Theory E and Theory O : The Theory E and O are the two contrasting approaches used by leaders to carry out turnaround in the organisations. The theory E is the hard approach with focus on cutting down costs, restructuring and layoffs. Its primary attention is on creating shareholder value and immediate results. In contrast, the theory O approach concentrates on developing corporate culture and human capability and is characterised by slow results. Studies have shown that adopting only one of the two does not produce the most optimum results. Both the strategies have to be carefully combined and used in the right balance to produce the desired results. Infact the balance is difficult to achieve and if achieved, it becomes the competitive advantage for organisations. This is what exactly happened at the BA with the appointment of Lord John King in the late 1980.
How did BA turnaround?
Lord John King applied both approaches skilfully and in the right balance. He started with more hard approach and undertook actions by cutting costs by layoffs, stopping loss making routes, stations and engineering bases, writing-off fleets and getting a turnaround team in place. This ensured that BA could only get better from that point on. After taking the more drastic steps that characterises the Theory E, he and Colin Marshall (CEO appointed in Feb 1983) moved towards improving the corporate culture and instilling the attitude of customer first. This was followed by PPF (Putting People First program) which was consistent with the right balance between Theory O and Theory E approaches. The MPF (Managing People First) program which followed the PPF was to make sure that this percolated down to their top managers and leaders. This followed by the fight against the regulators to avoid the route transfers to British Caledonian, ensured that the entire organisation was united. These initiatives showed results as BA was ready for privatization and after the IPO it partnered and bought stake in many airlines worldwide to increase its network.
BA's turnaround is a good example of effectively using the right mix of the economic and the organisational theory to carry out turnaround. Some of the other characteristics that are evident are:
Nokia : 2010 - 2011
Nokia, the world's largest mobile maker in terms of volume is clearly struggling. Its share price has lost over 1/3rd of its value in the last 6 months and over 70% in the last five years - trading at nearly €4.75 down as compared to the €64.95 in 2000.
Nokia issued a profit erosion warning in the first week of June 2011. Nokia's sales & operating margins were falling steeply because it was losing share of the smartphones (down from 38% to 33% in one year) and is not able to charge premiums unlike Apple. Apple's average selling price is $635 whereas Nokia's average selling price is €156 ($219) which makes it one third the size of Apple's iPhone revenues. At the low cost segment, it is facing immense competition from the mobile phone manufacturers from Shenzhen region in China and the Android run phones are beginning to offer great threat to the Symbian based Nokia's handsets. The mobile handsets and service division which had zero percent real growth last year. The consumer brand preference has dropped to 20% and Nokia has taken a hit on its credit rating by the Fitch, Moody and S&P. S&P had downgraded it from A to A-1 in the long term in Feb 2011, and Fitch recently rated Nokia only one rank above the junk status (BBB- from BBB+) on the 7th June 2011.
Contracting Market Share of Nokia
There are a number of reasons behind Nokia's current state of affairs. Firstly, mobile phone handsets is no more a competition of devices but that of the ecosystem. This can be very well explained by the Innovation Ecosystem model by Ron Adner.
Innovation Ecosystem Model by Ron Adner
It postulates that successful innovation by an organisation requires tracking its partners and potential adopters as closely as the tracking the innovation inside the organisation. In high tech markets, it is necessary for an organisation to manage its complete value chain and its success depends upon how well it manages the risk that lie outside and within its own boundaries. The innovation strategy depends on three risks as shown above - Initiative Risk (risks related to the project management skills, organisation's capability to come up with innovations fast), Interdependence risk (equally fast development of the partners, suppliers, infrastructure to support the innovation on which it is dependent) and Integration Risks (how the efforts of the outside players and can be integrated and whether the leaders of the ecosystem can be internalised or not).
Nokia failed on all the above three risks. It had become slow to respond to changes. Apple's iPhone was launched in 2007 and in June 2011, it still doesn't have a comparable product(failing in Initiative risk). It became complacent. It was completely blinded to the Interdependence Risk and got its strategy wrong with the MeeGo and Ovi Appstore. Finally, it has come up with using the Microsoft's Windows Phone as a platform for its new launches, but it has made the move very late and that the first Windows based Nokia phone may not be out until late 2012. (Integration Risk)
Nokia's decline can also be explained by the Irving Janis's Groupthink model. It occurs in a group of people when they try to minimize conflict and reach consensus without critical evaluation of the alternatives and trends. Since Nokia was so successful, there was no need/motivation to change (Collective Rationalization). It discounted the warnings that it was getting from the direction in which the market forces were acting and it did not reconsider its assumptions.
Performance and Health : Balance out both
Performance is the measurement of organisation's effectiveness in the operational and financial terms, whereas Health is the speed with which the organisation can align, renew and execute itself. A Turnaround is a transformation that is tragically delayed. Turnaround occurs due to poor health and therefore in the case of Nokia, it has to manage both performance and health at the same time to turnaround. Its announcement of the strategic partnership with Microsoft to use the Windows system was followed by a widespread resentment by employees when many thousands walked out of its workplace. Nokia at this stage cannot afford to lose its important human resources when it needs them most but at the same time it requires to control costs. Hence its management needs to act in tandem and not in isolation as performance and health are complementary. It can follow the 5A framework to achieve its goals.
In the midst of the crises that Nokia is currently in, it is very easy for the management to get lost in the sea of initiatives. A better understanding of the ecosystem and the use of the 5As framework will help Nokia keep focus equally on the performance and health of the organisation and carry out an effective turnaround.
Thus it can be seen from both the cases that it is needed to concentrate on both people and business process during turnaround. However, depending upon the context and the industry the approach used will need tweaking to bring out the best strategy.
"The narrow pursuit of shareholder value was the dumbest idea in the world"
Jack Welch
Understanding Decline Lecture Notes from Corporate Turnaround course 2010-2011 by Alastair Nicholson and Steve New of Said Business School.
HBR : Cracking the Code of Change by Michael Beer and Nitin Nohria
FT frontpage News on the 7th June 2011.
Nokia's profits fall again Article in the Guardian on the 27th January 2011 by Charles Arthur
Speech by Stephen Elop, CEOP of Nokia posted on the internal Nokia blog - 9th February 2011.
Speech by Stephen Elop, CEOP of Nokia posted on the internal Nokia blog - 9th February 2011.
Nokia hit by debt downgrade, FT Published on the 7th June 2011.
FT frontpage News on the 7th June 2011.
Match you Innovation Strategy to Your Innovation Ecosystem by Ron Adner published in the HBR in April 2006.
Understanding Decline Lecture Notes from Corporate Turnaround course 2010-2011 by Alastair Nicholson and Steve New of Said Business School.
Colin Price and Scott Keller in their book - Beyond Performance
Gary Hamel in the HBR 2003
Microsoft is the plague: Nokia stock drops 14% as 1000s employees walk out by Joe Wilcox, http://tinyurl.com/6zoz5nq