The Transforming Medium Size Businesses into Large Multinational Companies - Literature review Example

? THE STUDY OF PRODUCT DEVELOPMENT AS THE CORE IN TRANSFORMING MEDIUM SIZE BUSINESSES INTO LARGE MULTI-NATIONAL COMPANIES The Study of Product Development as the Core in Transforming Medium Size Businesses into Large Multi-national Companies 1. Background Organizational change is an important phenomenon which is considered as the main task of leaders. It is very important since the businesses need continuous adaptations to their changing business environments for improving their performance and growth. Hence, many theories have been formulated to explain the organizational change over time. Organizational change is reported a s process that changes over time and not a single event(Smith,2000).This is based on four aspects namely the types of changes needed, conditions needed for flourishing changes, assessment of the condition and assessment of mechanisms promoting the conditions. Here, the organizational transformation from medium size businesses to large multinational companies is discussed with the focus given to product development. As a background, the different theories explaining organizational transformation are discussed. 2. Academic Frameworks for Overall Organizational Transformation Six different theoretical frameworks have been formulated to explain organizational transformation. They include life cycle, evolutionary, dialectical, teleological, social cognition and cultural approaches to change. Evolutionary models include social evolutionary and biological models. Here it is assumed that situational variables, circumstances and environment faced by each organization determine the change in each organization. Here very little role is given to people in determining the direction of change and change is considered as very slow process (Kieser, 1989).The later version of these models assume managers having ability to respond and anticipate changes (Cameroon, 1991).Based on this theory, mergers are considered as a form of organizational transformation to respond to forces outside an organization. Through mergers, there can be overall change in the organizational structure of an existing corporation in a mature product market as a part of its growth strategy to survive in the industry (Cassiman and Colombo, 2006). This happens when the results of the past investment decisions will not be able to produce assets or resources that can finance the activities. Thus, the process of mergers and acquisitions involves the reduction in the resources as a part of the reallocation to new growth areas. In the case of mergers, the firms receive a surplus than they obtain individually through the economies of scale. This surplus increases when the product demand is high and falls when it is low (Lambrecht and Myers, 2004). In addition to these, during the economic downturns, the unproductive assets existing needs to be sold off to shareholders. The hesitancy of the management in doing so results in takeover activities (Maksimovic and Phillips, 2000).The takeover results in selling the unproductive assets to the acquirer of the firm and thereby reaching the proceeds of the takeovers to the shareholders. Thus mergers result in cost savings and revenue enhancement. The main criticisms of the evolutionary models include their base on mathematical field and not human fields, failure to explain change as a social phenomena, difficulty in linking environmental and organizational variables, etc(Collins,1998). The teleological models see change as the phenomenon resulting from the leaders’ perception of necessity to change. Here change is assumed to be dependent on internal decisions in accompany instead of external changes. This model gives the central role to leader and considers leader as a rational agent and change is explained on the basis of scientific management tools. Thus these models are considered as more human than the evolutionary models (Brill and Worth, 1997). This theory focuses on the need for leaders to motivate the followers rather than imposing their behaviour on followers (Trice and Beyer, 1986).Another main aspect of this theory is that it explains the underlying influential process better than the other theories (Bass, 1985, 1996). It focuses on the need for leaders to have a vision congruent to the followers’ values and identities, which can increase followers’ commitment and performance. At the same time, it also emphasizes the need for followers to select their leaders who will advocate their values. Thus, this theory describes the influential process to achieve the outcomes well. This theory also explains the dynamics of the influential process at an individual level. The main criticism associated with this theory is the overemphasis on leader behaviours and neglect of contextual variables (Beyer, 1999). Based on this, many researchers have shown that the results of charismatic leadership need not be positive always (Conger and Kanungo, 1998). Second is the overemphasis on the role of vision in motivating followers, which is questioned by many (Conger, 1999). Third is the failure of the theory to explain the dynamics of the influential process at the group or organizational level. The last one relates to the need for including more change related variables at the organizational level (Yukl, 2006). In spite of the similarities of lifecycle theory with the evolutionary theory, this theory is more subjective and gives main role to people. Organizational growth, maturity and decline are considered as the different stages based on this theory (Van de Ven and Poole, 1995).Here change is considered as rational and a process. Here the leaders’ perception of necessity to change is objected while change is considered as a non alterable natural process. Here the role of management in assisting the staff for adapting to the environment through training programmes is emphasized (Collins, 1998). This means managers sharing their power with employees by regularly asking their input and at the same time keeping a minimal rejection on their ideas. This has created an atmosphere of employee empowerment instead of the previous management style whose philosophy was simply deciding what needs to be done and ordering people what to do (Brown et al. 1994).Thus, the importance of employee participation as a business strategy was first found to be important according to this school. The main criticisms of this model include lack of empirical support, over deterministic nature of the models etc. The dialectical model is based on Hegelian Marxian perspective. This theory focused on advocates the need for a justifiable management decision in employee participation cases. They consider agents as irrational and non deterministic. Based on these theories, the influential process includes maintaining a good relationship between leaders and the followers, breaking up the tasks into goals, methods and standards of performance as well as carrying on the power to the leader to get the job done by the organization (Fiedler, 1997). The new theories suggest the need for motivating the followers by the leaders in order to get the job done. However, Conger and Kanungo (1998) showed that focusing on the process related issues will result in taking risky decisions and can result in serious failure in the future. The social cognition models assume change as not linear but as a multifaceted and complex with different systems that are interrelated. Here environment is given very little role only and learning process for adaptation to new business environment is given importance (March, 1991).The main criticisms focus on the lesser role of environment and external forces in this approach, ignorance of values, feelings and emotions etc(Nevis etal,1996). Based on the cultural models, the changes in the human environment mainly determine the organizational transformation (Morgan, 1986). These models consider organizational transformation as slow and long term. The ability of the leaders to shape organizational culture is emphasized here (Martin,1992). In the first stage, the in-group members and the out-group members are defined. In-group members are the subordinates who get along well with the leaders and are willing to expand their roles while out-group members are those who have only formal relationship with the leaders. The second stage emphasizes the need for high quality exchanges between leaders and followers in producing multiple outcomes. The third stage emphasizes the need for transforming the relationship into mutual trust, respect and obligation to each other (Graen and Uhl-Bien, 1991). The main criticisms against this theory is regarding the discrimination among workers as in- group and out group members which can have negative impacts for organizational justice(Mc Clane, 1991; Scandura, 1999). Second is regarding the neglect of situational variables in affecting the exchange process. Third, one is regarding the theory not explaining the evolution of the process of occurrence of the relationship. 2.2. Transformation of SMEs Based on the traditional growth models of SMEs, five stages of business growth have been identified (Churchill and Lewis 1983, Greiner 1972, Kazanjian 1988).They are (1) existence (2)survival (3) success (4) take off and (5) resource maturity. These models assume that markets are perfectly competitive. Hansen(1998) correcting these assumption attempted to reflect the recent trends in business and market opportunities for SMEs, thereby modernizing the five stages of growth of SMEs. The modernized stages of growth according to Hansen (1998) are concept development, foundation building or commercialization, rapid market expansion and market stabilization. According to traditional theories, the main motivation behind the organizational transformation of SMEs is value creation through a change in management and control and thereby increasing efficiency (Bertoncelj, 2006).However, it has also been largely criticized recently due to their failure in achieving the aims and due to the tremendous rise in insolvency filings (Kemper and Khuen, 2004). In other words, there are many challenges to efficient value creation leading to inefficiency. According to the inefficiency hypothesis, a change in control and management team will result in better efficiency through strategies of cost containment and better access to financial markets thereby leading to efficient asset management and greater cash flows (Bertoncelj, 2006). The enhancement of the value creation through organizational transformation as argued by many studies need to be evaluated in terms of enhanced sales growth, cost containment and operating margin, new resource creation leading to enhanced revenue growth or reduced cost or both as well as minimized tax rate, minimized capital expenditure and working capital(Sudarshanam,2003; Damodaran,2005; Bertoncelj,2009). Some key success factors are identified that help in delivering value creation through organizational transformation. They are classified into hard and soft success factors (Bertoncelj and Kovac, 2007). The hard success factors include management team, intellectual capital, organizational culture and communication. The soft factors include acquisition search, due diligence, financial resources and integration plan. Many studies show that prioritization and selection of management team is an essential factor for value creation through organizational transformation (KPMG, 1999). Moreover, it is suggests that the evaluation of intellectual capital needs to be completed in the initial stage itself since it contributes a lot for value creation (Fitz-enz, 2000; Lajara, Lillo and Sempere, 2002; Koh and Gunasekaran, 2006; Thomas and Allen, 2006; Kundu and Rani, 2007). Important communication to all stakeholders, which minimize uncertainty and confusion, is considered as an important factor involved in successful value creation (KPMG, 1999). A risk associated with the value creation is considered as the difficulty in the valuation of the target due to the subjectivity and arbitrary assumptions associated with the different valuation models, which make them unreliable and inaccurate. The other factors resulting in value destruction rather than value creation are the antitrust implications, regulatory costs and the multiplicity of jurisdictions as argued by many studies (Sudarshanam, 2003; Bertoncelj, 2009). The antitrust implications of the deal are argued to have maximized the risks associated with them and the costs. Moreover, the uncertainty associated with the regulations are argued to have extended for a long time resulting in maximizing the risks associated with the mergers (Sudarshanam, 2003). In addition to these, studies show that there are many risks associated with the corporate transformation like infighting, culture clash that can result in value destruction rather than value creation (Sudarshanam, 2003; Bertoncelj, 2009). According to Brown (2002), the main reasons for organizational transformation include slow market growth, enhanced competition for market share focusing on price, declining revolutionary inventions and declining profitability in the industry. The next section discusses the academic frameworks for transforming the new product development itself within companies. 3. Academic Frameworks for Transforming the New Product Development Itself within Companies It is widely recognized that innovation is very essential for economic growth and development through the introduction of new products, introduction and development of new production processes as well as making organizational changes. This will help the industries to improve their productivity, which in turn leads to higher economic growth (Gault and Earl, 2004). There are five diverse forms of innovation that include new products, new production methods, new supply sources, exploitation of new market , new ways of business organization (Fagerberg, 2005). According to other scholars, the two categories of innovation include radical and incremental innovation. Incremental innovation involves improvements in technology that take into account the low uncertainty that surrounds the income. Radical innovation involves significant development in technology or procedures and deviates from the path taken by the preceding technology(Orlikowski,1991). There are two other categories of innovation that are stressed that include disruptive and sustaining innovation which according to Christensen (2003), are not similar to the incremental and radical categorization. Sustaining innovation refers to consecutive incremental advances in performance. This form of innovation is common in incumbent firms where the advances are incorporated into the existing products. This is one of the ways through which the existing firms are able to sustain their capabilities and core competencies. Disruptive innovation emerges from less expensive processes or processes and lower performance that gains a grip on a low end of a market that already exists. In this case, the less expensive processes and products move up when some improvements are made in the performance and eventually substitute the existing products (Christensen, 2003). Radical innovation is the most common type in a majority of firms across the globe because it is vital to the growth of economies and firms as well. It involves merging markets, creating new ones and destroying the old ones. This is one of the ways through which small firms become industry leaders and even cause downfall to existing firms that do not undertake any innovative projects (Chandy and Tellis 2000; Srinivasan, Lilien, and Rangaswamy 2002; Utterback 1994). Firms that are involved in radical innovation often dominate the world market and enhance global competitiveness in their home countries (Atuahene-Gima 2005; Tellis and Golder, 2001). According to Brown (2002), the characteristics of a mature product market include slow market growth, enhanced competition for market share focusing on price, declining revolutionary inventions and declining profitability in the industry. Studies have shown that broader economic shock like exchange and interest rate shocks as well as other shocks like deregulation, technology, foreign price competition and energy price volatility can result in the characteristics shown above (Mulherin and Boone, 2000 etc). Here the firms have to survive and need immediate response for these shocks. In this type of market, for the survival of the product market in the industry, the market will be segmented for survival by looking for the products, customers etc which have higher growth than the industry average. Moreover, the company needs to be positioned in such a way as to capitalize on the growth. Hence, one main growth strategy is to restructure the value chain by adding more feature and functionality called the value added strategy (Brown, 2002). This strategy helps to raise the product value. In addition to this, other strategies include backward or forward integration, removal of intermediaries for distribution, mergers etc. Thus, the products can be improved through innovation, mergers and alliances. In addition to this one most popular growth strategy in the mature market is acquisition. There are six different forms of restructuring that a mature product market can take .They are buyout, divestiture, outsourcing, relocation, downsizing, and bankruptcy (Lazonick and Lowell, 2003). In the first case, a particular product unit in the mature market will be turned into a separate company through the necessary financing obtained by the managers. In the second case, the company sells a specific unit to outsiders. In the third case, two corporations in the market will work together in supply and distribution activities that were performed previously alone by each for enhancing the overall growth. In the fourth case, there will be relocation of the activities of the corporation to a different place. In the fifth case, the employment level will be reduced tremendously with no substantial change in the activities of the corporation. In the sixth case, the corporation fails to pay its debt obligations and consequently there will be restructuring of the activities. Hence, it can be seen that as a part of the corporate restructuring, there will be an overall change in the organizational structure of an existing corporation in a mature product market as a part of its growth strategy to survive in the industry. This happens when the results of the past investment decisions will not be able to produce assets or resources that can finance the activities. Thus, the process of corporate restructuring involves the reduction in the resources as a part of the reallocation to new growth areas. In addition to this in a cyclical product market where there are both economic booms and recessions, the corporate restructuring activities like mergers, acquisitions and takeovers occur in both the cases (Lambrecht and Myers , 2004).For example, in the case of mergers, the firms receive a surplus than they obtain individually through the economies of scale. This surplus increases when the product demand is high and falls when it is low. In addition to these, during the economic downturns, the unproductive assets existing needs to be sold off to shareholders. The hesitancy of the management in doing so results in takeover activities (Maksimovic and Phillips, 2000).The takeover results in selling the unproductive assets to the acquirer of the firm and thereby reaching the proceeds of the takeovers to the shareholders. Thus in a cyclical product market, corporate restructuring activities takes place in both economic booms and downturns. Thus, overall it can be seen that a mature and cyclical product market drives organizational transformation to a great extent. Seven important factors for profitable new product development identified are customer focus, front end loading, spiral development, holistic approach, lean, scalable and adaptable process, focus and effective portfolio management and continuous improvement(Cooper,2006).Figure1 illustrates these seven principles. Figure1: Seven Principles of New Product Development In the first case, customer becomes the main person playing main role in the definition of product, validation etc instead of reliance on sales person. Customer satisfaction through product differentiation is a major aspect in this regard (Cooper, 2006).Front end loading means collecting information in the first days of a project itself through due diligence. This essential for the success of new product development (Cooper, 2006).Spiral development means changing the development of new products n based on the things prevailing in the market at different times. Here based on the changes occurring in the business environment at different times and based on the customers; feedback, the development of new products changes. Thus based on the feedbacks and iterations, the finalized product is developed quickly. Holistic approach means effective team functioning needed for successful product development. This means efficient members in the main team who work with severe dedication and equal commitment for the development of new product (Cooper, 2006). No free riding is allowed based on this approach. Based on the continuous improvement approach, each company needs to measure the success of the outcomes of its product for successful performance. Focus and effective portfolio management means careful scrutiny of high valued and low valued projects so that productivity is improved. Lean, scalable and adaptable process means the process for launching new products need to be regularly updated if it takes lot of time, paper works and bureaucracy. This approach demands the product development process an easy one to be handled (Cooper, 2006). 4. Case Studies of Companies Achieving Transformational Goals Natura, which is one of Brazil’s leading cosmetics company started operating in 1969(Brazil Company Handbook, 2009). The company was opened as a lab and a small store in 1969 in Sao Paulo, which growed significantly with increased profits in the 1980s(Brazil Company Handbook, 2009).The company has been famous for its innovative technology making use of the biodiversity in Brazil for research and development. In 2004, the company merged with Natura Empreendimentos and Natura Participacoes as a part of the corporate restructuring process (Brazil Company Handbook, 2009). The merger was a part of the rapid consolidation process seen in the international beauty industry that persuaded smaller companies to merge with bigger companies to establish new products and markets as well as developing the existing markets (Jones and Pinho, 2007). Reports show that the sales in the beauty industry in Brazil has been higher than even the total GDP of the nation which shows the importance of the industry in the nation (Jones and Pinho, 2007). Moreover, the sales of the products like deodorants, hair care products, perfumery and personal care products have been high even internationally according to the reports (Jones and Pinho, 2007). This again shows the significance of the cosmetics products in the nation. KFC Corporation is based in Louisville, Kentucky. It is one among the most popular chicken restaurant chains in the world. It has branches all over the world with 5200 restaurants in USA and more than 15000 units all over the world. It attracts many customers globally and the recipes are world famous. KFC is world famous for its original “fried chicken”. In the Fortune list, the company’s ranking is 235. The company is part of the world’s largest restaurant company Yum brands Inc. It is also reported to have successful financial performance with more than $11 billion in 2008(KFC, 2009a). The founder of KFC is Herland Sanders. KFC was founded by him in 1930 in the middle of the Great Depression in Kentucky. The original recipe of fried chicken was born in 1940.In 1956. KFC Corporation became a public corporation and in 1971, Heblein Inc acquired KFC Corporation. In 1982, it became a subsidiary of RJ Reynold Industries and in 1986, PepsiCo Inc acquired KFC from RJR. In 1997, it was acquired by Tricon global restaurants. In 2002, Tricon global restaurants changed its name into Yum Brand Inc. It has now branches in more than 80 nations and territories globally. In 2007, KFC’s new recipe was announced. The reviews by the customers show that the main strength of KFC is its high quality food and standard menu. Further, reviews show that the food provided by KFC is cost effective too. Yum Report (2008) shows that in 2008, KFC has introduced $10 grocery store challenge with a seven peace family meal, which cannot be obtained for $9.99 at a grocery store. This was a part of KFC’s strategy to attract customers in the midst of the economic downturn. At present, it is one among the world’s most popular and highly ranked restaurant chain with very successful performance (KFC, 2009b). The major strengths of KFC are its high quality food and menu , high branded image and promotion of global diversity in recruitment. 5. Case Studies of Companies Not Achieving Transformational Goals Established in London in 1954 as a family business, Laura Ashley Plc has developed into an international group over years with 500 global branches including those in Europe, America and Pacific Basin. The case study shows that there were mismatches between the organisation's strategic capability and its competitive environment that were difficult to correct. The Laura Ashley group had some internal strengths like loyal customer base, IT capability etc. However, there were no clear strategies for the company to exploit these competencies to maintain the competitive position of the group. The bargaining power of suppliers was high and the competitive rivalry was very high. The entry and exit barriers were also high resulting in the threat of entry of new competitors. The products were not supplied based on the choices of the customers in different locations, which resulted in the failure of the business. Though acquisition based expansion was one major strategy of the group, it was done without proper planning and marketing evaluation. Lack of effective leadership and management team was a major reason for the failure of acquisition-based strategy. There was no clear focus and direction for the group. The key strengths of the group were not identified. The critical success factors for achieving the focus of growth and performance of Laura Ashley plc are investing in new capacities, developing new products and markets, acquisition based expansion subject to rigorous and controlled process. Among these, the most essential ones can be considered as developing new products and markets as well as the acquisition based expansion. This is because of the highly fragmented market, the fragmented production process, high bargaining power of suppliers and the high threat of entry to the industry. For the effective functioning of the group, the customer choices in different destinations have to be recognized .Based on these, high quality products need to be offered by reducing the costs thereby maintaining cost leadership strategy. New markets and products need to be developed with proper planning and evaluation. This will help to maintain the differentiation strategy. The key strengths of the group need to be identified and the marketing campaigns need to be done more effectively in this regard. Recently, the three big carmakers, General Motors, Ford and Chryslor, in the US automobile manufacturing industry have started to manufacture special utility vehicles and large pickups. Initially, these have been quite profitable than small cars. The 2003-2008 energy crisis has resulted in a huge increase in the prices of automotive fuels. This has discouraged the purchase of special utility vehicles and large pickups by the public. Hence, the profitability of these three started declining. Together with this, the industry wide credit crunch as well as the high-risk averse behaviour of these companies that emerged due to global financial crisis worsened the situation. Due to the decline the availability of consumer credit, the sales declined further. In addition, since the defaults on loans have been increasing, the banks and finance companies were extremely careful in approving car loans to consumers. Thus, the available evidence gives an indication of the financial constraints existing in the US automotive industry due to the decline in FDI because of the global financial crisis. Due to the fear of bankruptcy, the stock prices also fell (Sauvant, 2008). In the case of Ford Company, one of the major sources of finance is the revenue from the sale of cars (Ford, 2008). The report shows that the sales of cars are likely to decline in 2009 due to the financial pressures to the suppliers. In the case of Ford Company, the report shows that there was considerable reduction in the pre tax earnings, which were reflected in the statement of retained earnings(Ford,2008). However, the company report shows that the operations of the company and the cost structure are being restructured in such a way to reflect lower financing volumes resulting from lower automotive industry sales volumes. Hence, the company is planning to enter into new strategic alliances and relationship in the international markets and to update its international operations. As a part of the restructuring, the company is planning to reduce the number of persons and staffs and to accelerate the development of new products. The annual report of the company states that the various costs for the company resulted in creating resulted in negative operating and other cash flows in 2008(Ford 2008). These have created significant pressure on the automotive liquidity also. 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