Essential Elements of an Organization's Strategy and Change Management

Reference: Lussier, R., Achua, C. (2015). Leadership: Theory, Application, & Skill Development (6th Edition), Texidiumversion, students are to applytheessential elements of an organization's strategy and change managementconcepts and theories learned in this course.

Case Study Report Format and Structure of the Written Report: The body of the report should have:

1)Executivesummary- brief summary of the case

2)Issues- Identify five issues/symptoms

3)Problem statement- short statement summarizing the primaryproblem(s) of the case; to be a series of well-constructed sentences (nomore thantwo paragraphs)

4)Decision criteria- Clearly define the criteria thatprovides the basis for evaluation

5)Analysis of Alternatives - three alternatives; strengths andweaknesses

6)Recommendation- describe the preferred option and provide a justificationfor the solution you choose

7)Implementation/actionplan- briefly discuss what short, medium and long-termaction steps you wouldtake (one action step for each).

CASE STUDY

TEMOC Stores Inc. began life as a two-man operation namedTEMOC Batteriesin 1948 byits founder, Ethan Gilchrist, an engineer, as a business charging up batteries forcustomers' bulky wireless radios in Melbourne, Australia.With an eye for spotting upcoming trends in electronics, in a very short time, Gilchrist outgrew thisstart-up position. He shifted the business into radio rentals, then capitalized on early televisions andopened thefirst store in the 1950s.TEMOC expanded during the 1960s and 1970sandbecame apublicly listed company in 1972.The company sold consumer electronics and white goods along with related products andservices and pioneered theconcept of the out-of-town discount warehouse in Australia.In the early 1950s, demandfor wireless radios grew fast, and founder Ethan Gilchrist changedthename toTEMOC Radio, opening his first retailstore. More stores followed quickly.Following the Consumer Prices Act (1964), TEMOC expanded beyond its Victoria state heartland, becoming a national discount retailer.TEMOC was indeed the unrivaled championof the out-of-town discount warehouse market. Predominantly a mail-order business,TEMOCadvertised stock andprices 45% lower thanthe manufacturers' recommended retailprices. Fewpure-play electricalretailers could compete.

Expansion

In 1968,the firstTEMOC superstore opened in Sydney, makingTEMOC the first companyto launcha warehouse style store forselling electricals, suchas televisions andradios.Considereda trailblazer, TEMOC beata path subsequently followedby Do-it-Yourself(DIY)stores and supermarkets.TEMOC has developed from selling sofa-sized radiogramsto iPods, digital cameras andlaptops under the grammatically dubious slogan "we liveelectricals".TEMOC went public in July 1972 and expanded its range by purchasingEvoenergyGas, adiscountretailerof gas appliances. By the end of 1976, the group had grown to 50 outlets.

During the 1970s and 1980s the company had competition from several growingcompanies also providing electricalgoods. One such company was Bi-Rite whichTEMOCbought out in 1989.UnderEthan Gilchrist's leadershipand vision, andfor much ofthe '80s andthe 90s, TEMOCwas booming,with 460 storesand 10,000 employeesand mind-blowing profits.Ethanfeltconfident that this success would continue because of his vision and leadership, and resultingstrategy.Gilchristdeveloped aprogram where TEMOC gaveaway its ownbrand of batteriesin exchange forgetting people hookedon their brandof batteries yieldingTEMOC a nice annuity inthe form of80% of themarket for batteriesfor small electricalpersonal andhousehold appliances.InsideTEMOC, this was known as the "nickel" strategy named after one of the chemicals in itsbatteries. Itwas a fantastic success story. This businessstrategy was similarto Gillette's orthatof printer manufacturers: give away razors or printersto make money on blades and inkcartridges.TEMOC gave away batteries to make money on service andreplacementbatteries.TEMOC'smarketed its batteries under the private brand"Spartan"and due to the lowerpricing and relatively good quality, manyconsumers purchased Spartan batteriesfor other needs. Asa result, TEMOC enjoyeda 39% shareof the battery market; slightly behind thebattery giants DuracellInc. and Eveready Company.

Wal-Mart Enters the Scene

In 1994, Wal-Mart entered the Australian market with the takeover of Appliance Giant.The world's (then) largest retailereffectively wiped close to US$1,500m off the value of Australian chainstores with itsannouncement that it would discount some goods byaround 60%.To survive, retailershad to -at least - match Wal-Mart'slike-for-likediscounts.Theconsumer appliance retailbusiness was relativelysecure and profitable,and TEMOC's marketdominance was sosecure throughout the1980s, the electricalretail chain barely batted an eyelash when Wal-Mart entered the Australian market. In 2001, the consumer electronics and white goods sales peaked worldwide. But in a weekly senior executive meeting, Noah Harrison,TEMOC'sExecutive Vice-President of Marketing toldthe otherexecutives in themeeting that, "althoughsales are atan all-time high,a peak always conceals a treacherous valley." He went on to say, "Revenue growth is different than strategically positioning ourselves for the future. We need to focus on the long-term game to continue to enjoy the growth we have had for these so many years."Many of theother senior executivesviewed Wal-Mart asa formidable competitorand voiced theirconcerns about howcritical they thoughtit wasto focus on the long-termgame as well.Harrison waspleased that hisother colleagues hadbrought this up. He knows thatWal-Mart's behaviourelsewhere could help themunderstand how thecompany will likely operate inAustralia.Harrison pointed outthat Walmart hasstated publicly thatit iscommitted to itsimplementationof its cost-cutting modelin every market whereitoperates.He made the following passionate statement:"Wal-Martis particularlyrelevant because comparedto other largeinternational retailers; it has thelargest footprint inAustralia andis therefore poisedto expand rapidly. Wal-Martexecutives emphasize the need to buildscale in existing markets in orderto achieve profitablereturns, as soon as the company enters a new market, rapidgrowthis apriority. I believewithout adequate safeguards put in place, TEMOC may not survive."As founderand Chairman of TEMOC, andthe largest shareholderin the company,Ethan Gilchrist disagreedanddownplayed the situation,pointing to historicalmarket trends where salespeak, slow andpick-up again. "It isa cyclicalphenomenon, andwe need to stay focusedon the directionwe're headed. Ithas stood thetest of time,and made thecompany very prosperous, andthe leadingelectrical retailer in Australia."SinceTEMOC isa public company anda highly visible one, EthanGilchrist comments cameunder fire by analysts,pundits, and the media.The stakesforTEMOC's fourth-quarter earnings report were high. Forthe past year,analysts and investors have demandedthat the consumerappliancecompany clarify itsvision and strategyand explain what itis doing tocombat the entry of Wal-Martinto the Australian market. Calls for achange in leadership intensified.A well-respected industry analyst commented in her recent report about the retail consumerappliance market, "The problem,it seems, isthat as the worldhas changed, TEMOC hasn't".Ethan Gilchrist isan engineer andwas known around TEMOC as a "niceguy," a consensusbuilder, simply not whatTEMOC needs right now.

Is the Market Changing?

Overthe next twoyears, first, themarket began shrinkingvery slowly, andthen picked upspeed. During theweekly senior executivemeetings chaired by Gilchrist,Gilchrist used thisnew market data to emphasize his rational to stay focused on the current strategy. He said, "our reputationand long-standing positionin the countrywill bolster usfrom any stormscaused by Wal-Mart."The signs of a changing marketplace were both external and internal.

Externally,life became harderyet forTEMOC when online stores started to see big sales.TEMOC's strategy focusedon discount warehouse superstores and the traditionalbrick andmortar approach to purchasing and selling products. With over 460 superstores now,TEMOCwasundergoing a massive refitting of many of its stores, adding mezzanine levels to many ofthem, which was very costly.

Online Shopping Takes Off

TEMOC missed the initial signs ofshoppers moving to the internet for the best prices.Customer behaviour was changing, and customers are not being influenced and controlled bythe brandand firm asmuch now, whenthey make abuying decision. Peoplewere increasingly startingto use andbecoming more comfortablewith the onlineplatforms to gather informationand purchase productsand services. As a result,TEMOC was losingsales to ecommercegiants such as AppliancesOnline (#1 e-commercesite in Australia), Amazon,B2W Digitaland Alibaba.com.

In response,although slow toadopt to e-commerce,TEMOC establishedits own e-commercebusiness;store.TEMOC.com.au.With its background and competence with brick-and-mortarstores,TEMOC committed a cardinalsin in the development of e-commerce platforms: It appliedin-store segmentation to its e-commerce scenario. Althoughstore.TEMOC.com.au.was packedwith information that consumers wanted, many customers complained that the e-commercesite was difficult to navigate.

One online shopper commented:

"Theydon't have a clue about creating anonline experience forcustomers. I don'thave all day tofindwhat I'm looking for. It's very frustrating. They shouldgiveAppliances Onlinea call andget some help!"Antonio Iaconis, Sr. ExecutiveVice-President, e-commerce management services for Sana, agloballeader specializing in e-commerce management noted ina Forbes Magazine article that:"Corporate leadershipmust fully graspthat in the digital era, retailers must providecompelling reasons to buy in-store andconvert that intent into sales."Although purchaseson the internetwere growing, the"bricks and mortar"retailers (such as TEMOC) could survive. To survive, however, they need to develop an integrated multi-channelapproach and view their operations from the positionof the consumer (looking from theoutside in) and develop an engagingenvironment thatenhances brand loyalty.TEMOC executives appeared to have little understanding of integrated multi-channel retailing,operating instead fromdisconnectedsilos - marketing in one, customer services in another,supply chain and logistics in yet another and operations and technology outon its own.

8Technology expert Jonah Dundee toldBusiness First Magazine: "TEMOC is failing to understand theimportance of multichannel retail and failing to invest in e-commerce."Storm Clouds on the HorizonCustomers hadbecome dissatisfied with TEMOC's in-store experience andlack of customer service. One customer was interviewed on a local radio show during a segmentabout Wal-Martand its onlineshopping store. Oneof the listenerscalled-in, and theradio show host asked her what she thought of TEMOC. She answered:"Unfortunately, with stores like this and the overheads they have - renting premises andpaying staff - they can't compete. A lot of people prefer the internet shopping, especially the younger age group. Everyone's now just conscious of money and it's all about price."Also, fromthe outside waspeer pressure. SeveralAustralian retailers suchas Wesfarmers, Coles Group and Ampol Limited were already on a track to develop new strategies includinge-commerce to competewith Wal-Mart and itslow pricing, cost-cuttingmodel and onlineshopping store.Another, slightly bizarre, problem emerged. With similar-sounding names and both companies'logos blue ona white background,consumers confusedTEMOC with TAMOC(owned by rival Wesfarmers). Despitea US$20m rebrandingcampaign in 2005,TEMOCcontinued to lose market share.The internal triggers were clear.Thereare, in theend, two genericmarketing strategies: costleadership and differentiation. Operatingin a fiercelycompetitive market characterizedby very lowmargins,TEMOC wasnever going to be able to sustain a cost-leadership position. Yet it continued to focus (almostsolely) on price.Global Economic CrashThe global economic crash of the 2007 was the final straw. The turbulence emerging from thefinancial sector passedover into the realeconomy, and backfrom the realeconomy to thefinancial sector. Economic activity was paralyzed in practically the entire world with unprecedented synchronicity.TEMOC and other electrical retail companies were facing challenging times, with unprecedented decreasesin sales andprofits, but withstrategic cost-cutting, wereable to stay relevant. However, those cost-cutting measures included cuts to service that customers expected, and as a result, service levels dropped. When the service levels dropped, consumersstayed away, andworse, became street-savvyand avoided doggedselling of extended and expensive warranties.TEMOC was severely damaged, more so than its competitors because of its brick-and-mortar strategy andthe added pressure toreduce costs byre-structuring stores and laying off staff.

TEMOC's profitbefore tax tumbledfrom US$150m toUS$56m. In successiveyears it posted losses ofUS$8m, US$3m and finally US$39min 2011. In2012, it isreported to havelost a similar amount. Turnover peaked in 2008 at a fraction overUS $2bn and declined steadily toa reported US$1.2bn in 2012. Scott Morrison, afull professor and researcher at the Economic Department of the AustralianNational University said:"Increasinglevels ofunemployment, wage freezes andstagnationin the propertymarket combinedto keep consumer spendingon discretionary purchases rockbottom. It was simply impossible forstruggling TEMOC toimprove itsappeal tocustomers whilst closing stores andaxingstaff."

Best Buy Puts the PressureOn

In April 2010, Best Buy launched an online shop inAustraliato take the fightto itscompetitors AmazonAustralia,Bunnings and Woolworth Corporation. The online move byBest Buy was intended to shake up the lucrative online consumerelectronics market.However, oneyear later, BestBuy's efforts towin over Australian consumerswere an expensive failure, costing some US$200m to set up just 11 big box stores. According to RogerTaylor, CEO, "We werea bit late to launchthemand, in that time, clearly consumer confidencehasfallen significantly, theproduct cycle isquite tough tobe trying tolaunch a big boxmodel." Although Best Buy failed, it still placed serious pressure on TEMOC.

Smartphones Eating into TEMOC's Sales

With every passingday, more and more customers are buying smartphones like neverbefore. This has been fueledby the increasing number of cheap smartphones that are beingintroduced in the market by all major smartphone makers.Smartphone owners are downloading thousandsof applications towatch movies, televisionshows, listen to radiobroadcasts, sportsbroadcasts, news eventsand so muchmore. As aresult, television and computer and related consumer product sales dropped dramatically. These consumer goodssales areTEMOC's bread and butter.TEMOC continuedto make a loss.Meanwhile,TEMOC's stockhas plummetedby roughly50 percent since its post-IPOpeakabout a year ago. WhileTEMOC's first quarter revenue came in at $436 million, an increase of74% over last year, the amount fell below analyst expectations and the company'sguidance. The company lost $162million during the quarter.

Calls for New Leadership

Calls for achange in leadership were being demanded. The Board ofDirectors of the company said the company needs a CEO with"a definingvision"for the company.Finally, EthanGilchrist was forced to step down.In April 2013, Nicole Gibson, was announced as the new CEO and President ofTEMOC StoresInc. On her first day, Gibson was sitting at her desk, and looking out the windowand said toherself, "where do I start?".