High Profile Corporate Disasters: Strategy Failure - Literature review Example

HIGH PROFILE CORPORATE DISASTERS: STRATEGY FAILURE by Introduction In the contemporary era, the presence of a globalized society essentially signifies the presence of a shared liability in case of any negative effects, influences and occurrences. This is majorly subjective to the presence of inter-links between various aspects of a given society where these are further linked to others in the global setting. Corporate disasters are often influenced by a variety of issues, in turn negatively influencing not only the affected entities and pertinent stakeholders, but also the general society at large. The paper will assess two such high profile corporate disasters in the U.S. – Tesco and Royal Bank of Scotland – in terms of critical strategic failures experienced. This will be the basis upon which a number of recommendations will be put forth, in reference to general improvement of the two entities under focus. This will be anchored upon the necessary application of relevant strategic planning and implementation measures. Strategic Planning: An Overview In the very competitive global corporate sector, it is a basic requirement for entity management to constantly review their strategic planning and implementation measures; as a safety measure against potential crises and disasters. Definitively, as Sun (2009) portrays, strategic planning pertains to the systematic procedure of envisaging the desired future. This is followed by the translation of such a vision into generally defined objectives and goals of a given corporate entity. Subsequently, the process is complete through necessary procedure through related sequences of steps towards achieving such goals and objectives (Sun, 2009:21). To be noted, as Douma and Hein (2013) present is that in contrast to long-term planning, strategic planning begins from the desired end goal, aim or objective working backwards towards the prevailing status. Long-term planning, on the other hand, usually begins from the prevailing status, following a specific path towards meeting estimated future entity needs (Douma & Hein, 2013:54). As Tricker (2009) espouses, long-term plan necessitates querying at every phase, which steps are needed, or what must be done to attain a higher goal or aim. In strategic planning, the planner at each phase will query what must be accomplished at the lower/previous stage, to attain the current position. In contrast to the aspect of tactical planning, strategic planning envisages the wider picture, which is flexible in terms of choices or avenues towards achievement of set goals (Tricker, 2009: 39). Tactical planning focuses primarily towards the achievement of narrowly defined provisional objectives, through the pre-determined avenues or means of achievement. From this, it is clear that strategic planning as a concept may lead to great success through determined achievement. On the other hand, it can result in disastrous outcomes and experiences (Fisher, 2010:4). Tesco: Strategy Failure In recent times, the corporate disaster where the UK’s largest retail chain admitted to have overstated its first-half profits by around £250m resulted in the suspension of four senior executives. Furthermore, McLean (2014) observes that the illegal artificial inflation of the profits also resulted in investigators being called in to probe further. This state of affairs led to major events where the most influential was the loss of the entity’s total shares valuation by £2bn; a large amount of its overall market capitalisation value in the London Stock Exchange. All this emerged after a whistleblower’s detailed account of financial accounting wrongdoings, i.e. the glossing over of business costs and the mis-booking of suppliers’ payments. These are what had misleadingly increased profit margins by the stated amount; a gross violation of existing rules and regulations, as standardized by the Financial Conduct Authority (McLean, 2014). This profit blunder revolves around the manner in which it accounted for both waste food and supplier contracts. Through its overly ambitious prediction of sales volumes in its food business, the entity subsequently experienced a reduction in cash rebates received from its suppliers. This is usually the case with suppliers paying out rebates whenever specific sales volumes are achieved (Mari, 2010). Furthermore, the mis-reporting of accounting information was linked to the inaccuracy of ‘waste’ costs, which refer to the out-of-date foodstuffs, as well as ‘shrinkage’ in reference to costs from unaccounted or stolen products. The implications are serious, being of significant impacts to small producers who could eventually suffer the most. In terms of strategy failures, a real threat emerged from existing corporate governance issues at the retail chain (the Leadership Foundation, 2015). Critical in this aspect was the hidden use of unsuitable accounting policies, which occurred as a result of the existing failure to institute regulatory mechanisms that are adequate. First and of critical concern was the fact the entity’s board of directors did not have adequate composition especially since it lacked any non-executive director with experience in retail marketing. This most likely explains why the adopted accounting treatment, as accepted by the entity Audit committee, was able to go through the board resulting in the signing-off of false information. The absence of necessary expertise and knowledge in the board resulted in the lack of effective challenging and questioning of the firm’s executives (Leadership Foundation, 2015). As pointed out by different industry players, major concern regards the failures within the entity’s corporate governance structure. This is especially in regard to income recognition procedures and issues concerning the board of directors’ composition. The lack of expertise and deep knowledge of retail in the board provides one aspect of the problem. The other is portrayed in the lack of employee autonomy and authority by the audit committee and auditors, to both challenge and question corporate executives. This is especially in regard to accounting figures being estimated based upon erroneous assumptions (McLean, 2014). The core strategic failure of having governance issues is in turn interlinked to another key strategic failure by the same entity concerning its IT sector project implementation. This is in regard to its online grocery shopping website, with the lack of seamless integration into the new system frustrating a wider base of consumers as Mari (2010) portrays. A critical issue, which was consumer dissatisfaction emanated from the upgrade of the online platform, in terms of order transfers from the old to the new system. Thus, the prior booking of delivery slots through an advance entry of a small placeholder order, and followed by a later date amendment or completion of the order as the due delivery date nears was the issue of concern (Mari, 2010). This was due to the new systems inability to effectively amend such place-holding orders. On the part of the customer’s web browsers, everything was portrayed as fine, but the orders received by the entity’s different stores for picking were the initial place-holding orders without additions or amendments. This resulted in the wrong orders being delivered (Mari, 2010/ McLean, 2014). Royal Bank of Scotland (RBS): Strategy Failure As a major global banking services provider, the corporation’s 2012 computer system problems technically affected various computers the entity operated, including those of Ulster Bank and NatWest. As Krigsman (2012) presents, the causal factor behind this system glitch came as a result of the application of a software update or upgrade to its CA-7 software, which resulted in different forms of malfunctions. This resulted in the wide-scale disruption of customers’ payments and wages amongst other transactions, with some customers being unable to view their bank account details or withdraw cash from ATMs. Others were further affected in terms of facing fines for ‘alleged’ late bill payments, as a result of the system’s incapacity to compute direct debits. Also experienced was the delay of completions of new home purchases, with some international travellers being stranded abroad, not being able to complete their journeys (Krigsman, 2012/ Mari, 2010). The double charging of personal loan borrowers was also another negative effect, with social welfare beneficiaries in the Republic of Ireland being affected as a result of delays. These, as conveyed by The Economist (2015) are but some of the negative domino effects that followed the presence of poor management, hubris and bad governance, as well as the lack of oversight authority, and accountability. As a result of expansive integration of banking services with other banking entities, the negative effects of the system failure was also experienced in other sectors. The ripple effect was far-reaching and caught various ‘watchdog’ agencies off-guard, just when the entity was facing major collapse. Fundamental to the issue is the aspect of ‘out-sourcing’ IT services to India, one of the major reasons touted as a cause, with the rest being squarely placed upon management and governance in the corporation (The Economist, 2015). As Fred Goodwin, the CEO oversaw rapid expansion of the entity abate with the lack of adequate adjustments. The most insightful aspect was his leadership style. He was known for clinically wielded cruelty, great ambition and melded charm in addition to inculcating the culture of assent and fear within the corporation. As Winnett and Tracy (2009) aver, his leadership and governance style was viewed by many as being compulsive or even fixated about small irrelevant issues, yet the huge risks his bank was running into did not appear to concern him or the corporate board of directors. As the leader of the entity, his position necessitated his continuous knowledge of the entity’s vulnerability to diverse risk especially those related to the dangerously thin cushion of capital it operated on as well as the IT system’s effective integration. This culture of lack of accountability, wrong strategy making and implementation, excessive expenditure on non-essentials and disregard for employee autonomy and authority, all contributed to the full-blown disaster (Winnett, R & Tracy, C, 2009). A critical aspect here was corporate culture that was inherent during his tenure. He was accused of governing the entity with a mixture of charm and terror. The lack of employee autonomy and authority was evident in the manner in which he often bereted employees both in private and in public. Often, he lost his temper whenever set targets, which many a times were unattainable because proper procedures were not implemented. The issue of combative, charismatic and clever chief executives being surrounded by executives and management that was too afraid or awed to question operation procedures is hence vivid in this context (Krigsman, 2012). Hubris is to be majorly blamed for the disaster and its wide-scale negatively impacting domino effects. His ruthlessness in undertaking different processes was evident especially during the integration of the former RBS and NatWest, just after the latter’s acquisition. To say the least, this zeal was evident in regard to the spontaneous buying up of assets where huge private equity deals were financed without proper strategic mapping. This eventually spread the entity’s capital base to breaking point, and it was only a matter of time, before everything collapsed with huge disastrous effects (Mari, 2010). The IT system failure was perhaps a perfect timing occurrence, which provided evidence of the deep trouble the entity was in. As a ruthless leader, he engineered various processes, which were approved by the board of directors and management, despite various issues of concern being forwarded. Through this input, the entity was able to grow extremely fast, despite the lack of proper foundations on which such growth could be established (Krigsman, 2012). Recommendations to Tesco While the Tesco’s crisis in terms of impact may not match other disasters, a number of parallels are drawn from their occurrences: poor governance, corporate hubris, and perverse incentives or excessive rewards despite presence of strategic failure. The presence of shared similarities in terms of management culture, routine public criticism deflection and undue attention towards making flattering amendments to entity earnings per share provide evidence of the problems present. As presented by Crawford (2007), the issue of concern is that of corporate failure, portrayed by the poor record on governance, risk management and strategy. The global reach and high profile of such an entity means that it is more susceptible to complaints and investigation, therefore requiring that governance and management issues be in line with existing best practices (Crawford, 2007:54). Furthermore, the huge amounts of monies spent on top advice regarding remuneration, non-audit consultancy and legal advice need to be enhanced, in order to avoid such case scenarios. There is need to enhance the presence proper and effective of corporate governance, especially at top management level, which is one of the key areas the entity needs to keenly look into. As Fisher (2010) states, this is in regard to issues of transparency, employee autonomy and independence, effective management and observance of ethical practices. While a majority of concerns were raised in advance, the red flags were not considered as a result of the lack of expertise and knowledge in the board (Fisher, 2010:3). There is need for focus to be on the continued redefining of capital employed and per share earnings adjustments. These are two areas of concern, which evidently played a role in the malpractice and subsequent national and international service interruptions. Employee autonomy and authority needs to be further strengthened with the aim of enhancing the culture of corporate accountability and transparency. This is informed by the fact that entity employees had raised concerns, which were however ignored (Sun, 2009:34). Recommendations to RBS The extra-ordinary growth of the bank that led to the entity taking pole position as the largest bank globally was as a result of different ventures, mergers and acquisitions. Notably is that these processes were all aimed at streamlining banking services, enhancing consumer satisfaction, effecting optimal output and propelling the entity in terms of greater global presence. The integration between the corporation and major banking platforms such as Ireland’s Ulster Bank and the British NatWest bank meant that greater efficiency in management and corporate governance was required. As Tricker (2009) conveys, this is due to the expected increase in amounts of capital flow that would be experienced, larger balance sheets that would need to be processed; the necessary importance of enhancing greater accountability and transparency in processes and ripple effects on the UK and global economy at large (Tricker, 2009: 49/Sun, 2009:37). Key to the concerns raised about the IT system failure was the issue of outsourcing of such a fundamental aspect of entity operations, especially given the fact that it was a major industry player not only in the UK and Ireland, but also Europe and globally. There is need to rethink on this issue. Therefore, the best recommendation will be to nurture an effective home-based platform, which is operated and managed at the headquarters. However, this is but a side-effect of prevailing issues of corporate management where there is a need to place more focus on (Douma & Hein, 2013:78). The presence of governance issues at top management level is one of the key areas the entity needs to look into. This is in regard to issues of transparency, employee autonomy and independence, effective management and observance of ethical practices. While a majority of concerns were raised in advance, the red flags were not considered as a result of the lack of expertise and knowledge in the board. Fundamentally, there is need for a reconstitution of the board and top management; in order to effectively stem the problem and reverse the negative effects experienced (Goergen, 2012:114). Conclusion In both case scenarios, it is evident that the nature of entity corporate disasters is primarily linked to inherent issues of corporate governance. A notable issue is that it is the top and/ or upper-middle management levels that are most affected, influencing subsequent organizational procedures. While employee concern may be present, the stifling of employee autonomy and authority in matters pertaining to organizational processes is portrayed through continuous ignorance of critical input. The presence of board of executives and management is firmly founded on the need to correctly and effectively play the role of over-sight; effecting both transparency and accountability. This is in addition to listening to issues of concern raised by employees. Furthermore, the essence of employee autonomy and independence is critical towards effectively running an organizational entity. The lack of such environments portends to the likelihood of negative results occurring, leading to inefficiencies, irregularities and corporate disasters as showcased. Reference List Crawford, C J 2007, Compliance & conviction: the evolution of enlightened corporate governance. Santa Clara, California: XCEO Publishers. Douma, S & Hein, S 2013, Economic Approaches to Organizations, (5th Ed.). London: Pearson. Fisher, J 2010, Corporate Governance and Management of Risk (M_o_R White Paper). UnconfuseU, TSO copyright. Goergen, M 2012, International Corporate Governance. Prentice Hall. Governance issues at Tesco. Leadership Foundation: Governance, (11 Mar, 2015) retrieved from: http://www.lfhe.ac.uk/en/governance-new/resource-bank/previous-news-alerts/Governance-issues-at-Tesco.cfm Krigsman, M 2012, RBS Bank joins the IT failures ‘Hall of Shame.’ ZDNet-Banking (11 Mar, 2015), retrieved from: http://www.zdnet.com/article/rbs-bank-joins-the-it-failures-hall-of-shame/ Mari, A 2010, Has the private sector caught the public sector IT disease? ComputerWeekly.com – Management Matters, (11 Mar, 2015) retrieved from: http://www.computerweekly.com/blogs/management-matters/2010/07/has-the-private-sector-caught-the-public-sector-it-disease.html McLean, C 2014, Colin McLean: Hubris can bring down any FTSE darling, not just Tesco. 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