Case Study: Oligarch Enterprises

This is written in the style of a Harvard case study. It is an allegory; imagine a real company in this situation and facing similar challenges. The questions at the end are a guide to what the issues are and the process to deal with them. Suggested answers are most welcome.

“They did what?!” exclaimed William, Chairman of Oligarch
Enterprises, at one of the regular informal gatherings of the “mini-board”. The
recovery of the supermarket division was progressing well, and the cafés were
holding ground, but yet again, two senior executives in the café division had
committed a very public faux pas, leading to widespread condemnation in the
media, and from some key investors. “Get them to make a public apology with a
bit of self-serving commentary”, he directed. “This will blow over like the
last one”. But in response to the e-mail advising the board of his decision, he
was challenged: “These things keep happening to us again and again. Maybe we
should hire a professional PR firm to help us communicate better with our
customers and use the media better?” asked Frank, the newest member of the
board. William was taken aback by the show of dissent. “We don’t need to waste
money on expensive consultants. We know what our customers want, and what’s
best for them”.

Was this just another hiccup along the way in Oligarch’s recovery?
Or is it symptomatic of some deeper issues? What should William and the board
do next?

Here’s a brief history to help understand how Oligarch found
themselves in this predicament.


The Coup

The best kind of coup is the one no-one notices. And so it was at
the supermarket and coffee shop giant formerly known as Autocrat Enterprises –
nurtured and grown into a large group of businesses for many years by Gerald,
who over time assumed the position of Group Executive Director (GED). Nothing
happened in the business without his knowledge or approval. When he started,
there was just one supermarket and a small coffee shop. But with a combination
of marketing savvy and his natural warmth to and connection with customers, Gerald
grew the business into the major force in the sector with the highest ranking
in customer loyalty. The flagship mega-café was Gerald’s pride and joy, and he
would visit regularly to sit and talk to customers.

Knowing that his days on earth were numbered, he set up a new
board of individuals he trusted, and a constitution uncommon amongst other
companies in the sector. Just a handful of people held ‘A Class’ shares with
voting rights, and several of them were also directors. The company was largely
kept running thanks to the ‘B Class’ investors – who together represented 92%
of issue capital – who continued to pour money in despite having no voting
rights, largely out of loyalty to Gerald and the brand.

When the time came in 2008, the coup was swift. Gerald had wanted
the senior executive of the flagship mega-café to take over his position, but
after his passing, the role of GED was effectively dissolved and all control
passed to the board, and principally to William as Chairman. The senior executive
remained exactly where he was, and while many people – particularly outsiders –
viewed him as someone who held a lot of sway, insiders knew that he was
destined to run the mega-café as a silo, and never anything more. The
only other person Gerald would have liked to take over was Harry – a
regional senior exec in the café division, and was also on the Master
Franchisor Committee because of his longstanding relationship with Gerald. But William
had successfully marginalised the only two realistic contenders for the top
job.

At the time, the biggest parts of the group – the two supermarket
chains – were headed by a couple of older execs who had each been there for
over thirty years. Rather than fully retiring them, they were gently shifted
into consulting roles and given positions on a newly formed board subcommittee
that actually did nothing and had no real responsibilities.

Supermarkets

Oligarch had been in supermarkets for as long as anyone could
remember. They launched back in the 1950s with two distinct brands – Gold and
Bronze – servicing what they considered two distinct and non-overlapping market
sectors. Most other companies in the industry preferred to run a single brand,
but this segmentation strategy worked well for Oligarch, and both chains
flourished. Despite owning both, they operated as silos with separate
management and administration. Over time, Gold pushed ahead thanks to its
ability to position as a brand with broader appeal to its primary target market
and several adjacent market sectors, as well as a better-executed growth
strategy. There was also long term stability at the CEO position, Gold was able
to attract superior staff, and they didn’t suffer from any of the OH&S
issues that seemed to plague Bronze.

In theory, Bronze’s market sector was of similar size to Gold, but
they were unable to make serious inroads in the market. By the time the
OH&S breaches at Bronze became public in 2010, the CEO had stepped down but
stayed on in a senior consulting role, as well as the board advisory committee.
An initial attempt to find a long-term successor failed miserably. A global search
for a CEO conducted by a specially appointed board subcommittee ended up
choosing someone not much younger than the previous CEO. She didn’t fit in
culturally, many staff were disaffected, and customers ran for the competition.
After just two years, she was paid out of her contract early, and a much
younger CEO, Michael, was poached from a competing chain where he had risen
through the ranks and established a reputation as a turn-around expert and a
good leader.

After just a year in his position, and following the shift of the
CEO of Gold to an advisory role, the board appointed Michael as Group CEO of Supermarkets.
He quickly set about merging administrative and supply chain of both brands,
resulting in economies of scale and improved performance. He was unafraid to
ruffle some feathers as he set about restructuring and running a series of
redundancies, but a few longstanding staff refused to leave, and one of the
board members suggested to Michael that he should prioritise other things. Despite
some minor issues, it appeared that the supermarket chains might be turning
around. But still the OH&S breaches continue to haunt him.

Cafés
The café chain also had its challenges. With a strong
history and loyal following, the original flagship mega-café was very successful,
particularly during the peak of Gerald’s tenure as Group Exec Director in the
1970-80s. But with the growing popularity of coffee, new competition emerged
and challenged Oligarch.

After an international chain announced a new concept store – a
combined book-store and café – Oligarch was under pressure and quickly opened
one in the same category, headed by Gerald’s trusted associate Harry. It was
widely viewed by the market as a reactive move, and after enjoying initial
success for a few years it began to flounder. Initially considered a
loss-leader for other categories within the brand, the losses continued to
mount, and the customer transition to other brands within the group just didn’t
happen. Gerald emphatically refused to close it down, and it continued to be a
drain on the group for many years.

In 2011, a new ‘next generation’ CEO was appointed to work
alongside Harry. His presentation to the board was very impressive, and he had
strong credentials working abroad in the same niche category. He set about
turning the business around quickly, controversially cutting some long-standing
senior staff and embarking on some innovative marketing campaigns. Things are
looking positive for the book-store café, but as a loss-leader, its value to
the group is regularly questioned.

Franchise
With population surges in a few key areas and the mega- café
unable to service a growing market, Oligarch needed to act quickly to capture
market share, so Gerald embarked on an aggressive franchise program. Cafés
under the group brand started popping up everywhere, with Gerald handing out
franchises to almost every applicant, ensuring along the way that those close
to him received franchises in what were considered the most attractive areas.

Even people who weren’t happy with Oligarch’s own flagship café
were issued franchises to open elsewhere, so what in fact was a growing
dissatisfaction with the flagship café was masked by significant growth at
group level. Even Harry, who operated the book-store café, had a separate
franchise café of his own on the side, despite questions about divided loyalty
and conflict of interest.

Gerald was the master franchisor, but following his death, his
role was replaced by the Master Franchisor Committee (MFC), consisting of three
members: Harry, Sam – who merged his café franchise with Oligarch – and Gordon,
who was a franchisee himself. The MFC was a very dysfunctional group, as each
member had their own franchise as well as tribally loyal franchisees, and there
was no process for conflict resolution. It didn’t even have formal reporting
lines to the board, nor was there a board member on the MFC. At one stage, it
descended to the point where the committee members themselves were no longer on
speaking terms. Somehow, the franchises continued to operate and new ones were
issued despite the problems.

The mega-café
The mega-café was for many years the flagship of Oligarch. Gerald
took a special interest in the mega-café to the point of micromanaging, yet
imbuing it with a personal flavour and warmth that attracted customers from far
and wide. But as Gerald grew old, it was harder to find and retain staff, and
many regulars stopped coming. Some became regular customers at other Oligarch
franchisees, but many left for competing cafés.

The position of senior executive running the mega-café is unclear.
He is considered by the market as holding a senior and influential role within
the group, but has little support from the board, especially after almost
regular public gaffes. The mega-café is in desperate need of some investment to
provide a fresh look, but while it can’t attract customers, continues to lose
money, and is unable to hold on to good staff, board support for the capital
expenditure is not there.

The OH&S Scandal
Gerald was not one for keeping meticulous records, and a series of
occupational health and safety (OH&S) incidents in the Bronze supermarkets
and one of the cafés that occurred in the 1990s became public in about 2010.
Gerald knew a lot about supermarkets and cafés but didn’t know much about
OH&S, and the regulatory environment at the time was weak. Some of the
affected customers demanded immediate sackings and the involvement of external
inspectors. But the majority were satisfied at the time for the matter to be
handled internally, which meant they would receive full medical cover and that
the staff who committed the OH&S breaches were dismissed and sent away.
Despite the breaches, they actually liked the supermarket chain, and didn’t
want it to suffer too much damage as a result of a few bad apples (no pun
intended).

Gerald thought he had the wisdom of Solomon to fix what was
actually a very complex problem and satisfy all stakeholders. He wanted to
protect both his loyal employees and the customers affected by the breaches. In
hindsight, these would turn out to be mutually exclusive goals.

What Gerald didn’t realise was that some of the OH&S problems
were systemic, and that standards changes were in the winds. So like any sore
left to fester, things only get worse with time. With the introduction of the new
OH&S standards, and several high-profile OH&S breaches at a very large
competitor supermarket chain, the issue started receiving more and more media
coverage. A newly formed advocacy group came after Oligarch Enterprises, with
claims for retrospective compensation, and demands for the sacking of the former
CEO of the supermarket, who remained employed at a senior level, as well as any
other senior executives who may have known about the breaches.

Oligarch knew that current OH&S processes were now fully
compliant and went out of their way to tell the market about it. But instead of
seeking to draw a clear line in the sand from the sins of the past and working
with the advocacy group on some related structural reforms, Oligarch hunkered
down for what would likely be a long battle. Knowing that a large compensation
claim was sure to come, the board’s lawyer prohibited any public comments, but
that didn’t stop several senior executives from entering the public debate on
the issue, and each time with disastrous consequences.

Group CEO of supermarkets, Michael, was regularly under the pump.
Even before his tenure, the chain had brought itself up to the new OH&S
standards, and Michael extended the program of compliance with a full external
audit. But as the face of the supermarket chains, he was still paying the
price. While he assured customers that standards were being met, some
long-standing customers demanded more. Given the history of the group and the
possible scope of previous breaches, they wanted to hear not just from the head
of the supermarket division, but from the board itself. They continued to
demand a full clean out, not just of the board members who were there at the
time, but of any senior staff who were in positions of authority during the
breaches. While Michael was in control of standards now, he could not speak on
behalf of the board, nor did he have control over the other parts of the group.
He was caught between a rock and a hard place.

The latest faux pas came when two senior executives showed public
support for a storeman and packer union protest. The public outcry was from all
sides – regular high-profile customers, competitors, and of course the advocacy
group and its followers. A leaked e-mail from a board member protesting their
comments was also circulated, and there were rumours of dissent from several other board members regarding the way this was being handled. Many were astounded that both the board member and
the senior executives retained their positions.

The 24/7 news cycle moved on to the next crisis, and it seems
Oligarch had against dodged a bullet. But everyone knew that a class action led
by the advocacy group was not far away, and that every time anything went wrong
at Oligarch, all the old problems would be dredged up again publicly.

Oligarch Org Chart

Questions

  • What patterns of behaviour can you identify in the board? What is
    driving these behaviours?
  • What drove the choices the board made and how did that affect their ability to deal with the issues? Why do they consider this an acceptable outcome? What could they
    reasonably expect would happen and why?
  • What are the barriers to a different
    outcome and how might you change things to create a different outcome?
  • Why are the senior executives retained in some form or another? What are the consequences of failure at Oligarch?
  • How would you describe the culture of Oligarch? How would it look using the Bolman & Deal four frame model?
  • What would you do if you were William? Harry? Michael? a disaffected ‘B class’ shareholder?
  • How would you restructure the Master Franchisor Committee?

Thanks to NG, CS, and JC for their feedback

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Join the discussion One Comment

  • Joe in Australia says:

    What an interesting study. My take on it is that the supermarket and mega-café should be physically separated. Now that the management is distinct there is little or no synergy between them. This would also be an opportune time to review the role of the mega-café.

    Competing outlets have continued their growth at the expense of the mega-café and their clientèle, significantly, tends to be a good bit younger. The mega-café continues to be a flagship, but it is now badly sized and suffers from an aging structure and distracting signage.

    My suggestion would be that the mega-café site be taken over by the supermarket, and the mega-café itself relocated. A purpose-built structure would better accommodate the existing range of uses – the large familial functions and annual events as well as the usual smaller groups that dine separately – and the supermarket site would enjoy extra space and greater contiguity. I appreciate that this would be expensive, but the mega-café is hæmorrhaging and simply cannot continue in its present form.

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