Could the KGB Concept Have Worked? This paper provides a sample analysis and solution to the fictive Harvard Business School case study on Kent Chemical Products (ICP), an 191 7 founded Ohio-based global leading chemical company.
ICP produces plastic additives and further specialty chemicals and tats America’s largest supplier in this sector with revenues of $2. 2 billion in the year 2007 (Bartlett & Wining, 201 2, p. 1). The case is set in July 2008, about the time when the recent global recession had been looming. The company’s situation is considered from the perspective of Kent Chemical Internationally (KC, a ICP subsidiary comprising the international divisions) President Luis Morale, who is the major decision maker in the case.
Other key decision makers are Kent Chemical Products CEO and Chairman Ben Fisher, his son and Vice Chairman Peter Fisher and he President of Kent Chemical U. S. Angela Peers. Throughout great parts of the 20th century, Kip’s operations and sales remained mainly focused on the united States. By the end of the century, in the year 1 999, only 1 1 % of KCs total revenues came through exports from outside the IS. S. , licensing agreements and minority Joint Ventures (Jobs).
From the year 1 998, initiated by its newly appointed CEO Ben Fisher, the company began to pursue a more global strategy to stimulate further growth and thus wanted to become a company that develops, manufactures, and sells worldwide” (Bartlett & Wining, 201 2, p. 3) by increasing its international alignment and global expansion ambitions. As a result of Kbps new strategy, reinforced by the overall globalization tendency of the world economy, the company’s international sales as a proportion of total sales had climbed to 25% in 2007, where most progress in expanding international sales had been made until the year 2004.
After Morale began implementing the global integration strategy by taking majority interests in Kip’s offshore Jobs, acquiring further foreign companies and generally intensifying international manufacturing ND sales, he was facing various problems. His most obvious problem was that Kbps international sales and income and thus overall firm growth have plateau, since Kip’s international business has been the main driver for its overall firm growth.
However, since 2004 only little progress has been made in expanding international sales. The company has only grown moderately at a much lower rate in the recent years after 2004, profit margins have declined and ICP has even shrunken in terms of sales volume after 2006. The reason for the decline in Ken’s profitability in the recent years, especially between he years 2006 and 2007, is the sharp increase in manufacturing costs, while sales volume has increased only moderately.
This is probably a first impact of the impending global recession that is an additional external problem Morale and his company are facing and that piles the pressure on him to find a fast and sustainable organizational solution to set up the company for tough years to come. This urgent need for an organizational change leads to the heart of Ken’s problem, which is one of organizational structure and hence certainly the main reason restraining Kip’s further growth. In detail, Kent definitely suffers from its inability to adequately coordinate its businesses due to its misbranded organizational set-up.
Therefore both: in terms of the structure of Ken’s international organization KC and especially the organizational linkages between the domestic and overseas divisions, withholding the company from adequately coordinating issues with global implications. In addition to these problems regarding Ken’s overall organizational structure and organizational linkages, there are also the more intangible continuing problems of poor relations and communication teens the domestic-based business and the international subsidiaries.
These manifest themselves as several facts: First of all, the U. S. -based organization failed to adapt demands for change, second, the U. S. -based business divisions have been unwilling to grant any autonomy to the international divisions and third the international subsidiaries, having a long history of independence, reacted to such treatment by resisting to being controlled and or managed by the domestic-based business divisions. These problems Luis Morale faces as the President of KC when he began pursuing n international expansion strategy.
In the chapter 2, the problems will become investigated more detailed to show where the different causes for unsuccessful organizational changes come from. The strategies used are closely related to the theoretical coordination / configuration framework (Porter, 1 986) and also in conformity’ with empirical evidence according to a current McKinney study (Gibbs et al. , 2012). Both stated that organizations get more difficult and complicated to manage once they pursue global growth and thus become larger, more international and more complex.
In detail, it is dated that the two dimensions of configuration and coordination are positively correlated, where configuration comprises where and at what scale primary activities of the firm are conducted and coordination defines to what extent and how these activities need to be coordinated (Porter, 1986). The relationship between these two variables is exactly what the case of Kent Chemical Products shows and corresponds to the fundamental organizational challenge lying ahead of ICP. . 2 Link of Kip’s Strategy to Porters Generic Strategies Porter’s framework of generic strategies include three different approaches a firm can follow in order to be successful. Those are named cost leadership, differentiation and focus. The differentiation strategy, according to Porter, requires special skills and resources such as strong marketing abilities, product engineering, creativity and a corporate reputation for quality or technological leadership.
Furthermore, Porter stated that companies following the differentiation strategy pursue to attract highly skilled labor, scientists, or creative people. According to the stated definition, Kip’s chosen strategy can be linked best to this theory amongst the Porter’s three generic tragedies, since ICP is a chemical company, following a scientific approach strongly engaged in product engineering and R&D and thus relying on its strong reputation for quality and technological leadership. A tailored marketing and above all highly skilled and creative employees are also key success factors.
However, following a strict cost leadership strategy or even partly (with reference to the focus strategy), would never be viable for a firm operating in this extremely capital demanding chemical/technology industry, carrying a huge responsibility due to the nature of its products and being giggly dependent on its high R&D expenditures. 1. 3 A Suitable Vision for ICP and KC Following a potential vision conceivable for the companies ICP and KC: “We are the worldwide technological leader in the chemical industry. Our customers view Kent Chemical as their partner of choice.
Our highly innovative products and intelligent solutions make us the most competent global supplier in the chemical industry. We generate a high return on our assets, while we strive for sustainable development and aim for making people’s lives better, safer, and healthier. We, the employees of Kent Chemical, welcome change as an opportunity and together ensure our success. ” 1. 4 Ken’s Fundamental Organizational Challenge Kip’s fundamental organizational challenge is to cope with its transition from a domestic-oriented organizational structure to a truly multinational structure.
Relating to Daft (2007), pointing exactly this process of firm development, he argues that organizations typically transit from domestic- oriented to global organizations following certain stages. It defines four different stages of organizational development. Stage one is labeled the mystic stage, in which the company is highly domestic-focused with few initial foreign activity through export. The second stage is the international stage of an organization, wherein companies pursue an “export-oriented multi-domestic” strategic orientation.
In this stage, the company typically establishes something like an international division instead of having just an export department and hence competitive issues in each country are now independent of other countries. Stage three is called the multinational stage, wherein the company has made extensive experience in several international arrests, maintains manufacturing, Research and Development, and marketing units in a number of countries and probably of utmost importance, obtains a huge percentage of total reeve uses from sales outside its home country.
In the fourth and final stage of organizational development, named the global Stage the company’s strategic orientation is absolutely global, covering any single country and its organizational structure is that of a transnational matrix. Therefore corporations in the fourth, global stage such as “global players” like Nestle, Enhances-Busch Ellen or Procter & Gamble no anger associate themselves with any domestic country.
When Kbps CEO and Chairman Ben Fisher announced in 1998 the company’s international expansion strategy, he attempted to progress to the third, so called multinational stage. However, ICP currently appears to still stuck in the shift from stage two, the international stage, to stage three, the multinational stage. As the development of Ken’s foreign-to-total-sales ratio and thus the growing importance of its international segment shows, some considerable progress in Ken’s internationalization has been made.
Nevertheless it is obvious that ICP has not yet successfully made the structural transition from the international to the multinational stage of an organization, which will be Kip’s fundamental key challenge for years to come. Even though the firm’s CEO Ben Fisher established KC as a separate corporate entity within the Kent Chemical group, effectively KC is not acting as more than an international division (second stage) bound into a still predominantly domestic-oriented company.
There is still only poor coordination and communication but a lot of conflict between the U. S. -based and oversea divisions, which should be poised urgently. In order to finally realize the transition to the multinational stage and to generate further growth through increasing international sales, it will be of utmost importance for Morale and the other executives to abolish the existing lack of coordination on issues with global implication in order to be able to coordinate price, product, or sourcing decisions globally.
Furthermore Kip’s strong domestic orientation needs to become given up to provide the international subsidiaries with more autonomy and scope for decision-making and use their specific knowledge to tailor Kip’s products and racketing efforts to the individual demands and needs in the different countries. 1. 5 Task Analysis and Role Assignment Luis Morale as the President of KC, Ken’s international subsidiary, assisted by the implemented Gabs, bears the brunt of finally ensuring more coordination and integration within the Kent group.
Morale saw the integration failure mainly as a failure in conflict management, while in retrospect there is no doubt that the assignment of roles and tasks thus far was a major reason for the failure of Silk’s integration process. While Morale hoped the global business directors (KGB) for each product division would unction as an integrator between Keens domestic and international divisions, implementing the Gabs did not help to integrate KC at all.
Besides the problems concerning role assignment especially with focus on heritage and regional expert knowledge (more detailed explained in part 2), also mistakes have been made in setting the individual tasks within the integration process. Morale definitely failed in defining the tasks of the Gabs sufficiently, so they defined them for themselves, what in combination with their overall “U. S. Soused” attitude were doomed to failure. With all this in mind, it was also a ajar flaw to make the Gabs the chairs of the subsequently established world boards, since their acceptance and reputation has been damaged in both the domestic and the international organizations. As first but vital steps to solve these problems regarding the role and task assignment, Morale supported by Peter Fisher should put together a mix of U. S. VSP and foreign- based managers in key roles, like the KGB-positions and define their roles in detail such that regional managers are enabled to obtain extensive authority over their operations. This includes also country-specifically tailored racketing and technology control while the Gabs should strongly concentrate on integration tasks and act more as an intermediate between the domestic and international organization instead of trying to gain or maintain control over the operative activities of the firm. . 6 Why These Problems Emerged Now and not Earlier in the asses Morale has begun implementing an international expansion strategy in 1998/1999 (and not earlier) by taking majority interests in offshore Jobs and subsidiaries, that caused more control and responsibility for KC and a significant growth in overseas operations and sales. According to the introduction of coordination/ configuration after Porter and the compatible empirical study by Gibbs et al. It lead to a stronger need for more coordination and integration of the firms international divisions and also on a product basis, since the new amount of requests were not longer feasible by Morale alone as Silk’s principal top-level contact. In addition to this development, there has also been the global economic recession that began in 2007/08 and piled the pressure for Serfs organizational restructuring to keep the firm profitable and shelter it from uncial distress. 2 Unsuccessful Responses 2. 1 Changes Morale Made 2. 1. The KGB concept The first major reorganization in 2006 started with the announcement of Angela Peers as the new president for the U. S. Businesses of Kent Chemical Products and Peter Fisher as vice chairman with responsibility for all corporate staffs and the international operations. Furthermore, Kent Chemical International became a separate legal entity structured as subsidiary of ICP. In the same year, Luis Morale started the first organizational change & new structure by the appointment of three new so allied “Global Business Director” (KGB) with responsibilities for each of the three product lines.
Because of several reasons, in sum the restructuring failed: First of all, all three appointed Gabs were managers with a long career in the united States and it is not stated that they have some experiences working in a foreign country or culture -which is only suboptimal for the target to extend the international business. This overall goal requires multinational influences and thinking to support empathy and social skills coming from working in several areas and regions.
Secondly, an issue that name along with the implementation of the new roles was the missing initial definition of the role of Gabs tasks, goals and responsibilities that would have strengthen the position in order to mandate decisions affecting other top- level managers. This could ensure acceptance and freedom to act only by the measure that would cause a ratification of Gabs actions and competencies. Furthermore the necessary interfaces and collaboration links have not been established in the first place which leads to the result of ignorance how to work together with Gabs from other managers’ point of view.
One advantage of the newly established concept was the newly diversified view of the direct- reports to Morale. This comes from the situation of different views to the issues caused by the circumstance that Morale had the opportunity of regional directors focusing mostly on the local issues on the one hand and Gabs focusing a bit more on products on the other hand. So in fact, all disciplines were set but to make it successful, the right connection to domestic managers and disciplines are missing to ensure a product and market focus within the KC leadership team.
But this potential advantage as only the theory where little successes could have been found – in case of a right definition and implementation of the concept. The organization chart from 2006 offers several drawbacks like the fact, that Gabs Were not “real” vice-presidents (which are per definition people reporting directly to the president / vice chairman). The Gabs reported in first instance to Morale as president of the separate legal entity KC and in consequence of that, the product division mangers did not really respect and accepted the Gabs as equals. Furthermore the regional director for MEME (Europe, Middle East and
Africa) saw them only as a burden that requires more organizational resources and time to align and coordinate. Last but not least, the clear definition of Gabs targets and goals was missing which lead to the behavior known from neo classical economy theory of principal agent problem (Ross, 1973), where hidden agendas and actions of one individual causes loss of performance -? in the case of KC it is caused by asymmetric information between other established managers agents”) who feared the loss of competencies and power in their area of responsibility and the newly established Gabs (“principals”). 1. 2 World Boards Due to the unsuccessful first organizational change by introduction of KGB concept, Peter Fisher had the idea to implement another change to correct the KGB concept and optimize the organizational issues. This lead to the deployment of so called world boards in the year 2007 with the goal to support Gabs with their target to improve international activities of KC. These world boards should be composed of representatives from domestic and international organizations on the one hand and different product and functional areas on the other hand.
For each of the company’s global genuineness fire protection, medical plastics and consumer products, a world board was formed. At the presentation Of this concept, Fisher showed also the updated role of Gabs and overall tasks of the world boards. Also this change was no huge success. Only the fire protection world board performed well and met the stated objectives. A reason for this was the internationality of the fire production product ranges itself because the opportunities, risks and other topics had global implications that made it easy to discuss on a worldwide level without micro discussions about local specialties.
Another success factor was the internal organization of the fire protection world board where the KGB who served as board chair, discussed all relevant topics and issues with the domestic division vice president before the official world board meeting to avoid plasticization of the discussions. The other two world boards have been unsuccessful which leads to the result that all in all this organizational change was also a fall. Diverse factors like the big size and huge number of participants in the world board meetings and also a lack of support from key domestic managers.
Reason for this was the fear to give up rower or the endeavor to enter the next career step and manage international activities on in their responsibility. Furthermore, the status of the Gabs was not the best – resulting from the fail of the first organizational change that led to a lack of reputation in combination with the impression of some managers that the top leaders tried to give Gabs more power to establish them now by force after failing in the first try.
So all in all, both organizational changes failed. The ideas itself were not bad but the implementation was a disaster -? starting from communication and alignment before the changes, selection of the key people, definition of their role and communication of cooperation models that were all done only halfway. 2. 2 General Options for Organizational Design of Kent Chemical Referring to the five traditional organizational structures of Pearce and Robinson (Pearce and Robinson 2009, p. 45): simple, functional, divisional, matrix and product- team organizational structure, there are several opportunities to set a structure for Kent that would support the overall goal of international growth. In consequence, the matrix organ sectional structure (with some adoptions to Keens preferences) could fit best, because it is an organization “in which functional and staff personnel are assigned to both a basic functional area and to a project or product manager.
It provides dual channels of authority, performance, responsibility, evaluation, and control The matrix form is intended to make the best use of talented people within a firm by combining the advantages of functional specialization and product-project specialization. ” In the specific case and with respect of the specific requirements of Kent Chemical International, it could make sense to establish his organizational structure both to ensure clear focus on the product range and also the region with equal weights.
This could have several advantages like an uniform authority level of managers with different areas of responsibility. Furthermore it ensures the link to the corresponding product division managers and functional areas on corporate level. Next to this approach focusing only on changes within Kent Chemical International, another way to optimize the organizational design is the integration of the separate legal entity KC that deals with the international business and ranges the responsibility for regional issues also to the product division managers who then diversify their organization after regions.
This has the advantage that on the one hand, specialties of the individual product ranges are taken into account by the possibility to adapt the division to the special requirements and on the other hand, the existing vice presidents can stay in their position avoiding power struggles, plasticization or double reporting within the organization. 2. 3 Could the KGB Concept Have Worked?
In general, the concept of global business directors could have worked with he limitation that several changes starting from concept development, alignment, selection of key people and resources until implementation of this new organizational concept must have been considered more intensively. But it could not work in the way it was done by Morale in 2006. Some tools and approaches can be useful to optimize the organizational change.
First of all, a very easy and also useful tool of chance management can become used- a discussion and preliminary alignment with other managers and especially the president and vice president to gain backing, collect other Opinions and abbey detect some shortcomings. Next to this step and the final conception of the change, the change management tools of a detailed project implementation structure, working packages, detailed goals for each step and manager and also factors to evaluate the success / failure later must become defined.
Furthermore, the steps before the appointment and communication of the new directors are very important. These include a clear definition of the role, responsibilities and reporting streams for Gabs and also a presentation of the strategy to other managers to unify and clarify why the many decided to take these steps. These actions require the uncovering of shortcomings, the overall formulation of goals and especially how this concept targets company long term focus. Furthermore it is inevitable to show also personal benefits for the managers.
Secondly, the selection of the three Gabs must be strategically with respect of the overall goal of international growth. Therefore the managers itself must also have an international background – which was not ensured by initial implementation because Morale “appointed three global business directors (Gabs), each with long, successful U. S. Career” (Bartlett & Wining, 2012, p. 5). Next to the origin, competence levels must be at maximum to gain acceptance of colleagues and especially critical opponents.
This could be done via the change management tool used in the “Change-process Control phase” that requires some personal interviews with human resources department, other managers and long-time colleagues knowing the person and his strengths and weaknesses. Last but not least, another step that would have improved the KGB concept implementation is a accompanied announcement and communication Of the hang, presentation of the directors and the hoped-for goals to be achieved. 3 Sterling Partner’s Recommendations 3. New Management Challenges As international sales started becoming an increasing proportion of Kent Chemical’s total revenue (from 11% in 1998 to 25% in 2007), a more strategic approach to the international market was necessary. Since 2004 the process seemed to stagnate despite two reorganization efforts. One of them was the introduction of Global Business Directors (Gabs) on a UP-level and the second attempt to overcome the challenge of integrating KC with ICP was he incorporation of “World Boards”.
Unfortunately, both strategies brought little to no improvement regarding communication and coordination between the domestic and international business units. The main problem seems to be the company’s organizational structure. The internal organization is insufficient and outdated since the company is growing and becoming more and more international. Also, the linkage to the international subsidiaries obviously does not work. In addition, there is an imminent global recession that already had an impact on Ken’s earnings but might impose an even ore serious thread if the management will not be able to find an organizational fix.
Looking at the company’s recent history, We can State that Kent Chemical is an international but not a multinational company yet, bundling the informational flow through the U. S. Headquarter and preferring to fill key-positions with American managers. Even with KC becoming a separate legal entity, the division continued functioning more like an international division in a heavily domestically oriented firm. Further efforts of intergeneration included taking majority interests in all 15 of Kent
Chemical’s offshore join ventures and the mentioned introduction of Global Business Directors (Gabs) and “World Boards”. Neither the general relations, nor the communication or the coordination between the domestic entity and the overseas subsidiaries improved. The first reason for that was the U. S. Based headquarters’ failure to adjust to new systems and demands. The second reason was the international subsidiaries’ unwillingness of cooperating with or being managed by the company’s U. S. Headquarters. The resistance was probably caused by the abduction of the international visions’ autonomy.