dynamic startegy

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MBA501: Dynamic Strategy and Disruptive Innovation

MBA 501 T2 2019 Assignment 3 is based on workshops 10, 11, and 12 content

Case Study

Essendon Food Solutions (EFS) Jonathan Jacob and Henry Shultz started Essendon Food Solutions (EFS) forty years ago. Both were working for a multinational food ingredient company and felt that the company’s systems and processes were inhibiting creativity and innovation. Jonathan was a microbiologist, and Jacob was a Food technologist. Today, EFS employs more than 800 people with combined revenue of $ 1.6 Billion. EFS is a holding company with two subsidiaries; EnzymeTech and Essendon Emulsifiers. Each subsidiary is headed by a General Manager (GM), and they report to the EFS CEO (Jonathan) and the Board of Directors. The two GMs have significant autonomy and tightly control each business unit. The managerial structure is top- down; all decisions such as project appraisals and selections are made by the GM and senior executive team of each business. Both companies compete for resources from the holding company EFS, which is listed in the stock exchange. According to one insider “, each unit is trying to outdo the other, and I feel the Board likes it that way, competitive, secretive, divide and rule. Ironically, Jonathan and Henry created a company similar to what they left 40 years ago, bureaucratic and toxic.” The company culture is such they believe senior executives should come up through the ranks. Therefore, most of the top executives have worked at EFS for an extended period and worked at only one business unit. The average age of the senior management team (the executive committee – fifteen executives) is 53 years, and the next level of leadership is also not far behind. Junior executives call the executive committee, the senior citizens club. Experience at EFS is seen as one of the critical criteria for promotions irrespective of your experience elsewhere. Most of the senior staff (60%) have a Degree in Microbiology. Even those who head the marketing functions have been scientists first and then moved into marketing and sales. It is a standard practice that the Human Resources department when hiring staff, considers anyone coming from a Microbiology background as having an advantage. According to an executive who joined recently “first few months at EFS can be difficult, but after you learn to ask fewer questions and follow orders, life becomes easier, and honestly, you can stick around for a long time.” EFS is proud of its management trainee program. Close to 80% of the R&D staff and senior executives joined the company as management trainees or R&D trainees. They have been successful in attracting high achievers from leading universities at a young age. Jonathan and Henry, both PhDs, believe in recruiting high performing graduates and see them staying in the company for an extended period as the best thing that

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can happen to EFS. According to a recently hired Senior Sales Manager, “this company is run by a bunch of academics, don’t take me wrong, they are really really smart, but they don’t have a broader experience in other industries. After all, we need to strike a balance between book-smart and street-smart.” EFS has consistently given dividends to shareholders since listing twenty years ago. Even during the low-profit years, EFS did not miss out on dividends. The new CFO is of the view that the company should build a better relationship with the shareholders so that some of the dividends can be directed towards high-potential long-term R&D projects. However, the executive committee and the Board of Directors are worried that it would send the wrong message and impact the share price. “last thing we want is the stock price to go down, it will take ages to pick up, and by that time we will be retirees with stock options, so, why upset the apple cart?” was the response given by one senior executive.

EnzymeTech EnzymeTech supply Enzymes to different food industry clients around the world. The company pioneered many Enzyme applications in the food industry. The EnzymeTech R&D is known for its research and commercialisation of customised Enzyme solutions. The R&D centre is located in Adelaide. The R&D staff at the centre are older than most other employees at EFS but world- renowned for different Enzyme applications they have developed over the years. The Board of Directors observed a drop in breakthrough R&D activities at EnzymeTech over the last five years. Several multinational competitors are making noticeable inroads into traditional EnzymeTech customers. “it is difficult to work with the R&D department. We want our R&D staff to meet customers, visit them, and work with them, but they are such bureaucratic know-it-alls, it is frustrating, they don’t want to leave Adelaide for a day. With all these issues, we develop a new product, and then the CFO and his team will give a price that it is impossible to work with. They have no clue about what is happening in the market. Sad to say, EnzymeTech is living in a bubble like Kodak and Nokia,” Glassdoor comment from an ex-employee from the marketing department.

Essendon Emulsifiers In recent years, export markets have done well, where Australian made products are received positively. The state-of-the-art R&D centre is in Sydney. Export markets are handled through distributors, and only a few staff are familiar with the export operations. The marketing manager only visited two of the main export markets (China and Indonesia) last year, although 30% of the profits and 20% of the revenues are coming from export sales. According to a senior executive, “export markets are good, but we don’t have the expertise or the energy to run around Asia. We are an Australian company, and our primary

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focus should be Australia. If we do well here, then the distributors will come to us.”

The company can only supply standard emulsifiers through distributors. Expanding the international market further would require a team of technical sales executives similar to EnzymeTech that would visit and meet international customers regularly. The company has received several offers to set up an R&D joint venture that target the Asian Emulsifier market. Several companies are keen on collaborating and setting up an R&D centre in Singapore where the government regulations are favourable for this kind of R&D, and the government is proactively promoting such investments. Several products that are not performing well in Australia seems to have found a good market in some of the Asian countries. Overall, the Australian market for Emulsifiers have matured, and the growth has stagnated for a decade. Although Essendon has a sizable share, it is insignificant compared to growth markets such as China, Indonesia, Vietnam, etc.

Annual Strategy Review meeting Every year, the senior management team (executive committee plus 20 senior staff) meet for the three-day annual strategy review. The numbers presented by the EFS strategic planning team did not look that well this year. Generally, this strategy review is considered a “one big party,” but this year, the mood was gloomy. The key competitors of EnzymeTech are developing newer products faster and cheaper. At this rate, EnzymeTech will face significant challenges in four to five years. The situation of Essendon is far worse; if the current trend continues, the company may have to retrench staff. Following is a conversation between Jonathan, Henry, and the CFO.

Jonathan: We need to turnaround this company fast. We need to be open with our shareholders. I propose we appoint Micheal Ray as the CEO of both companies and give him the responsibility of turning around the group. He worked at EFS for more than 30 years, and he knows everything that is needed to turnaround this company. After all, he ran EnzymeTech for more than eight years now. Henry: Jonathan, don’t you think that is precisely the problem? He only knows this company; he started here as an R&D trainee. He does not have any experience in turning around companies. We need fresh thinking. We need to get someone from outside. The only issue is whether this company is ready for an outsider to come and change things fast. CFO: Henry, I think an outsider can do the job. For example, Karlos Ghosn turned around Nissan, and Alan Mulally made Ford stronger. Both were outsiders. I fully agree with you. We need to bring an experienced outsider.

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Jonathan: yes, what you are saying is logical, but I am still not sure whether that is the best path given the current situation.

Note: This is a hypothetical case study with hypothetical market situations. You are not expected to research the different industries mentioned in the case study. The focus should be on researching, analysing, and applying disruptive innovation, organisational innovation, and strategic leadership related concepts, theories and scholarly views.