Six Classic Case Studies

8/2/2019 Six Classic Case Studies

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The Winning Edge Compiled By: Chhaya Sehgal

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Strategic Cost Benefit Analysis of differentBusiness Restructuring Propositions

Six classic case studies

1.Diageo in high spirits

The background

Diageo was formed in 1997 through the merger of Guinness and Grand Metropolitan. Both

companies were themselves products of earlier mergers - Guinness had famously acquired

Distillers in 1986, while Grand Metropolitan had diversified from its origins as a hotel chain intospirits (IDV), food (Pillsbury), restaurants (Burger King), and pubs.

As with most mergers, the initial changes were relatively superficial. Executives argued for

the synergies between the various businesses, but the only real integration occurred between the

spirits businesses of the two companies. Fairly quickly, however, a more focused strategy

emerged. When Seagrams announced the sale of its spirits and wine business, Diageo quickly

moved in to pick up as many brands as it could (competition rules prevented a complete

acquisition). Pillsbury and Burger King were sold off, and the Guinness business was integrated

into the global spirits organization.

The premium drinks strategy

The purpose of all these changes was to make Diageo the world's leading premium drink

company. During the post-merger Integration, CEO john McGrath and his executive team had

homed in on their real strength: the ability to build a premium consumer brand, and leverage it

on a global basis. They built a sophisticated methodology - the Diageo Way of Brand Building -

based around insights into their consumers' need states. They identified a set of global priority

brands (e.g. Smirnoff, Baileys) for managing on a worldwide basis. And they developed a unique

organization structure in which country operations were organized not by geographical regionbut according to their expertise and potential. There were four "lead" markets (UK, US, Ireland,

Spain) that were expected to take leadership roles in developing new brands, 14 "key" markets

where Diageo already had a strong position, and then a larger group of "venture" markets, in

which there was a "tight focus on fewer brands, using a more flexible model." The theory was

that brands would be developed in the lead markets and then rolled out quickly on a global basis

through the key and venture markets.

The enormous success of Smirnoff Ice has validated the Diageo model. Under new CEO Paul

Walsh, Diageo has invested heavily in "ready to drink" (RTD) brands including Smirnoff Ice. These

were initially aimed at the female pubgoer who did not like beer but increasingly targeted toward

male drinkers. Smirnoff Ice was launched in 1998 in the UK, and once it was proven there it was


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rolled out over the next two years to a further 15 countries, with total sales so far in excess of 1.5

billion bottles. And not only is Smirnoff Ice a big seller in its own right, it also has two very

attractive side-benefits: it helps to invigorate the core Smirnoff brand, and it takes market share

away from beer. For the global beer companies like Heineken and Interbrew, Diageo is suddenly aserious threat.

The lesson

Diageo provides a clear example of a company that understands and leverages its core

competence. Rather than pursue multiple strategic thrusts back at the time of the merger, the

company put its faith in its ability to build global drinks brands, and it created an organization

that allowed it to extract value from that ability. In a difficult market, Diageo still managed 9

percent organic growth over the last 12 months, and it looks well set for further growth as it

launches new RTD products such as J&B Twist.

2.Fords Venture into Consumer Services

The background

Jac Nasser became CEO of Ford Motor Company in 1998, with a reputation as a problem

solver, cost cutter, and agent of change. One of his key initiatives was to enter the world of

automotive consumer services, which covers such things as car financing, insurance,

maintenance, repair, parts, and recycling. These services were estimated to account for 60

percent of the total value of the automobile industry, and most of it was far higher margin

business than Ford's core business. Nasser wanted Ford to become a major player in this

downstream part of the business system.

Building an auto services group

Nasser hired Michael D. Jordan to create Ford's "Automotive Consumer Services Group."

Their first significant move in 1999 was to buy Kwik-Fit, the UK-based exhaust repair company

owned by Sir Tom Farmer, for 1 billion. A number of smaller acquisitions followed, in the areas

of car servicing, collision, and recycling. The strategy was to buy operations across thisfragmented sector and to create the first consolidated automotive services group. Nasser and

Jordan saw enormous opportunities for gaining synergies between the various parts by cross-

selling services, transferring best practices, and building a complete set of consumer-oriented

services.

Emerging problems

But while the strategy looked good on paper, it proved difficult to implement. Apart from Kwik-

Fit, which had a well-known brand and operations in five countries, there were very few

companies of significant size worth buying, so it took a long time to make progress. And from the


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perspective of Ford as a whole, with 2001 sales of $131 billion, even Kwik-Fit was a relatively

small acquisition.

But the real issue ended up being problems elsewhere. Ford reported weak results in 1999

and 2000, thanks to a declining performance across the whole industry as well as problems of its

own in Europe. Buying Volvo and Range Rover used up much of the company's cash reserves.

Then, in 2000, the Firestone tire problem hit, and Ford was thrust into a public relations

nightmare, leading to extensive product recalls and large write-offs. In early 2002, Chairman Bill

Ford, the great-grandson of the founder, had had enough. He ousted Nasser and took the job of

chief executive himself. With the company now in a very weak financial position, and with its

reputation tarnished, Bill Ford announced a back-to-basics strategy -35,000 jobs were cut, along

with five factories and four product lines, and the automotive consumer services group, which

was a non-core activity as well as being clearly associated with departed CEO Jac Nasser, was

quickly axed. In 2002, Kwik-Fit was sold to UK private equity group CVC for 330 million.

The lesson

Ford fell into the classic value trap in building new businesses. It saw a logical extension of its

business by building on its existing consumer base, and finding new services that those

consumers could buy. But by moving down this route, Ford found itself in unfamiliar territory -a

fragmented, service-intensive, local industry rather than the globally consolidated, capital-

intensive world of car engineering and manufacturing. It was by no means impossible for Ford to

traverse this gap, but it needed to develop a new set of capabilities, and overcome the inertial

resistance to the new strategy. And ultimately, Bill Ford never completely bought into the idea.

He was a "car guy," and for him (and his family) this meant designing, building, and selling cars,

The jump into automotive services was a big one, and Nasser did not have either the time or the

good fortune to pull it off.

3.Fitting it together with Lego

The background

Founded in 1932 by a Danish entrepreneur, Ole Kirk Kristiansen, Lego became an

international success story in the post-war years. Its famous plastic bricks were first sold in

Denmark in 1947 and then quickly rolled out across Europe and North America. Gradually the

basic bricks gave way to more complex model sets, then a range of related products including

Duplo, Lego Technics, and Lego figures for girls. By the late 1980s, Lego was one of the biggest

toy brands in the world,

Lego remained family-owned and was built around four core values: creativity, play,

learning, and development. The word Lego was formed from the Danish words leg gout(play

well).


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The threat

In the early 1990s the toy market changed dramatically with the introduction of Nintendo's

N64/Game Boy and Sony's Play station. Children were no longer content' with self-guided play.

They quickly embraced the interactive offerings from the electronics industry. And rather than

playing for the sake of playing, they began playing for the sake of winning. Traditional toys were

still selling but the growth was in the electronics segment,

Lego's response

Lego's initial reaction to the threat of electronic toys was to do nothing, Game con- soles

were anathema to the values of the company -they were not creative and they did not help the

child develop. Lego had also experimented with combining bricks with electronics (Lego Dacta) in

the 1980s without much success.

But faced with the continuing growth of electronic toys, in 1996 Kjeld Kristiansen, CEO and

grandson of the founder, created a new division, Lego Media, to develop software, music, and

videos. Three interactive software products were developed on CD-ROM: Lego Creator, Lego

Chess, and Lego Loco. A new programmable "Intelligent brick" product called Mindstorms was

launched at the top end of the market. And Lego developed its online offerings with a range of

games, kids' clubs, and merchandising opportunities.

But despite (or because of) all this, Lego found itself in difficulties. It posted its first-ever loss

in 1998. The following year was profitable, largely because of its enormously successful Star Warsproduct range. In 2000 there was a deeper loss.

The lesson

Why the bad results? Lego suffered all the classic problems companies face when entering

new markets. Nintendo and Sony were established competitors and were not prepared to give

up ground to Lego without a fight. The multimedia industry was immature and all players,

including Lego, struggled to make money out of it. In addition, Lego moved beyond its proven

areas of capability. As Paul Plougman, executive vice president, said in 2000: "We lost focus. We

will now refocus on our core business, which is materialsforopen-ended play for children."

Lego has now scaled back many of its multimedia operations and is focusing on those that fit with

its core values and capabilities, including a themed product line called Bionicle. With cost-cutting

measures in place, 2001 was once again profitable.

The underlying lesson is important -it is not enough just to follow your customers into new

product areas, you also need the capabilities to deliver on their new demands. Lego could not

hope to compete head on with Sony and Nintendo. Instead it had to rethink its product range to

combine its core values and skills with what today's children are looking for.

4.Mike Harris and the creation of Egg


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The background

In 1995 Peter Davis became CEO of Prudential Insurance, which at the time was seen as a

rather slow-moving and old-fashioned company in an industry undergoing rapid change.

Davis made a number of acquisitions to take the company into new areas of insurance and

investment, but his central thrust was what became Egg -a business designed to offer banking,

mortgages, and other financial services via the telephone and cut out expensive branch networks

and commission-hungry independent financial advisers.

The creation of Egg

To lead the Prudential's foray into telephone banking, Davis approached Mike Harris, who

had made his name in UK business circles by leading the creation of First Direct bank when hewas at Midland (now HSBC). Davis knew Harris quite well, and quickly convinced him to take the

job. And Harris, like Davis, felt that the time was ripe for a new class of customer-focused

intermediaries to compete with the lumbering, vertically integrated incumbents in banking,

cards, and insurance.

During 1997 the business plan for Egg took shape. It would be established as a completely

separate company, financed and owned by Prudential but with its own buildings, its own culture,

and its own brand! Consumer research had established that while people liked the concept, they

could not square it with the Prudential's traditional image. So Harris and his team chose Egg,

which evoked many of the values they were looking for. The name "proved to be a very hard sellto the board," but with Davis's backing it was accepted.

Harris and his team invested heavily in customer research to try to understand how people

reallywanted to interact with their bank. His team followed 1,000 people for a year, and Harris

personally took part in customer feedback sessions on a weekly basis. The original concept was

for a telephone-only bank, but as the potential of the Internet became apparent, they developed

an online offering as well. Their timing was fortuitous: UK Internet usage boomed during 1998,

largely thanks to the launch of free ISPs like Freeserve, so Egg became de facto the first Internet

bank in the country.

The result

Egg was a spectacular success. Within days of launching the business, Egg had to more than

double the size of its call center operation to cope with customer demand. Thanks to its separate

business model, it managed to get the new capacity up and running within four days. In contrast,

Davis observed, "the Prudential would not have found the forms in four days."

Launched in 1998 after a spend of 80 million, Egg reached its initial five-year target of

500,000 customers and 5 billion deposits in six months. It then developed its product line to

become a financial services supermarket, offering loans, insurance, mortgages, credit cards, and


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funds as well as banking. After an IPO in 2000 - to "institutionalize its independence," according

to Harris -Egg broke into profit in the fourth quarter of 2001 and reported pre-tax profits of 9.4

million on revenues of 79.6 million in the third quarter of 2002. With 2.4 million customers,

Egg's market value at the end of 2002 was 1.1 billion, and it was set for expansion into France.

The lesson

While there were many contributors to Egg's success, two factors were key. First, the

complete separation bfEgg from the rest of Prudential gave Harris the freedom to move quickly

into a new area, unencumbered by tradition or bureaucracy. Second, Harris and his team were

obsessive about consumer research: they did not just repeat the First Direct model he launched

at Midland bank, they started with a clean sheet of paper to find out what consumers really

wanted.

5. The destruction of Marconi

The background

General Electric Company (GEC), the British company with no relation to America's GE, grew

rapidly in the 1960s under Arnold Weinstock's domineering but effective leadership. Like its US

counterpart, GEC became a conglomerate, with interests in such diverse businesses as white

goods, defense electronics, telecoms, and power systems. While there was no real logic

underlying this array of businesses, Weinstock held the company together through a combinationof his imposing personality and a strict system of financial controls. At its peak GEC had sales of

11 billion and a cash pile of 2 billion.

Simpson's masterplan

Lord Weinstock retired in 1996 and was replaced by George Simpson, a former executive at

Rover. Over the course of the next five years, Simpson and his Finance Director, John Mayo,

masterminded a complete rethinking of GEC's corporate strategy. He decided to focus the

company on the fast-growing telecoms equipment industry. He bought two mid-sized US

competitors (Reltec for $2.1 billion and Fore for $4.5 billion) and invested in developing a rangeof new products to compete with industry leaders Cisco and Nortel. To pay for this growth, most

other businesses, including defense electronics, white goods, and power systems, were, sold off.

To reflect this change of strategy, GEC was renamed Marconi.

The denouement

Marconi's share price peaked in August 2000 at 12. Then things started to go badly wrong.

The dot-com bubble burst, and demand for new telecom equipment dried up. Lucent, Cisco, and

Nortel all announced profit warnings. Marconi's share price dropped, even though it denied that

its sales had been hit. Then, when the profit warning finally came, angry investors dumped thestock. The downturn was far more severe than anyone anticipated, and with large and mounting


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debts Marconi was facing bankruptcy, its shares worth less than 1 percent of their peak value.

George Simpson and John Mayo were forced out. A new executive team was brought in, but by

then 37 billion of market value had been destroyed in just a year and a half.

The lesson

Marconi's story is a classic tale of an over-ambitious growth strategy and subsequent

collapse,But the lesson to take away is that despite their ultimate failure, Simpson and Mayo

did some important things right.

First, they correctly reasoned that if Marconi was going to become a major player in

telecoms it would have to grow aggressively and it would need a strong US position. Hence its

acquisitions of Fore and Reltec. This approach worked for Cisco. Where Marconi went wrong was

that it paid cash, partly because it had plenty of it, and partly because it did not have a full listingin the US (so its paper was not an attractive currency). So rule one -if you are going to overpay

for an acquisition, better to overpay with your own overpriced shares. The cash drain from

these acquisitions is what ultimately killed Marconi.

Second, Marconi's decision to major on one business, and sell the rest, is exactly what the

markets were asking for. Conglomerates were OK in the 1970s and 1980s, but the trend during

the 1990s was toward highly focused corporations. Indeed, Simpson was lauded for his courage

in breaking up and focusing the company he took over from Lord Weinstock,

But Marconi's failure underlines how risky this sort of refocusing can be. Simpson put all hiseggs in one basket, but it was a relatively untested and new basket at that. Such dramatic

changes in corporate strategy can work. For example, Spirent made a successful transition from

industrial conglomerate to fast-growing telecoms company during the late 1990s. But more often

than not major changes in strategy take the company into new areas that it does not really

understand, and the results end up being disastrous -as the shareholders of Vivendi and Enron

will confirm,

6. Volkswagen strikes back

The background

Volkswagen began importing the Beetle in the early 1950s. The Big Three (GM, Ford,

Chrysler) did not take it seriously. One executive called it "a personal insult." It was noisy,

cramped, air-cooled, and it had its engine "where the trunk was meant to be." But it was

enormously successful, with sales growing to a peak of 570,000 in 1970. This was partly due to

the Beetle's unique positioning as a small, affordable car (Ugly is only skin deep" stated one

famous ad). But more importantly it achieved cult status among the hippies and beatniks of the

1960s anti-establishment movement.


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Success continued into the 1970s, The Beetle was replaced with the Rabbit (Golf in Europe),

but it never reached the same level of popularity. Quality problems started to appear. New

competitors, particularly Honda and Toyota, arrived in the US for the first time. And the decision

in 1978 to start manufacturing in the US proved to be a fateful one for Volkswagen, because thecars lost their distinctive European styling and handling.

Close to exit

Through the 1980s, Volkswagen's US market share declined. The brand's unique positioning

disappeared, and the product quality was not up to the standard of Japanese competitors. The

manufacturing plant was closed in 1987. By 1993 Volkswagen was selling only 49,000 in the US,

and thought to be losing significant amounts of money. Industry observers were predicting that

the company would soon follow the lead of Peugeot, Fiat, and Rover, and exit the US market.

But Volkswagen's new CEO Ferdinand Piech refused to give up on the world's largest and

most competitive car market. And he oversaw a remarkable turnaround, from a low of 49,000

units in 1993 to the most recent figures of 356,000 in 2001.

Secrets of a turnaround

How did Volkswagen do it? There were four key elements to the turnaround. First, it sorted

out manufacturing quality. The turning point came in 1992 when Bill Young, President of the US

operation, refused to accept any of the new Golfs and Jettas from the Mexican plant because of

quality problems. This was a gutsy decision because it meant the dealers had no cars to sell for sixmonths, but it proved he was serious. The Mexican plant got its act together, and quality

standards improved markedly.

Second, the brand image was revived. Volkswagen had become famous for its off- beat

advertising, but it lost its direction during the 1980s. In 1992 the US company replaced its long-

standing agency DDB Needham with a small Boston agency called Arnold, which managed to

recapture the values and spirit of the earlier campaigns. Its tagline: On the road of life there are

passengers and there are drivers... Drivers Wanted.

Third, a new management team was put in place, led by Clive Warrilow, formerly head of

Volkswagen Canada. He faced a disillusioned workforce and angry dealers, but through a strong

focus on empowerment, trust-building, and partnership he was able to win them around.

Fourth, and by no means least, was the New Beetle, a product that was conceived,

designed, and built in North America. If anything symbolized the return to glory of Volkswagen in

the US, this was it -a throwback to the company's heyday in the 1960s, but at the same time a

thoroughly modern product built on the same plat- form as the Golf. The turnaround was already

in place before the New Beetle was launched, but this proved to the sceptical US public that

Volkswagen was truly back.

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Six Classic Case Studies