Review the case scenario illustrated below and answer the question below:
How does the external environment influence organization design? Using your experience and the Best Snacks scenario, how does the decision to enter an entirely new market affect the design decisions you as a manager make?
What is the relationship among organizational design and structure, technology, and talent management? Using your experience and the Best Snacks scenario what are the key contributing factors dealing with talent management and how do you retain talent to include what type of systems must be in place to include measurements and communications systems?
SCENARIO: Best Snacks
COMPANY OVERVIEW:
Five years ago, Best Snacks, Inc. began a concentrated effort to make creativity and innovation an integral part of its corporate culture. As part of the effort, Vice President of Organizational Development Sabrina McKay created several initiatives intended to foster employees’ creative thinking skills. Initially, these programs were very successful. Employees were excited about a new creative vision; those who weren’t gradually left and were replaced with recruits of high creative caliber. The push for innovation led to the introduction of new products and services with potential to significantly grow the Best Snacks market share. One new line geared to the health food market seemed particularly promising.
Although the healthy snack line had an encouraging start, the group that introduced it has encountered several obstacles to commercial success. Best Snacks has always followed a business model that called for selling products to large distributors who then sold the products to mainstream grocery retailers. But most of the large distributors have no interest in serving small health food retailers, which has prompted a need for new sales, marketing and distribution models -- an expensive proposition for one line.
Because the health food product line is currently quite small, CEO Elizabeth Fairchild has left it in the hands of the grocery division. As a result, all decisions about budgets, hiring, performance evaluation, planning, organizational design, compensation strategy, incentives and reporting have all been subject to the business models Best Snacks has been using for years. For example, the company’s standard product development procedure -- with its rigorous testing and approval process, and its expectations for certain timely milestones -- has been applied to this product line. And the high quality, eye-catching packages that are Best Snacks standard are also required for the healthy snacks, which only serves to drive up the cost of the line.
Over the past six months, the health food group has failed to meet several key expectations. Product sales have not accelerated as quickly as anticipated, and the division is not producing the expected profitability. If this continues, the entire grocery division may not meet its growth objectives for the fiscal year.
Meanwhile, talented product developers with advanced degrees have been hired from the outside, but because of Best Snacks’ policy of promoting from within, they are nearly all working for executives who are company veterans. The result: A division of corporate culture. Though these product developers have identified several new products they are convinced could make a success of the healthy snack line, these ideas are subject to the same approval process plaguing the healthy snack line itself. As the leaders struggle to meet expectations, these developers have become increasingly frustrated and have either left or are threatening to leave.
Elizabeth Fairchild is troubled by these events. The grocery division general manager, Martin Hernandez, believes that Best Snacks should cut its losses with the health foods, a line he feels strays too far from the company’s business model. Elizabeth, however, is not convinced that the product is the problem. She’s beginning to wonder whether the right people are in leadership roles, both in the grocery division and in the health food group. One thing she knows for sure: Something has to change.
THE PLAYERS:
Elizabeth Fairchild, Chief Executive Officer: Elizabeth came to Best Snacks more than five years ago, after spending a decade in the consumer electronics industry, where innovation and creativity were vitally important to ongoing success. Immediately, Elizabeth sought to create an innovative culture at Best Snacks and though she has been pleased with those efforts to date, she is beginning to worry that some of her managers, especially the long-time veterans, are not fully on board with the concept of innovation.
Sabrina McKay, Vice President of Organizational Development: Sabrina has been with Best Snacks for 15 years, and earned favor with Elizabeth when she spearheaded the push toward an innovative culture. She is well-respected throughout the organization and is known for her participative leadership style and her ability to work effectively with all operating divisions.
Martin Hernandez, General Manager, Groceries: Martin has been with Best Snacks for 27 years, and has worked in the groceries division for the past 15. He is responsible for developing sales and marketing strategy for the groceries division
Robert VanDam, Project Lead: Two years ago, Elizabeth recruited Robert to lead product development for the healthy snacks line. His cross-functional team of employees from product development, marketing, operations and finance all report directly to their functional areas, maintaining only a dotted-line reporting relationship with Robert. He has been increasingly frustrated by the entrenched culture in the grocery division and is considering leaving the organization.
June 12, 2011
MEMO TO: Elizabeth Fairchild
FROM: Martin Hernandez
RE: Q1 and Q2 Grocery Division Results
Elizabeth,
Thank you for giving me the opportunity to discuss the grocery division’s financial results for the first two quarters of the year. As I‘ve told you, we are lagging behind our financial targets in several areas, and I believe we need to take corrective action soon in order to avoid a complete disaster.
Our sales have been flat for the first six months; I think there are several reasons for this. First is the economy, which has been weak. Consumer surveys suggest that many people are cutting back on spending everywhere, even in the amounts and types of food they’re buying. There’s not much we can do about that.
Second, our sales projections included an estimate of 25% growth in the healthy snacks product line, which is consistent with our standard expectations for a product line in its second year; we‘re not meeting that.
Third, we are experiencing an increase in the amount of competition from private labels and niche snack manufacturers. Our largest client, for example, has recently developed its own line of private label snacks, and has cut back on our available shelf space by over 50%.
Even more critically, our profitability is significantly below expectations. Again, there are several reasons for this; I’ve listed the most significant variance items below:
1) Manufacturing costs have increased significantly in three product lines, largely as a result of increases in the price of sugar and other materials.
2) Marketing costs are 15% above projections, due largely to an increase in the amount of direct advertising to health food retailers. We are finding that our traditional advertising and promotion methods are not reaching this market effectively, and have invested significantly in alternate methods that have increased expenditures but resulted in limited success.
3) Research and development expenses are more than double our original estimates. Again, much of this is attributable to costs associated with the healthy snacks line.
Margins for the healthy snacks product line are well below those of our other product lines. While there are many reasons for this, I think the most important one is that this line simply does not fit our business model for success. Our model depends on efficient processes for selling and distributing products. When we are working with large accounts, such as the major grocery chains, we are able to achieve great economies of scale, and we can‘t do that here. I recommend that we cut our losses and kill this line, before it completely drains the resources that we need to ensure success in other areas of grocery.
June 12, 2011
MEMO TO: Martin Hernandez
FROM: Robert VanDam
RE: Healthy Snacks Product Funding
Martin,
The healthy snacks product team has identified three projects that need funding this year in order to meet sales projections and make a real entry into this market.
1) Distribution channels: Large distributors don’t want to handle our products, so we’ve got to find other, cost-effective ways to reach the market.
2) Organic snacks: Our current product offerings are healthy, but they do not use all organic food ingredients. Health food store owners are telling us that this is very important. It may increase costs, but our focus groups tell us that consumers will pay more for organic foods, so we believe we can earn a reasonable margin on products that are 100% organic.
3) High-fiber, high-taste children’s snacks: Consumer focus group studies have indicated high interest in high-fiber products for children. Most of the current high-fiber offerings for kids don‘t taste good to kids. Our research suggests this could be a very successful niche for us.
The team is asking for approval to move forward on all three of these projects. Our initial budget projections suggest that investment now could result in a break-even point within 18 months and profitability within 24 months.
I look forward to our meeting to discuss this.
Robert
June 20, 2011
Meeting between Robert VanDam and Martin Hernandez
Martin: Robert, I was very disappointed to get your memo asking for funding to develop more new products for healthy snacks. I’ve been looking for you to increase the margins on the existing product lines, and instead you come back and ask for more money for a product that isn‘t meeting any of our standards for business performance -- not sales, not margins, not operating efficiencies, the list goes on. Where is the sense in that?
Robert: Martin, this is a start-up product line, and it’s not fair to subject it to the same standards used for mature product lines. Now only that, but we shouldn’t be expected to meet the usual product standards when this is not the usual product; it’s a completely different market with different needs.
Martin: Like what?
Robert: In grocery stores, we compete for shelf space with hundreds of other products. Obviously, attractive, eye-catching packaging is important because we need to stand out in a sea of alternatives. But that’s not true for this market. Most packaging in health food stores is fairly simple, and there aren‘t hundreds of competing products. But still, because of these uniform standards, I’m required to develop snappy, expensive packaging that ends up being counterproductive because it boosts the cost of the product to a degree that customers aren’t willing to pay for it. I’ve argued this point for months, and gotten nowhere close to getting an okay to tone down the packaging requirements.
Martin: So what you’re saying is that health foods are “special” and you don‘t need to follow a business plan? What makes your group any different than any other group in the grocery division? Why shouldn’t you be held accountable?
Robert: We should most definitely be held accountable, but we need to be held accountable to realistic standards for this product. I can’t stress enough that this isn’t the usual Best Snacks offering, and it requires a different plan. Here’s another example: We’ve always gotten great leverage in distribution because we ship large quantities to distributors, who then get us placement in the grocery stores. We can’t do that with this product line. The distributors don’t want to service health food stores because there aren‘t enough of them to make it worth their while. I’ve got to be able to get products directly on the shelves, and my team members are telling me that means we’ve got to develop our own distribution method. But I’ve gotten no support on that idea either.
Quite frankly, Martin, if we don’t do something soon, I’m going to lose some key people. Many of my team members are part-timers on this project, and they are getting tremendous pressure from corporate to work on other projects. At the same time, they are very excited because feedback we get from the health food market says that if we had more products, we’d be creating quite a successful niche. But we’ve got to commit to it. If we back off now, we risk losing all that we’ve invested -- and not just financially. There are a lot of quality employees frustrated with corporate’s unwillingness to support this new line, and I‘ve heard more talk of jumping ship in the past three months than I heard in the 12 before that. Best Snacks can’t afford to lose these folks, but I’m on their side. I really believe in this product line, but if the company isn‘t willing to back it, then maybe it’s time for me to look elsewhere as well.
Martin: Well, I can tell you feel strongly about this, but I don’t like threats, and I’m not about to approve this funding just like that. Give me a couple of weeks. In the meantime, keep working on the things that are already approved. I’d like to see some concrete ideas for improving product margins as well.
June 22, 2011
Meeting between Elizabeth Fairchild, Martin Hernandez, Sabrina McKay
Elizabeth: Thank you for meeting with me to discuss the issues with the healthy snacks product line. Martin, Sabrina is here because I think some of the issues are directly related to the progress we’ve made with innovation over the past five years.
Martin: In what way?
Elizabeth: Well, it seems to me that things were going along pretty good in the grocery division -- at least from a “level business” standpoint -- when the results of the innovation projects were largely product extensions and improvements. But when the health food line was introduced, your division was been unable to handle it, perhaps because it was too innovative, and the change was more than your staff could handle.
Martin: Okay, I’m open to the discussion, but I don’t think the issue is my department’s ability to absorb a new product. The product is simply the wrong product, one that doesn’t fit our business model. We can’t spread ourselves too thin, and I think that’s what we’re doing.
Sabrina: Martin, let me ask you some questions about the Healthy Snacks initiative. I’m not completely familiar with what you’re doing, and I’d like to understand it just a bit more.
Martin: Okay.
Sabrina: Tell me about the product line itself. How does it fit with the other products in the grocery division?
Martin: It’s a line of products that are focused on providing consumers with healthy snacks that taste good. As far as it being a snack, it’s similar to our other lines that are placed in grocery stores. The key market, though, is quite different. We’ve had very little success placing these in grocery stores, but have been successful when the products are placed in health food stores, but that’s not a market we’ve been part of in the past. The project team hasn’t found a good way to distribute to this market, and that’s increasing our sales costs. The project team is also complaining that we are imposing grocery standards on this line -- like insisting they have proper packaging -- which they say inhibits their ability to get appropriate margins.
Sabrina: It sounds like you’re not sure that these are real issues, Martin.
Martin: Maybe because I think they sound more like excuses for not meeting the business plan. We haven’t asked this product line to perform differently than any other. We’ve used the standard stage-gate model for approving each phase of the project. We’re simply at a point where the product line is not meeting the requirements to move to the next phase, and the project team is looking for a way to get it approved outside of the normal process.
Sabrina: What other issues do you see?
Martin: The healthy snacks losses are rising. Even though sales have increased, profit margins are well below expectations. Other grocery managers are grumbling … you know, their incentives will be seriously affected if we don’t meet our overall sales and profitability numbers. Plus, they all have research projects they’d like to see funded. They’d like to know why we should keep funding a business that’s incurring loss at their expense.
Manufacturing capacity is also becoming a real issue. Sam O’Neal from Operations tells me that overall production capacity is nearing its limits. At this point, we’ve prioritized this line’s production, which is not as efficient as some of the other product lines. As a result, my managers are concerned they won’t get the products they need to meet their sales and customer service targets. So this healthy line is creating morale issues, because I keep hearing comments about how the “golden boy” and his team can do no wrong. I don’t need that kind of problem.
Sabrina: Well, those are certainly issues that can create conflict. Let me ask you a couple of other questions. How were the people working on the product line selected?
Martin: Robert VanDam is pretty well-known for his experience in the health food industry and he brought in a couple of product engineers and a marketing person to help. But those are all temporary, part-time assignments, so these folks report to the appropriate functional managers. Fortunately, most of the divisional and corporate managers have been in their positions for some time, and they understand Best Snacks and how things work around here. I think they’ve been a good moderating influence on Robert and his team when they get too carried away.
Sabrina: Hmm. That’s interesting. How are these people compensated?
Martin: They participate in the same incentive plans that all employees do. They earn incentives based upon the overall company performance. Since Robert is considered a divisional manager, he also participates in the divisional manager incentive plan for the grocery division.
Sabrina: Are there any incentives for the project team based on how well the project does?
Martin: No. That’s something we’ve always avoided with R&D projects. We believe that inhibits group spirit. It takes so many people to make a research project successful—who do you reward and who do you leave out if you do that? The ultimate goal is to increase divisional sales and profitability, so it makes sense to reward the team based on how the division does.
Sabrina: How were the goals established for this product line, Martin?
Martin: The same way that goals are established for every other product line, Sabrina. We have a common planning approach that we require from all product lines and divisions. This is no different. We expect a certain rate of return from every product line within 12 months of introduction.
June 2006
Health Foods Today – volume 42, issue 5 – editorial comments
In our continuing quest to encourage healthy living, we recently conducted a study of the snacks being offered by a number of mainstream producers. As we expected, most of the so-called “healthy” snacks are simply scaled-down quantities of the same high-fat, high-sugar, high-sodium snacks sold in larger quantities, without real nutritional changes that make them healthier. One bright spot, however, is a new line offered by Best Snacks. Its Healthy Snacks product line grabbed our attention with its new line of energy bars. These snacks not only taste good, they provide a real alternative to granola bars and nuts with their emphasis on natural fruits and grains. While not yet produced with only organic ingredients, a company spokesperson suggests that organic bars are only a few months away. Keep your eyes out for this company. We hear more products of this quality are on the way!