction via the continuous improvement of all organizational processes, recognizing that good is never good enough. Even excellent processes can be improved upon. In Volkswagen’s case, they recognized that their top-down decision making impaired their ability to keep executives honest and processes transparent.

Manufacturing uses continuous improvement processes to increase the uniformity of their products or services. Management often looks to employees for improvement ideas, and this might be an area that Volkswagen could also benefit from, as it enhances trust between employer and employee, a bond that is likely still fragile after these events.

Process reengineering and continuous process improvement aren’t change management solutions, but rather initiatives that companies put into place so they don’t find themselves in the same position as Volkswagen. Volkswagen can take steps with these measures today to prevent another crisis management issue in the future.

Practice Question

https://assessments.lumenlearning.com/assessments/14008

References

Amelang, Sören, and Benjamin Wehrmann. “”Dieselgate” – a Timeline of Germany’s Car Emissions Fraud Scandal.” Clean Energy Wire. April 15, 2019. Accessed May 20, 2019. https://www.cleanenergywire.org/factsheets/dieselgate-timeline-germanys-car-emissions-fraud-scandal.

McGee, Patrick. “Volkswagen Makes Sweeping Changes to Management and Structure.” Financial Times. April 12, 2018. Accessed May 20, 2019. https://www.ft.com/content/9a0b092c-3e48-11e8-b7e0-52972418fec4.

McHugh, David. “Volkswagen Replaces CEO Mueller, Announces New Structure.” The Seattle Times. April 12, 2018. Accessed May 20, 2019. https://www.seattletimes.com/business/vw-replaces-ceo-mueller-announces-sweeping-restructuring/.

Rauwald, Christoph. “VW CEO Urges Corporate Culture Change.” Bloomberg. May 3, 2018. Accessed May 20, 2019. https://www.bloomberg.com/news/articles/2018-05-03/vw-ceo-urges-corporate-culture-change-amid-sweeping-revamp.

“VW CEO Mueller’s Likely Exit Heralds Sweeping Changes at Carmaker.” The Business Times. April 12, 2018. Accessed May 20, 2019. https://www.businesstimes.com.sg/transport/vw-ceo-muellers-likely-exit-heralds-sweeping-changes-at-carmaker.

External Change Management

We believe that Web-based retailing will continue to increase in popularity and market share as a distribution method for physical book, music, and movie merchandise. . . . The shift toward digital formats represents an opportunity for us as we continue to strengthen our Web-based capabilities.

—The second-to-last annual report filed by Borders for the fiscal year ending in January 2009.

Borders Group logo, which has the name of the group in simple black letters with a horizontal red line in between the words.Tom and Louis Borders were University of Michigan graduates who developed an inventory management system that was second to none in the world of bookstores. It allowed them to expand their one little bookstore on State Street in Ann Arbor into 21 stores that were ultimately sold to Kmart Corporation in 1991 for $125 million. Kmart combined them with a group of mall stores they had in their arsenal called Waldenbooks and then spun them off with an IPO in 1995.

That’s the story of how the country’s second biggest big-box bookstore was born . . . in a quick four years, with a proud history of a management system that could manage physical inventories like nothing else could. Maybe, when you look at it that way, it doesn’t seem so strange that they never saw the internet coming.

This is how they didn’t see the future effects of technology:

  • In the 1990s, Borders executives chose to invest heavily in music sales, morphing themselves into a multipurpose entertainment retailer. It was around that time that Apple hit the scene with iTunes and iPods. Music was changing, but Borders didn’t see it coming. In fact, Borders developed and tested in-store machines where customers could build their own mix CDs, for a little less than the cost of a pre-recorded album. It was a feeble and misguided attempt to appeal to iTunes users, which included youngsters who were reveling in the notion that buying “singles” was once again an option in a post-CD, post-album-loving world.
  • In 2001, after an unsuccessful attempt to launch an online store, Borders opted to outsource their online sales to an up-and-coming company called Amazon. (You’ve heard of them?) Borders-dot-com redirected all their customers to a co-branded site and they invited their customers to shop with Amazon to fulfill all their online shopping needs. What they didn’t anticipate was that Amazon would become the go-to for book shoppers, and that people would literally begin shopping at Borders for a book, and then turn around and buy it online at Amazon for cheaper. Even going through Borders.com, Borders only received a commission on that book purchase. When Borders finally decided to take back their ecommerce business, it was too little too late.
  • E-readers became the new way that Amazon built its unwavering customer base. Amazon customers could now have a new book with the click of a button, without going out to the store at all. Sleek, lightweight e-readers allowed reader to hold War and Peace in front of them for hours and their arms wouldn’t get tired. What was not to love? Competitor Barnes & Noble came onto the scene with the Nook e-reader, but it took even longer for Borders to respond with the Kobo.
  • Finally, Borders was invested in expanding their global footprint on a national scale. They were opening stores in the UK, Singapore, and Australia. Unfortunately, they were neglectful in responding to new marketing techniques and even providing their domestic stores with the tools to do their jobs correctly. In an article for The Atlantic, business writer and one-time Borders consultant Pete Osnos wrote, “I was startled to find, on a visit to Borders in Madison, Wisconsin, in 2007, that the store still had no Internet access, instead channeling all communications through Ann Arbor.”1

External forces for change—this time technological—had turned the book and entertainment industry on its ear during the time that Borders was most vulnerable. The company had become too big too quickly, and couldn’t answer to these changes in time to make a difference. Their customers went elsewhere.

There were internal challenges for Borders that further hurt their ability to respond. Executive turnover at the C-level was steep and unmanageable. Store leases left little room for flexibility. And the company had acquired a suffocating amount of debt. Barnes and Noble fared a little better responding to these technological challenges because they did not have the same turnover and debt to deal with.

What could Borders have done to survive from a change management perspective? Perhaps they could have pulled back on international development and restructured their budget and organizational structure to support their own innovation. Brett Clay, author of Selling Change suggests that those “other external challenges” such as inflexible store leases and debt lessened their agility and led to their demise. While managers have traditionally budgeted for return on investment, Clay suggests their focus should be agility instead. “If you are adapting to a change, you are already in a follower position. As the Borders case demonstrates, that position can be fatal,” says Clay. Borders is an example of what happens to those who do not lead.

Practice Question

https://assessments.lumenlearning.com/assessments/14009

Stimulating Innovation

Among the contemporary change issues that managers face is the challenge of stimulating innovation. Borders may not have realized that they were in a business that needed innovation (libraries and books had been on shelves for users since Alexandria, for goodness sake!) but Brett Clay may have been right that agility and leading change may have produced a very different result for them. And in fact, managers look to stimulating innovation as a change management technique meant to stay ahead of, rather than respond to, environmental changes.

Innovation is a new idea applied to initiating or improving a product, process or service. Jeff Bezos was innovating when he created an online bookstore in 1994. New innovations can be products, services, new production technologies, new structures, new administrative systems . . . pretty much a new anything.

  • Structural variables have been the most studied source of innovation. If you recall from our organizational structure module, organic structures produce the most innovation. But it’s been shown that managerial tenure provides legitimacy and knowledge of how to accomplish tasks and create desired outcomes. And having a lack of resources can also nurture innovation.
  • Organizations with cultures that encourage experimentation—that award successes and failures and don’t punish mistakes—also foster innovation.
  • Finally, idea champions—individuals who take an innovation and actively and enthusiastically promote the idea, build support, overcome resistance, and ensure that ideas are implemented—are also of benefit to organizations that need innovation to stay fresh.

Borders didn’t have any of that. A relatively small company in 1991 with 21 stores, they might have been able to achieve an organic structure, but they got big very quickly, and their hierarchical structure didn’t support innovation. Their C-level managers changed with the seasons, so no one manager could step in and provide the innovative support needed. And Borders’ culture didn’t support innovation either. There was no room for a mistake—their increasing debt did not allow for the time or expense of that kind of culture.

References

Clay, Brett. “Borders Books Liquidation Shows Change Management Doesn’t Work, Says C.” PRWeb. July 19, 2011. Accessed May 08, 2019. https://www.prweb.com/releases/2011/7/prweb8652866.htm.

Frazier, Mya. “The Three Lessons of the Borders Bankruptcy.” Forbes. February 16, 2011. Accessed May 08, 2019. https://www.forbes.com/sites/myafrazier/2011/02/16/the-three-lessons-of-the-borders-bankruptcy/.

Noguchi, Yuki. “Why Borders Failed While Barnes & Noble Survived.” NPR. July 19, 2011. Accessed May 08, 2019. https://www.npr.org/2011/07/19/138514209/why-borders-failed-while-barnes-and-noble-survived.

Sanburn, Josh. “5 Reasons Borders Went Out of Business (and What Will Take Its Place).” Time. July 19, 2011. Accessed May 08, 2019. http://business.time.com/2011/07/19/5-reasons-borders-went-out-of-business-and-what-will-take-its-place/.

Vickers, Amy. “Amazon Takes over Borders.com.” The Guardian. April 11, 2001. Accessed May 08, 2019. https://www.theguardian.com/media/2001/apr/11/newmedia.citynews.

Internal Change Management

Amazon company logo. The logo has the company name in simple black font with an orange arrow in the shape of a smile under the word.

Amazon always seems to be among those companies that we talk about when we want to cite a good example of how to do business. But change looms like a threat in the background even when a company is setting standards for others, and Amazon is no exception.

In August of 2017, Amazon purchased Whole Foods Market, and it immediately became a player in the $840 billion grocery industry. Amazon made the move to compete with players like Walmart, who did business both in the ecommerce and brick-and-mortar space. Grocery and retail stocks saw a downward tumble as investors immediately saw Amazon becoming the big fish in this industry. But everyone was surprised, and now, more than a year later, we still don’t hear anything worthwhile coming out of the merger.

Whole Foods logo, which has the words Whole Foods Market in a green circle. The o in Whole has a leaf.What we heard however, were stories about Whole Foods employees crying in the aisles of their stores, responding emotionally and unfavorably to the new rules and regulations imposed upon them by the online giant. Scorecards are used to measure—and even terminate—employees and customers are screaming at the sight of their poorly stocked shelves. A merger that would allow Amazon to grow outside of the ecommerce arena and create additional buying power (and selling power) for Whole Foods looks to be stumbling, if not faltering entirely. What’s the issue?

The issue is culture—or, more specifically, the lack of a successful blend of the cultures of two very different companies.

As we mentioned earlier, Whole Foods’ organizational structure was team-based, with teams answering to themselves and to each other. Amazon, on the other hand, has a structure that’s rooted in manufacturing bureaucracy, functioning with military-like precision and not leaving much room for autonomy. It should not have come as a surprise that the two cultures would clash.

Whole Foods is a small part of Amazon’s business but a large part of their future strategy and a lot is riding on their ability to make this merger work. Still, the odds are against them: between 70 and 90 percent of mergers fail and it’s easy to see why considering amount of change has to be managed by the companies involved.

If Amazon were to adopt some of the habits of a learning organization and incorporate those behaviors into their change management strategy overall, some of these merger issues could have been avoided, or at least anticipated. Let’s take a look at how learning organizations prepare themselves for change.

Practice Question

https://assessments.lumenlearning.com/assessments/14010

Learning Organizations

Learning organizations are the result of looking for new ways to successfully respond to a world of interdependence and change, and the ideal learning organization has developed the continuous capacity to adapt and change. The characteristics of a learning organization:

  • There exists a shared vision which everyone agrees on
  • People discard old ways of thinking and standard routines
  • Members think of all organizational processes, activities, functions and interactions with the environment as part of a system with interrelationships
  • People openly communicate with each other across vertical and horizontal boundaries without fear of criticism or punishment
  • Personal self-interests and fragmented departmental interests are sublimated to the organization’s shared vision

This is easier to say than it is to do, but I think we can agree that most of these aspects of a learning organization are not in place where Amazon and Whole Foods are concerned.

Typical organizations address problems with single-loop learning, where errors are corrected using past routines and present policies. Learning organizations, however, have adopted double-loop learning¸ where errors are corrected by modifying the organization’s objectives, policies, and standard routines.

Furthermore, learning organizations are meant to be a remedy for three fundamental problems inherent in traditional organizations: fragmentation, competition, and reactiveness.

Fragmentation refers to the specialization within an organization that creates walls and silos. This fragmentation separates different functions into independent areas that often bicker with one another. Amazon is, in itself, a silo, with a rigid culture based on discipline and prescribed rules and regulations. Rather than reviewing and negotiating Whole Foods’ culture, they went about operating the grocery chain with Amazon rules – including scorecards and regulations. Amazon has inadvertently created an “us” and “they” with their actions.

Competition in an organization undermines collaboration. Managers compete to show who is right, who knows more, who is the most powerful. Whole Foods workers were used to having a lot of autonomy in their actions, negotiating face-to-face with customers and making educated decisions about how to go about their work. Amazon’s new rules and regulations will spike competition by presenting these new measurements and regulations by which Whole Food employees are evaluated.

Finally, reactiveness misdirects management’s attention to problem solving rather than creation. It remains to be seen how Amazon will respond to their faltering relationship with their adopted child. Experts agree that performance in 2019 will be key to Amazon’s future success in the grocery space, but will they be able to get this unstable ship moving in the right direction to do so? The managers of both companies have the opportunity to create something new, but if they’re addressing problems at every turn rather than innovating, reactiveness will thwart their efforts.

Organizations can make an effort to become a learning organization. Changing an organization to be a continual learner includes:

  • Establishing a strategy: a commitment to change, innovation and continuous improvement
  • Redesign the organization’s structure: formal structures can impede learning, so flattening the structure and putting teams into place increase cross-functional communication and eliminate boundaries
  • Reshape the organization’s culture: management must change its behavior as well as its strategy to embrace risk and change

Amazon isn’t going to wake up one morning, look at their faltering brick-and-mortar grocery sales, and say, “Hey, let’s become a learning organization and make this work.” Becoming a learning organization isn’t the solution to their problem—skillful change management is what’s needed. But organizations have thought about how to avoid what’s happening with the Amazon/Whole Foods merger and concepts like learning organizations are what results from it.

References

Gelfand, Michele, Sarah Gordon, Chengguang Li, Virginia Choi, and Piotr Prokopowicz. “One Reason Mergers Fail: The Two Cultures Aren’t Compatible.” Harvard Business Review. October 02, 2018. Accessed May 20, 2019. https://hbr.org/2018/10/one-reason-mergers-fail-the-two-cultures-arent-compatible.

Henage, Michael. “3 Reasons For Amazon To Reconsider Its Whole Foods Strategy.” Seeking Alpha. February 26, 2019. Accessed May 20, 2019. https://seekingalpha.com/article/4244216-3-reasons-amazon-reconsider-whole-foods-strategy.

Ladd, Brittain. “Was Acquiring Whole Foods Amazon’s ‘Bridge Too Far’?” Forbes. December 20, 2018. Accessed May 20, 2019. https://www.forbes.com/sites/brittainladd/2018/12/20/was-acquiring-whole-foods-amazons-bridge-too-far/#59306e801638.

Meyer, Pauline. “Amazon.com Inc.’s Organizational Structure Characteristics (An Analysis).” Panmore Institute. February 16, 2019. Accessed May 20, 2019. http://panmore.com/amazon-com-inc-organizational-structure-characteristics-analysis.

1. Osnos, Peter. “What Went Wrong at Borders.” The Atlantic. January 11, 2011. Accessed May 08, 2019. https://www.theatlantic.com/business/archive/2011/01/what-went-wrong-at-borders/69310/.


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