Organisational Behaviour: David Orton PLC Case - Assignment Example

David Orton PLC Case Study Introduction This is a case involving two retail merchandising businesses involved in an acquisition transaction. The Orton Group acquired Costwise, apparently to take advantage of the latter’s geographic competitive advantage which the former presently lacks. Hopes were high that Orton would generate the strong revenues Costwise had realized as an independent identity; however, unexpected problems accompanied the post-merger transition. Orton must address these challenges in order to benefit from the acquisition according to its strategic intention. Facts of the case 1. British food retailer Orton Group acquired Costwise in 2005, and became David Orton plc. 2. The size and structure of merged organization has not been worked out. 3. The morale of employees is affected but they remain hopeful. Camaraderie remains intact and has even been enhanced. 4. Prior to acquisition, turnover of Costwise was twice that of Orton. 5. Costwise stores have a presence where Orton has non, particularly the home countries, the south-west and Scotland. 6. Prior to the merger, Orton undertook a costly campaign to re-brand itself with the public. After the merger, the Costwise fascia was removed, leaving Orton as the only name in all 370 stores. 7. By end 2005, the Competition Commission (CC) ruled that the merged entity had to divest 50 stores to avoid the chances of monopoly. By late 2006, a total of 256, mostly ‘compact’, stores were scheduled to be sold to competitors, as they did not fit with Orton’s image. 8. The Costwise takeover had been more costly than had originally been estimated; the speed with which stores had been converted was slower than expected; and price-cutting and discounting had reduced profits at re-branded Orton stores. 9. After the takeover, the Chairman of the Orton Group, Mr. Orton, had fallen from power. He had been the prime mover behind the Costwise takeover. Subsequent criticisms of the merger gave other institutional investors the excuse to force him into a non-executive status. A CEO was appointed as well as other senior executives. 10. Orton subsequently stepped down and the hierarchy reorganized into regional areas. The former Costwise head office was shut down and sold, and out of 1,800 former Costwise staff in this office only 200 were retained. The problems of the case The case centers upon the demoralization of employees formerly of Costwise, and now of David Orton plc. The root cause of their demoralization is traceable to the fact of the merger, and the circumstances surrounding it, the more important of which are the following: 1. High level of uncertainty At the time of acquisition, there were unsettled matters on strategy, i.e. Costwise ‘compact’ stores business may be divested because they do not fit into Orton’s strategic thrust, but this matter is still unsettled. The eventual size and structure of the surviving company is not yet determined. This is causing morale problems among the staff. 2. Differences in management style Prior to merging, Orton and Costwise had different management styles. Orton was more centralized, autocratic and traditional. Costwise was more participative, dynamic and entrepreneurial, allowing greater managerial discretion to its branches. 3. Differences in business strategy Orton has a more homogeneous business, concentrating on large superstores and having a uniformity in its businesses. Costwise has greater diversity, with a portfolio of sites of varied size, product range, and retailing approaches. The variety of Costwise shops offered Orton to establish presence in other areas where it has not yet penetrated; however, Orton’s strategy here is not certain. 4. Declining turnover Due to re-branding and refurbishment activities, Orton found itself in a regime of declining turnover and profits, having has to issue at least five profit warnings in one year. While some of the decline was accounted for by the divesting of stores to comply with CC ruling, much of it also has to do with confusion among former Costwise customers who left the stores when they were re-branded as Orton. The declining turnover was exacerbated by the statement of the Orton chairman criticizing customers for their ‘southern snobbery’. 5. Numerous unforeseen costs The merged company experienced a sudden and unexpected rise in costs principally due to three causes. First, Orton underestimated the takeover value of Costwise and ended up paying a significantly higher acquisition price. Second, the costs of refurbishing and re-branding Costwise stores into Orton stores exceeded what had been originally intended. Third, the dwindling turnover at re-branded Orton stores convinced management to cut prices and offer discounts, aside from embarking on other promotional efforts, which further cut into the stores’ profit margins. All these costs were not originally taken into consideration by Orton prior to the acquisition. Perceptions of Costwise employees 1. The Chairman of Orton is viewed as inflexible. The chairman was known to have commented that he does not know or care what a middle class shopper is’. This supports the perception that as a leader he lacks flexibility and empathy with the customers as well as the staff, particularly Costwise staff because it is their business that the Chairman found not worthy of knowing. This also casts the Chairman in the eyes of the employees as a leader who is not aware of the issues and does not view a problematic situation with an open mind, but entertains preconceived notions to the detriment of his business. 2. The shift in marketing strategy is seen as disadvantageous to turnover There was a sudden and perceptible shift in marketing strategy for those stores that used to be Costwise stores. Formerly, the choice of merchandise and retailing management was determined by the store management which enjoyed some autonomy from the central management in these matters. Costwise stores were therefore well patronized because they catered to the locality’s tastes and preferences. As converted Orton stores, however, the choice of merchandise and details of their retail distribution were uniform for all stores and centrally determined. In those locations therefore where former Costwise stores were located, the new procedures were perceived to be ill-suited to the local market which was seen to have caused the significant drop in turnover. 3. Reduction in discretion and authority is perceived as disadvantageous to the business As mentioned, Costwise employees and management at the local stores were used to a great amount of discretion in deciding on matters pertaining to the store’s business. This included the choice items to stock, their marketing strategies, the setting of prices, and the recruitment of staff among other concerns. However, when Costwise was acquired by Orton, their store and staff underwent a radical change in functions and authority. It will be noted that while this is probably true of all Costwise personnel including those absorbed into the central offices, it would be most keenly felt in the converted Costwise stores in the various locations where they still operated, only under radically different circumstances. This would have been perceived as a change that was not warranted by the market’s conditions, given that Costwise stores were doing better under the old system. Simply stated, this would have been a change perceived as contrary to the best interests and goals of the company. 4. Ex-Costwise employees perceived themselves as ‘second-class citizens’ This perception among the staff was fuelled by several developments since the time of acquisition. At the onset, the former Costwise staff had been hoping that their pay, which was lower than that of similar ranking Orton staff, would be ‘levelled-up’ to meet their counterparts at Orton; to their dismay, their salaries were ‘levelled down’. Another indication of the staff’s irrelevance to management was that they had never been informed of major changes the company was undergoing, which they had to find out for themselves from other sources or when they were already being implemented. Ex-Costwise staff also felt disregarded when only 200 of the 1,800 displaced staff from the closed Costwise headquarters was absorbed in Yorkshire. Furthermore, the retention bonuses promised them before and up to the official takeover have not been received by them. 5. Finally, the affected employees also perceived the merged firm to exhibit poor communication and autocratic style of government, which they were adverse to. Motivational state of Costwise employees ‘Power relationships between parties influences the manner in which HR and cultural integration occur…Here, the HR policies and practices of the dominant party may be imposed. Feelings of defeat may affect merger outcomes in setting the direction of future cultural change and HR integration.’ (Horwitz, et al., 2002, p. 2). The differences in Orton’s and Costwise’s managerial styles mirror the motivational patterns of Theories X and Y formulated by Douglas McGregor. According to this classical theory, Theory X is premised on employees tending to avoid job responsibilities, for which reason they should be managed with a centralized and autocratic style. Theory Y, on the other hand, is built on the idea that employees are willing to assume responsibilities and must therefore be managed more liberally. In this case, Orton followed Theory X while Costwise followed Theory Y (Madura, 2007, p. 369). It is therefore only to be expected that the employees of an acquired company that was performing well on its own would normally feel threatened by the uncertainties in the acquiring company. The attitude among Costwise employees therefore was one of resentment and a feeling of being stifled in the freedoms they used to enjoy. Because of the negative perceptions of former Costwise employees about the new management and the takeover in general, there had been a severe deterioration of staff morale (i.e., ‘an all time low’). There appear to be several causes of the low morale that resulted among the former Costwise employees in the merged company, as follows: 1. Failure to conduct a pre-merger HR assessment and planning The HR (human resources) model of mergers and acquisitions (M&A) must necessarily include an HR planning and strategy development phase which must begin even before the merger or acquisition process has been completed. According to Croyle and Johnsey (2007), HR discussions should commence ‘as soon as the particular business unit has narrowed its scope and has chosen a deal that looks promising’ (p. 22). The purpose at this point is for the management of the acquiring company, or the two merging companies in an equal merger, to gain a clear understanding of the strategic objective of the merger or acquisition. ‘Merger and acquisition strategies seek competitive advantages which organic growth cannot achieve’ (Horwitz, et al., 2002, p. 2). Whatever benefits are expected to be drawn from the merger or acquisition would be anchored on the merging firms’ competencies and competitive advantages, which in turn should be discernible from the skills and capabilities of their respective staff. 2. Failure to assign people effectively and to retain valuable personnel Certainly, there will be redundancies, for which reason some will have to be separated. On the other hand, indiscriminate dismissal or assignment of personnel could defeat the purpose of the merger. It might turn out later that persons separated from the company might possess the competencies for which the merger was contracted in the first place. Or, alternatively, people who were critical to the competitive advantage of the merged firm might have been assigned to positions where their special skills or competencies were not made use of. Therefore, there must be a careful evaluation and delegation of jobs in the HR pool of the merged firm. Unfortunately, this was not done in the Orton case. Little regard was given to the skills possessed by store personnel in relating to their local markets; otherwise, they should have been allowed to operate with the same autonomy as they had previously done, which generated the strong turnaround that distinguished Costwise in the first place. There was also little importance given to the skills of the 1,800 or so personnel in headquarters, of which only a token 200 were retained after the Costwise HQ was shut down. Management should have given importance to the role identities already created within the organization, and to ensure that the behaviour expected of employees post-merger should be little removed from their roles pre-merger, at least in the foreseeable future, to maintain performance (Vaara, 1999). Valuable personnel in this pool should have been retained to man the new regional branches opened in new locations. 3. Failure to conduct a due diligence study of cultural compatibility In a study by Horwitz, et al.(2002), the importance of conducting a due diligence study on the merging corporate cultures in a prospective M&A has been underscored. By ‘due diligence’ is meant the assessment of organisational cultural differences between the two companies intended to be merged. Academic literature suggests that there are four integrated mechanisms of organisational culture that may influence its performance under a merger or acquisition: (1) the firms’ organisational direction and shared purpose, (2) early employee involvement, (3) consistency, and (4) integration of widely held system of norms and expectations (Horwitz, 2002, p. 2). Orton simply failed to conduct due diligence of corporate culture, as it simply also failed to do so for the financial and operations aspect of the company. The latter resulted in poor valuation and underestimation of true value. The same underestimation was committed in terms of the human resource aspect of the company. 4. Failure to properly inform the employees about major plans and developments, or make good on promised benefits The lack of communications, absence of transparency, and intention to keep employees in the dark prior to major changes only heightens the mistrust and anxiety experienced by employees, thereby negatively impacting upon performance. The delay in decision-making due to unclear responsibilities and post-acquisition conflicts is a major cause of failure in M&As (Emmanouilides & Giovanis, 2006, p.225). Moreover, management should consider that the undue stress and consternation experienced by employees at work are strong drivers of demotivation and loss of morale. ‘Mergers and acquisitions are disruptive events in the lives of the employees involved, and that they lead to increased stress and uncertainty with their usual associated dysfunctional outcomes’ (Moran & Panasian, 2005, p. 18). Recommendations to overcome the problem A major lapse of the acquiring firm is not to have conducted a due diligence of HR and culture of the acquired firm, costing the firm valuable human resource capabilities. It therefore becomes absolutely crucial to conduct a human resources inventory of each contracting firm, to assess what competencies will be needed in the new firm, and which among the combined complement of existing personnel should be retained and who should be allowed to go. In the advent of a merger, workforce in both companies naturally come together in a spirit of initial suspicion and distrust, due to the power struggle that accompanies the integration of overlapping, and possibly redundant, functions. In the case of an acquisition, the feeling of mistrust is overwhelming on the part of the acquired company because of its position of relative weakness in the power relation. What management should therefore do is to lessen the uncertainty and engender trust by fostering free and open communication, honesty and transparency with their employees. Krishnan & Park (2002) determined in an empirical study that ‘workforce reduction had an adverse impact on performance in the consolidated organization’ (p. 285). This is true in the case of both the acquiring and acquired firms. Thus, it is necessary for the merged workforce to be retained as much as possible, to ensure continued optimal performance. Orton must therefore create a systematic manpower needs assessment for the new organizational units it has created, and staff as many of them as possible with qualified Costwise personnel, providing them the needed incentives and challenges to develop a sense of engagement with the new company. Wordcount = 2,604 excluding title References Croyle, R M & Johnsey, A L 2007 ‘Dow's novel approach to managing the human element of mergers and acquisitions.’ Global Business & Organizational Excellence, May/Jun2007, Vol. 26 Issue 4, p18-26; DOI: 10.1002/joe.20151 Emmanouilides, X C & Giovanis, N 2006 ‘The Human Factor as Reason of Failure of Mergers and Acquisitions’ Journal of Business and Society. Vol. 19, Issue 1/2, pp. 221-234 Horwitz, FM; Anderssen, K; Bezuidenhout, A; Cohen, S; Kirsten, F; Mosoeunyane, K; Smith, N; Thole, K; & van Heerden, A 2002 ‘Due diligence neglected: managing human resources and organizational culture in mergers and acquisitions.’ South African Journal of Business Management, Vol. 33 Issue 1, p1 Krishnan, H A & Park, D 2002 ‘The impact of work force reduction on subsequent performance in major mergers and acquisitions: An exploratory study.’ Journal of Business Research, Vol. 55, pp. 285-292 Madura, J 2007 Introduction to Business. Thomson South-Western, Mason OH Manzini, A O & Gridley, J D 1986 ‘Human Resource Planning for Mergers and Acquisitions: Preparing for the "People Issues" That can Prevent Merger Synergies.’ Human Resource Planning, Vol. 9 Issue 2, p51-57 Moran, P & Panasian, C 2005 ‘The human side of mergers and acquisitions: A look at the evidence.’ Universidad de Talca (Chile). Facultad de Ciencias Empresariales. Accessed 28 October 2011 from http://dspace.utalca.cl/handle/1950/1152 Vaara, E 1999 ‘Role-bound actors in corporate combinations: a socio-political perspective on post-merger change processes’ Scandinavian Journal of Management. Vol. 17, pp. 481-509 Read More