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No kaizen here: Benihana of Tokyo case study

29 Jan

The heyday of the Benihana of Tokyo restaurant chain was the late 1970s and early 1980s. Back then, Benihana was glamorous, exotic and chi-chi. How do I know? I grew up in San Francisco, and precisely recall my experiences at the original location in that city, the chain’s fourth restaurant. The distinctive, finely crafted exterior. The tiled eaves. Its semi-cryptic Asian sign. Its heavy wooden front door. The dim, alluring interior. The private dining rooms with sliding Shoji screens. During its glory days, the era when this case study was written, Benihana was really something. I’ll never forget it.

You can still see a few telltale architectural details by searching for 740 Taylor Street on Google Maps Street View. The building was long ago converted into classrooms for the Academy of Art University, but it’s still distinctly Japonesque. The current Benihana in San Francisco was moved several miles to the West, to Japantown. I’ve never been to the newer version, but I’m fairly certain this newer outpost was not assembled by an imported crew of Japanese carpenters reassembling authentic materials from Japan.
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I have several memories of eating at Benihana in my late pre-adulthood, circa the early ‘80s. Some involved Japanese businessmen. My father worked in the computer industry, and commuted to a suburb called Santa Clara – it wasn’t even called Silicon Valley then – and occasionally we socialized as a family with his business contacts from Japan. Another memory involves a family celebration and my now long-dead grandmother. And the most specific memory was having dinner at Benihana with some guy whose name I can’t remember before his Saint Ignatius High School senior prom. We were served alcohol with dinner – score!

Here’s another thing I know about the restaurant industry in San Francisco in the late ‘70s: Don’t do it. During those Benihana halcyon days, my mother owned a public relations business in San Francisco. Several of her major clients were prominent restaurants of the day: the Graf Zeppelin in Ghirardelli Square, MacArthur Park. She also opened all the original Chuck E. Cheese Pizza Time Theaters, as Nolan Bushnell, the founder of Atari, was also her client. If there’s one mantra my mother drilled into my head, it’s that there’s no faster way to lose your shirt than to go into the restaurant business. Even back then, the margins were slender to none.

I can’t help but bring my childhood into this 30-plus-year-old case study. Geez, I even remember the Benihana of Tokyo print ads. Why am I including my recollections in a supply-chain analysis paper? Because this case study calls up my memories of what Benihana was once like, and its strengths – and also uncovers the weaknesses I can easily spot now from a supply-chain perspective. Any credible supply-chain consultant would visit his client, and if possible, experience the service for himself before completing a detailed analysis for the client. Knowing what I know about Benihana’s history, it would be unprofessional to exclude my observations.

Based on those observations, I can’t envision the restaurant as effective or efficient, at least based on what’s in the case study. I can’t evaluate the success, because all I see in the case study is the expense. Its operations obviously aren’t efficient. And since we don’t have complete financials, we can’t truly say it’s effective either. Since I know a little of the real company’s history – including what a showboater Rocky Aoki was – my analysis is colored, dyed bright red if you will, by my real-world knowledge.

We even get a little Rocky Aoki showmanship in the financials included with this case study. We don’t get profit figures – we get gross revenues. The Benihana budget for advertising is 8 to 10 percent of gross sales – way higher than the typical restaurant according to the operating statistics in Exhibit 1. And Benihana’s rents are quoted as 5 to 7 percent of sales, which is much higher than the standard 4 to 5 percent of fixed operating expenses.

In reading the case study, I identified four major supply-chain issues:

  • The chefs, staff and management imported from Japan
  • The restaurant construction and décor, also imported from Japan
  • The floor plans and table layout
  • The table turns

Chefs, staff and management imported from Japan

Rocky says in the case study “One of the things I learned in my analysis was that the number one problem of the restaurant industry in the United States is the availability and cost of labor.” Umm, something tells me that recruiting highly trained chefs in Japan, teaching them English for six months and then importing them to the U.S. is a lot more expensive and a lot less readily available than labor in this country.

The basic linear programming doesn’t work out favorably. Linear programming is a technique used to allocate limited resources among competing demands in an optimal way. Imported Japanese chefs are obviously a limited resource, especially since in the original way Rocky set up his business they had to return to Japan eventually. If the goal is to maximize profit, it’s easy to envision that a typical Benihana restaurant, which requires six to eight Japanese chefs, is going to be much less profitable than a restaurant which keeps its cooks in the kitchen and can probably just hire one imported chef from Japan who can then train the other staff needed.

The company’s VP of operations admits one of its biggest constraints is staff, especially since “each unit requires approximately 30 people who are all Oriental.” In addition to importing many members of the team, Benihana at the time was also offering the same “obligations” to staff as companies in Japan would, further decreasing effectiveness in the U.S. market.

The restaurant construction and décor

The most inefficient practice has got to be the construction and décor. At the time of the case study, the walls, ceilings, beams and other materials for the 16 restaurants were all gathered in Japan. Further compounding the expense, they were reassembled and constructed in the U.S. by Japanese craftsmen overseen by American unionized construction workers.

Now, going back to my childhood experiences, I have to admit that San Francisco’s Benihana was a standout, at least to a teenager, in a city known for its distinctive restaurants. But couldn’t Benihana just copy the décor from the first few restaurants – which were located in big cities like New York and Chicago, where the clientele is more sophisticated and harder to please – to all the succeeding restaurants? Did it all really have to be imported from Japan, with extremely expensive Japanese construction labor imported to go along with it? Couldn’t they just find a clever architect and a talented builder and copy it? The average customer would never know the difference. The company’s own data shows the average customer is NOT from Japan.

Much of the case study focuses on the company’s prospects for growth. At the time of the case study, the company could only open five units a year, because that’s as fast as the two crews of Japanese carpenters could work!

The floor plans and table layout

Rocky describes 22 percent of a Benihana operation as back of house, while the standard restaurant requires 30 percent. First of all, eight percent more front-of-the-house space is not radically different from the norm he cites. And when you require a lot more intensive staffing to serve that front-of-the-house crowd, I fail to see where there is any efficiency with that model.

He says he “eliminated the need for a conventional kitchen,” but according to the floorplan, well, he still has a regular kitchen with regular kitchen equipment, along with 14 mini-kitchens with stoves! Just in fuel consumption alone that will cost more, especially since the chef has to turn stoves on and off all night, versus running continuously in a regular kitchen.

Each table accommodates eight diners, with a chef-and-waitress team to serve every two tables. Most restaurants don’t have a chef, or a waitress, who serve only two tables at a time. That seems like an extremely high, extremely inefficient ratio. In a regular restaurant, one non-Japanese, non-imported chef, along with prep workers, might serve a whole restaurant, and a waitress might serve four to five tables simultaneously.

The table turns

What I remember most about Benihana was not the food, but the experience. And the type of occasions I ate there – special guests from out of town, family celebrations, proms – bore out that Benihana is experiential dining, not ordinary dining. I’m simply not buying that the average turnover at a table was an hour, as stated in the case study. First, due to the style of cooking, all the guests have to be seated together. So if you’re serving two parties of four at one table, you have to wait until all the guests have arrived until they can be seated. And people tend to talk more in this family-style arrangement, and drink more, and linger.

Second, when you are limited to tables of eight, you limit the number of turns you can perform in one night. Turns are an extremely important aspect of the restaurant business – I learned this from my mother. A turn is the number of times you can turn a table over in a night with new guests. The more table turns, the more revenue. Obviously, if you have table turns for alternating numbers – like two, or four, or six, or eight – over the course of an evening, all occurring at different times, you can generate a lot more revenue than if your operation is limited to groups of eight which can be seated only at limited time intervals. This could also be readily measured and evaluated with linear programming.

Seating guests in tables of eight also brings up an obvious customer service issue: What happens when one party of four has arrived, but the other has not? Now, the staff has to juggle to replace them quickly, so the table can be seated together and revenue can be generated. This is not a problem in ordinary restaurants, or even in family-style restaurants like Louis’ Basque Corner, simply because the food is not custom prepared at the table by the chef.

There’s also the related issue of job design for the chefs. In a regular restaurant, a chef keeps cooking until it’s time for a break. At Benihana, there is a lost opportunity in cooking time as a chef closes down and says goodnight to one table, and then has to move on to the next table.

What does hold up

One area of Rocky’s stated efficiency holds up: the menu. Reducing the menu to three basic, easily cooked entrees certainly eliminates waste, and allows Benihana to negotiate better agreements with suppliers. The limited menu keeps inventory low and reduces costs of inventory management.

Conclusion

As a model of kaizen, as a model of continuous process improvement, Benihana fails. If the company was about kaizen, it would have realized early on that many of its processes were inefficient and wasteful. Benihana’s success was due to clever advertising and savvy promotion by Rocky Aoki, who was known for wacky stunts like having a hot tub in his Rolls-Royce and suing four of his seven children.[1] Rocky’s extensive quotes in the case study paint him as a visionary, not an operations or numbers guy. Yes, Rocky eliminated some food waste, but he created a lot of other waste in his operations and supply chain. It’s straightforward to deduce that the care and expense that went into the old San Francisco restaurant I recall fondly simply couldn’t be replicated past more than a handful of additional restaurants.

Benihana of Tokyo is in the entertainment business, not the restaurant business. That’s the lens through which Benihana should have been evaluated: it’s treated as a restaurant case study, not an entertainment case study. Some of the Benihana practices which make little sense in the restaurant business – high advertising costs; expensive, lavish “sets;” rarified, imported talent – make perfect business sense in the entertainment industry. We should be comparing it to those supply-chain norms, not the ones supplied.


[1] Read more about the interesting life of Rocky Aoki in a New York magazine profile, Rocky’s Family Horror Show

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The acrid aroma of burning rubber

26 Apr

I’m overwhelmed with a virtual stinky rubber smell just reading this Harvard Business brief case, Treadway Tire Company: Job Dissatisfaction and High Turnover at the Lima Plant. The phantom smell is symptomatic of the problems at the plant, which are multiple. Human Resources Director Ashley Wall needs to identify the root causes of line foreman turnover, and present a plan to resolve it. Stepping into Ashley’s rubber-soled work boots, here’s what I identified as the root causes:

  • Lack of training and preparation for new line foremen
  • Weak support from their superiors: general supervisors and area managers
  • Lack of firing authority/ability to impact union grievances
  • Burden of 12-hour shifts
  • Too many roles for line foreman/too many targets to meet
  • Apparent unresponsiveness of other managers – why is equipment not working at beginning of a shift?
  • Failure of supervisors/managers to act upon line foremen’s requests/suggestions
  • More effort expended on testing potential hires than training actual hires
  • High level of specialty knowledge required

Here’s a mini-breakdown of line foreman turnover by category:

  • Overall turnover = 46%. Almost half leave within one-year period.
  • External hires = a whopping 75% turnover! Half leave voluntarily, half involuntarily.
  • Internal hires = 40%. However, 62.5% of these leave Treadway involuntarily. Meaning that more than three-fifths of employees who were successful enough to get promoted get fired within a year? This points to major systemic problems, probably correlating to issues above.
  • Transfers = 50%. This could be really, really concerning. Half of the transfers from within Treadway leave? However, the sample size is small – only 2 – so this is one is least concerning of the three. However, it should be assessed again using more data.

So how should Ashley plan to address the issues and lower line-foreman turnover? She might want to explore the following in her plan:

  • A detailed budget analysis. The budget has been cut, leaving no money for training. But what is the cost of constantly hiring? Develop a variety of forecasts to show that hiring constantly to account for turnover rate costs more than training would. Forecast losses in productivity, increased time devoted to union matters, increased time for more FLT testing, etc. While only a hypothesis at this point, all this hiring has to cost more than training. Develop the data to prove it.
  • External or college hires are the MOST likely to fail. Turnover is 75 percent within one year. However, it’s important to continue to bring in college-educated potential managers. Propose a temporary moratorium on specifically recruiting external line foremen. Presumably, it costs more to recruit these people as well. Once internal problems are alleviated, the external program could begin again.
  • Focus training on general supervisors/area managers FIRST. These people seem to create the greatest impediments, are the least responsive, and have the most ingrained behavior. Make them share in all targets the line foremen have: We succeed or fail as team. Change needs to come from the top down. Focus on this group heavily first, then roll out …
  • Training for line foremen. Follow Ashley’s original training outline, and add modules in specialty knowledge. Continue sporadic specialty knowledge sessions throughout the year.
  • Review union grievance processes. See if there are ways line foreman can be involved in follow-up and firing decisions.
  • Consider shift adjustments. There were several references to 12-hour shifts causing illness as well as lateness. Twelve-hour shifts work great for some people – they like three days off – and not for others. Perhaps employees could have the option of whether to work 12-, 10- or 8-hour shifts. This keeps costs down and factory running 24/7, but also gives employees leeway. This type of scheduling option is commonly used in acute hospitals, which have roughly the same scheduling issues.
  • Consider giving hourly staff more say. Perhaps they can self-schedule, which would relieve line foreman. (This technique is also used in hospitals.) As Jürgen Dormann of ABB recommends, ask hourly employees for suggestions on scheduling, productivity, broken equipment and other issues. This could also lower the number of grievances over time and help foment better management/union relations.

Case Study – Arrow Electronics

8 Mar

Confidential to Betsy Levine, branch general manager at Arrow Electronics circa 1997: Quit your job.

I’m sure by now she already has. Betsy’s management performance review is one of five exhibits evaluated in Harvard Business School Case Study 9-800-290, Compensation and Performance Evaluation at Arrow Electronics.

Arrow’s industry has dramatic turnover, up to 25 percent annually. Its employees, and those of its competitors, feel no attachment to any particular company. When these companies need to build market share quickly due to pressure from suppliers, they do it by stealing customers from another distributor via job-hopping salespeople. Even the company’s 43 branch general managers only have an average life span of three to four years.

The main reason salespeople jump ship: pay. There appears to be nothing particularly compelling about Arrow’s culture – in fact, its culture is “no one stays.”

Betsy’s drama began when Steve Kaufman, Arrow’s CEO, recognized that “problems” existed with the company’s Employee Performance Review system, or EPR. No one was happy with the three-year-old system: not employees, not managers, and certainly not Kaufman.

Kaufman was in a state of shock that “no one” in his entire organization received a 1 or 2 (the lowest scores) in one of the seven performance areas. As he put it, “that can’t be right.” Unfortunately, that’s the wrong mindset. He wonders why it is so difficult to get his managers to evaluate their employees “accurately.”

Well, because they can’t. An employee evaluation such as Arrow’s, which ranked employees on measures such as judgment and initiative, is highly subjective. What’s accurate to one manager is inaccurate to another.

Kaufman may suffer from his own educational background and experience: He’s a quant*. He has an engineering degree from MIT, an MBA from Harvard, and 11 years with McKinsey as a strategy consultant. He’s completely overlooking the impact of emotion and subjective judgment on the managers’ assessments of their employees.

Kaufman even decreed that “Every employee must receive a 2 on at least one of their seven areas of evaluation. No exceptions.” This silly, arbitrary assessment of course rubbed his managers the wrong way, let alone the employees. Part of Kaufman’s desire was to determine who was really worthy of promotion. But determining leadership potential from a subjective rating alone is faulty. What if the employee’s manager feels threatened? Even more important: What about the employee’s intrinsic desire to lead? Wouldn’t it be better to ask people if they want to lead and then assess their potential and provide training?

The CEO wants to “upgrade” his team — rather a loaded word, don’t you think? Any new hires need to be “better than the average of the existing team,” so that’s why he needs to measure performance “accurately” via the EPR. Well, wouldn’t the most expedient way of increasing the average be to increase the performance of every individual member of the team, rather than hire one or two better-than-average superstars?

So in addition to the written case, we’re given five written Management Performance Reviews to evaluate as exhibits. Three of them are extremely sparse and vague – one says to “develop some continued educational goals.” About what? Another refers to “developing direct reports” under position-specific knowledge and skills. How is that position-specific knowledge for a manager? Three of them were extremely poorly written, including a reference to a “pier group.”

And then we get to Betsy’s review. Poor Betsy. She exemplifies the problem Kaufman wants to solve: She’s a newly promoted branch general manager in her role for less than a year – exactly the person who’s likely to leave in another year or two, and exactly who Arrow wants to retain in order to grow its leadership team in years to come.

So what kind of review does she get? A coal raking. A mean-spirited, highly critical rant that at the same time acknowledges that there is “little to no turnover” in Betsy’s area – a key metric Arrow needs to improve. And that Betsy goes out of her way to help others in the company, which she’s dinged for. And that her customers, both internal and external, are satifisied. She even gets downgraded for the opinions of those who are not her direct reports! Her evaluator goes off topic on many of the questions, filling in what he wants to cover when he (I’m assuming it’s a “he”) is supposed to be addressing something else entirely.

And that underlies the fundamental problem with Kaufman’s EPR process: the pre-fab structure used to evaluate employees doesn’t focus on what’s really important to the company, just what’s most important for filling out the form. And the variation in the narratives – some are inscrutable, misspelled one-sentence responses, while Betsy gets a three-page diatribe – points to a flawed process poorly executed.

Kaufman made a fundamental error: The “problems” are not with the EPR. The problems are with the system as a whole.

* Quant: A person who works in finance using numerical or quantitative techniques.

Case Study – Sins of Commission

8 Mar

Jeffrey Pfeffer is right about the essential issue with performance-based incentive programs: “Most companies have production processes and objectives that are way too complicated to be adequately captured in any incentive scheme.” As Pfeffer points out, the answer to complicated production processes is to make performance measurement more complicated. However, the more complex it gets, the less likelihood it has of guiding behavior.

I used to receive an incentive payout based in part on the overall patient satisfaction score for a 528-bed acute-care hospital. For a hospital with more than 20,000 annual admissions, there are literally millions of individual interactions and transactions between patients and employees that would eventually comprise the score, including how the survey itself was conducted and the response rate. Patient satisfaction scores are based on a huge range of variables, everything from how the patient was greeted at the front desk to whether the food was hot on Tuesday. Weeks after the fact, the patient will get a bill, which will also affect how he or she perceives the experience. And of course, even the physician can’t guarantee the patient will get the cure he or she seeks.

While it’s great in concept to make us “severally liable” as a team, from a practical standpoint no one individual has a significant effect on this score. Employees are not guided in their moment-by-moment choices by what’s going to be on their annual review. They’re guided by what they’ve been trained to do, what their culture expects them to do, what their peers do, guidance from their supervisor and their own judgment and experience.

Am I saying this measure, patient satisfaction, isn’t important? Of course not – it’s crucial. But what really guides our behavior as employees? Broader internal forces, such as organizational culture and behavioral modeling by superiors and peers, are more likely to have impact on the day-to-day actions of employees than a once-a-year measurement process.

So why is it there? It’s the path of least resistance. It’s easier for leaders to spend one week or so tweaking the performance measure process for the year than it is work daily to change organizational culture, to really look at how to improve the work environment and communication. Managing requires developing a clear vision and goals, communicating that vision to employees, and repeating those goals over and over again. The ideal is for employees to have such clarity of mission and purpose that it guides them almost intuitively to make decisions and take actions which lead directly to achieving the business goals. They know the patient wants to be greeted warmly at the front desk, receive hot food and an easy-to-understand invoice, and they act accordingly.

“Sins of Commission: Be Careful What You Pay For, You May Get It” is excerpted from Stanford Management Professor Jeffrey Pfeffer’s book What Were They Thinking? Unconventional Wisdom about Management.

Case Study – SAS Institute

1 Mar

The anti-Nordstrom

Case Study HR6 from the Graduate School of Business at Stanford University asks us to review SAS Institute’s need to recruit a talented work force in order to build and maintain intellectual capital.

Could it, and should it, maintain its unique approach to pay and practices, and could it reasonably expect to thrive?

To answer that question, we need to determine if SAS succeeded because of its management practices. Or is its success simply due to being in the right place at the right time?

While the former certainly plays a role, I think there’s a bigger reason for the company’s success, and the reason WHY its management practices exist in the first place: It’s privately held.

Its need to please no one but its relatively few owners meant it could create a “benevolent dictator” such as Jim Goodnight who then creates benevolent employee policies and practices. With an internal locus of control, the company can eschew long-term planning and create a truly customer-driven development process. Its licensing structure, which forces the company to work to KEEP customers yet trades off margins in the short term for greater market penetration, would be less successful in a company focused on the drive for quarterly earnings. Although SAS doesn’t have a long-term planning function — wisely, since its industry changes so rapidly — the company certainly takes a long-term view in how it treats employees and their contributions to its success.

SAS has no grand policies about how to treat employees, just four basis principles, one of which emphasizes intrinsic motivation. The company aims to “deemphasize financial incentives as source of motivation.”

It’s really the anti-Nordstrom: even its salespeople are not commissioned. According to SAS leadership, sales commissions do not encourage an orientation toward taking care of the customer or building long-term relationships. Its HR leader commented “People are constantly finding holes in incentive plans.” Yes, no kidding. Just look at Nordstrom!

Does this kind of compensation system make it difficult to attract and retain talent? No – it eliminates the “sharks” and encourages people who really want to serve the company and its customers. A commission-oriented, extrinsic motivation structure means employees will move as soon as that motivation looks better somewhere else.

Can SAS succeed without the stock options common in Silicon Valley? Resoundingly yes. Everyone wants off the treadmill, to some degree. SAS counts on the “value of a return compounded annually” – getting its employees to stay for the long term. It’s a better guarantee for the employee than stock options, which are inherently risky. Yeah, you might get rich – but then again, you might not. Best of all, when SAS employees develop new ideas they will probably stay rather than forming their own startup, keeping intellectual capital within the company.

There’s no question that SAS will continue to thrive with these practices. In fact, they are thriving. In 2010, 12 years after the case study was published, SAS was named the No.-1 company on the Fortune 100 Best Companies to Work For 2010 list – after appearing on the list every year since its inception.

Case Study — Nordstrom: Dissension in the Ranks?

1 Mar

The anti-SAS

Harvard Business School Case Study 9-191-002 questions the compensation policies and practices of Nordstrom, which are inextricably linked with its high-touch customer-service culture. After rapid expansion in 1980s, this publicly traded retailer was lambasted by labor unions and the news media for its practices, which allegedly led to employees underreporting actual work hours in the interest of keeping both their commissions high and the best floor schedules, as well as currying favor with management.

Nordstrom, which started out as a family business in Seattle, grew rapidly in the 1980s. Its sales force grew by six times in less than 10 years as the company expanded geographically beyond its home base of Washington and Oregon.

Its reputation for “superior customer service” is considered a strong competitive advantage and source of its financial success, including sales per square foot double the industry average. However, that’s a strategy that can be copied readily. “Superior customer service” is only part of the equation in retail: No matter how good your service, if you don’t stock the clothes and shoes customers want to buy, they’ll shop elsewhere.

From the case study, there is little evidence of a strong management emphasis on creating a “great culture,” as at Southwest Airlines.  Although publicly held, the Nordstrom family owns half of the company. The family seems a little entitled, as witness this comment from Jim Nordstrom: “People don’t put in enough hours during the busy time.” What?

Nordstrom’s caliber of salesclerks seemed to withstand the pressures of rapid growth, but apparently it didn’t have a strong hiring screening program or training, as at Southwest. Most importantly, it didn’t seem to really care about treating employees well and backing it up with fair rewards.

Nordstrom’s policy was to “to pay employees for time,” but its practice was something different. The service behavior for Nordies is almost codified, such as the expectation that they make home deliveries. Compensation is driven by sales per hour, so if an employee does any work that’s not ringing up the register, he or she is effectively penalized. Why can’t they just put those activities against non-selling time? Or adjust the commission structure? Its culture made it clear what the “right” thing to do is, yet without breaking any laws.

A management memo defined tasks such as writing thank yous or attending a meeting “selling.” But writing a customer a thank you is no guarantee that customer will make next purchase from YOU! That should not be classified as a selling activity, but rather as a post-sale activity. The company should pay for that, not the employee, since the company overall is most likely to benefit from the next purchase. [Bruce Nordstrom compared this non-selling time to an advertising salesperson, or an insurance salesperson. But there’s a big difference in the business models: The next sale will probably go DIRECTLY to that person in those businesses.]

There’s no question that the United Food and Commercial Workers union, which represented about 5 percent of employees, was behind a lot of the complaints. It reported Nordstrom’s practices to the National Labor Relations Board and the Washington Department of Labor and Industries. It clearly wanted to grow its membership by representing a greater percentage of employees, and what better way to rally them by telling them their employer is a cheat?

Although not every employee is unhappy – in fact, a fair number seemed to have stood by the company, and they later ousted the union – at the root there is something inherently wrong with the company’s compensation structure. The old saw “Where there’s smoke, there’s fire” lends credence to this case study.

However, the union’s claims were not entirely true, and this is why Nordstrom in essence prevailed: Employees DO get compensated for selling work. It’s just that the underlying system discourages reporting the hours. The irony: If there were no union, would any of this have come to light?

When Denny Flanagan performs outrageously for United, he’s probably not being compensated. However, he’s an outlier within the company – no one is expecting him to do that, or marking him down if he doesn’t. At Nordstrom, however, everyone is expected to perform outrageously, but unlike Southwest, the environment seems punitive, rather than fun.

Nordstrom tells employees, “This is your business, treat it like your business.” No, it’s not their business – they don’t get the profits! The family and shareholders get the profits.

In the end, the Department of Labor and Industries order that Nordstrom compensate employees was rather silly, because it did not address the systemic and cultural issues at the company. What will change? Yeah, now employees have a written time sheet, but will they use it?

Case Study — Specialty Medical Chemicals

24 Feb

“The higher you rise in an organization, the more you have the play the role of organizational architect.” – Michael Watkins, Harvard Business School

Summary

Case Study 9-399-094 from Harvard Business School asks how Specialty Medical Chemical’s new CEO, Carl Burke, should restructure his senior management team to grow the company’s product lines and sales, and create value for shareholders.* In his first 90 days, Carl has discovered his senior management team is weak, and sales have slowed. Carl has developed a new strategy for the business, developing three new divisions to focus on developing, marketing and selling new pharmaceutical, generic and biotech products. Now, he needs to create the management team to carry out his vision.

* Specialty Medical Chemicals appears to be a pseudonym. Perhaps, as they used to intone on Dragnet, the “names have been changed to protect the innocent.”

Quantitative/Qualitative Analysis

Specialty Medical Chemicals’ products have matured, and without significant new product development, top-line revenue and earnings will stall, just as the company’s market capitalization already has. His task is to reignite growth and create value.

Carl has an additional challenge. As a new leader within the organization, he has a limited timeframe in which to make changes. Michael D. Watkins, a former Harvard Business School faculty member and author of The First 90 Days: Critical Success Strategies for New Leaders at All Levels, says “If you fail to build momentum during your transition, you will face an uphill battle from that point forward.”

SMC is a publicly traded company, and investors won’t wait forever for growth. In fact, if analysts rate the company’s prospects poorly, it could begin to affect the institutional investment community’s willingness to invest. Carl needs to take action soon.

Although financials are not given for SMC, we can assume the company is profitable, just not growing as it should. Also, we aren’t aware of what the chairman and Board of Directors want Carl to do, but we can presume they want greater returns for shareholders over time.

Acccording to Watkins, once you determine an organization’s strategy is sound, you have to bring structure into alignment with strategy. Carl needs to put structure and strategies into place, and then measure the results. However, some of Carl’s ideas could stand much more study: For example, how will manufacturing cope with multiple demands from multiple divisions? What capacity will it need to add? The same is true of sales, finance, marketing, customer service and the other support functions. Do they have the bandwidth to do what Carl proposes? How will he preventing infighting for scarce resources? What additional funding will be needed?

There are good reasons for shifting some members of the team into new roles: to prevent certain VPs from leaving, to broaden the team members’ indiviual compentencies, and to strengthen weaker areas. However, Carl should first develop a detailed strategic plan with more detail on what the measures of success will be, and the scale the company needs to develop, before he restructures the management team. How does he know he’s correctly identified the positions without a more detailed plan? Then, he can restructure the management team if necessary to match competencies and abilities with organizational needs, and develop goals, incentives and measures.