This Document Contains Cases 19 to 20 Case 19: Tim Hortons Inc. INTRODUCTION This case examines a Canadian fast food restaurant chain at a point when it is in the final stages of being acquired by a large investment firm. In the third quarter of 2014, Tim Hortons Inc. is poised for aggressive geographic expansion, is confronting critical strategic choices, and faces tough competition, both domestically and internationally. Based on the potential to generate a variety of ideas and recommendations, this case analysis provides an excellent opportunity for a lively classroom discussion on the company’s strategic options. After a brief introduction, the case opens with data on the restaurant industry and consumer trends. The history of Tim Hortons’ restaurants is then presented, along with descriptions of the company’s organizational structure and goals, store locations, menu items, franchise system, store operations, and financial performance. Comparative information on the company’s main competitors follows. The case then closes with an explanation of Tim Hortons’ five-year strategic plan, the impending acquisition by G3 Capital, and other strategic considerations. In order to evaluate Tim Hortons’ strategic options, a case study should be completed using internal and external environment analyses to produce a comprehensive summary of the company’s strengths, weaknesses, opportunities, and threats (SWOT). With competition intensifying for the Canadian restaurant chain, a thorough competitor analysis should also be conducted so that appropriate business strategy proposals can be weighed. Again, due to the complexity of choices and potential input from students’ personal experiences, a variety of strategic recommendations should emerge from the analysis, and a vigorous classroom discussion should be possible. • Perform an internal environment analysis of Tim Hortons Inc. Construct a summary of the company’s strengths and weaknesses. Does the company maintain any perceived competitive advantages? • Perform an external environment analysis of the domestic and international restaurant industries. Construct a summary of the company’s opportunities and threats. • Conduct a competitive comparison between Tim Hortons and its biggest competitors in Canada and the U.S. What are the strategic implications of this analysis? • Using the results of your analysis, assess Tim Hortons’ strategic objectives and five-year strategic plan. Does the analysis reveal any flaws in the company’s direction? Make recommendations to strengthen the company’s strategy and to improve its chances of achieving success. ANALYSIS • Perform an internal environment analysis of Tim Hortons Inc. Construct a summary of the company’s strengths and weaknesses. Does the company maintain any perceived competitive advantages? A comprehensive look at Tim Hortons reveals substantial organizational strengths and some weaknesses within the firm. The company’s internal strengths, weaknesses, and competitive advantages are outlined and described below. Strengths » Iconic Canadian Brand – The Tim Hortons’ name is almost synonymous with the Canadian identity. Known as “Tims” or “Timmy’s” by the locals, Tim Hortons is one of the most widely recognized consumer brands in Canada. The restaurant chain is branded internationally as Tim Hortons Café and Bake Shop. Foreign awareness of the brand is highest at U.S. locations along the Canadian border. The company promotes community involvement and “gives back” through its Children’s Foundation. » Domestic Quick Service Market Position – Tim Hortons is the largest quick service restaurant chain in Canada and the fourth largest publicly traded quick service restaurant chain in North America based on market capitalization. The company holds 27% share of dollars and 42% share of traffic in Canada, which exceeds the shares of the next 15 chains combined. Tim Hortons’ ability to protect its domestic market was demonstrated by Dunkin’ Donuts’ unsuccessful entry attempt in the early 2000’s. » Franchise Model – 99.5% of Tim Hortons restaurants are franchise-owned, and the company maintains a close relationship with its franchisees and their communities. Even with steep fees and stringent terms, there is high demand for Tim Hortons franchises because of their profit potential. The table below shows that the company’s franchise revenues are on the rise, up $95 million in 2013 compared to additional revenues of $40 million from product sales. % Chg Net Change 2013 2012 Sales (in 000’s) 1.8% $40,225 $2,265,884 $2,225,659 Franchise revenues: Rents & Royalties 5.2% $40,229 $821,221 $780,992 Franchise Fees 47.9% $54,575 $168,428 $113,853 Total Revenues 4.3% $135,029 $3,255,533 $3,120,504 » Customer Convenience – Focus in the quick service category is on convenience for the customer, and Tim Hortons caters to “on-the-go” consumers. • Hours and Service – Tim Hortons is open 24 hours a day, offering take-out food and drive-through service in addition to the typical restaurant dining space. • Menu Items – The company’s menu items are fast to prepare and easy to consume. • “We Fit Anywhere” – The company uses non-traditional locations (such as gas stations, convenience stores, universities, hospitals, office buildings, and airports) as well as co-locating with other franchise restaurants to extend its customer reach. Its alliance with the Canadian Forces operation in Kandahar demonstrates the company’s commitment to serving its loyal consumers. During the 5 years that CF troops served in Afghanistan, Tim Hortons established a “temporary” shop that served 4 million cups of coffee, 3 million donuts and half a million iced cappuccinos and bagels to over 2.5 million customers from more than 37 countries. » Menu Specialties – Tim Hortons specializes in coffee, baked goods, breakfasts, and home-style lunches. • The Coffee – Tim Hortons has passion for coffee and extensive brewing expertise. The company’s biggest draw is its legendary coffee, 100% formulated from Arabica beans grown in the world’s coffee producing regions. At its stores, the coffee is freshly brewed every 20 minutes. The premium blend is also sold in tins and single pods in the restaurants and at supermarkets, along with some mugs and seasonal merchandise. Tim Hortons offers single selections of “best-in-class” coffees – one premium blend and one dark roast coffee. • Baked Goods – Famous for the donuts, Tim Hortons also offers a broad variety of “timbits” and pastries, including muffins, cakes, pies, cookies. • Beverages – In addition to the coffee, Tim Hortons has an expanded offering of hot and cold beverages, which includes teas, lattes, cappuccinos, iced teas and coffees, smoothies, and iced lemonades. • Breakfast Items – Beyond donuts and pastries, Tim Hortons serves oatmeal and breakfast sandwiches on biscuits, bagels, and English muffins. Wildly popular, the company holds 57% of the hot breakfast sandwich market in Canada. • Small Meal Items – For lunch and dinner customers, the company offers items with more substance, such as soups, chili, sandwiches, and combinations. Hot offerings also include paninis, crispy chicken sandwiches, and wraps. » Organizational Size and Resources – Again, Tim Hortons is the largest quick service restaurant chain in Canada and one of the largest in North America. The company has 100,000 employees and 4,546 restaurants globally. The table below breaks down the company’s international presence by region. Canada U.S. Gulf Europe Total Stores 3,588 859 38 61 4,546 % of total 78.9% 18.9% 0.8% 1.3% 100.0% • Geographic – The majority of Tim Hortons’ international restaurants (19% of the company’s total stores) are located in the northeastern U.S. (primarily in Michigan, Maine, Connecticut, Ohio, West Virginia, Kentucky, Pennsylvania, Rhode Island, Massachusetts, and New York). • Tim Hortons Coffee Partnership – Assistance and connections with farmers in Brazil, Guatemala, Honduras, and Columbia strengthen the company’s supply of quality ingredients and build its social capital. • Distribution Efficiencies – The company’s extensive offering of baked goods is produced centrally, and corporate-owned trucks deliver frozen product and supplies to dispersed store locations across Canada and the United States. This highly sophisticated operation of 3 manufacturing facilities, 6 warehouse distribution centers, and 1 warehouse services Tim Hortons’ North American restaurants. • Marketing – Chain advertising utilizes television, radio, outdoor, and print channels. Regional and local advertising is primarily in newspapers. Commercials are created for new product introduction and brand reinforcement. One of the more successful promotions for the customer base was Tim Hortons’ memorable “Roll up the Rim to Win” giveaway campaign. • Financial Performance – In 2013, the company’s revenues grew by 4.7% to $3.3 billion, and operating income rose 4.5% to $621 million. Sales growth is on par with restaurant growth in Canada (see table below). The company’s operating margin was 19.1%, and net profit margin was 13.0% in 2013. Dividends per share have increase for the past 7 years, growing a whopping 23.8% in 2013. Tim Hortons has experienced 22 consecutive years of same-store sales growth in Canada and 23 years of SSSG in the U.S. The company’s revenues per restaurant ($725,913) are 2.3% higher than the industry average in Canada (see table below). EPS rose 8.9% from 2012 to 2013. Returns are very strong, and its debt-to-equity ratio is improving. Also, franchise fees are up 48% (see table on page 2). Impressively, the company’s net income after taxes is currently 18.9%, which compares to an industry average of 3-6%. Canada U.S. Comparison Percentage Can. to U.S. Tim Hortons Number of Employees (in millions) 1.1 13.5 8.15% 0.1 Number of Restaurants 81,000 900,000 9.00% 4,546 Revenue Dollars (in billions) $ 57.5 $ 683.40 8.41% $ 3.3 Revenues per Restaurant $ 709,877 $ 759,333 93.49% $ 725,913 Employees per Restaurant 14 15 90.53% 22 Growth Rate 4.7% 3.6% 130.56% 4.7% » Cost Advantage – The company’s operational efficiencies and financial performance enable lower prices for consumers. This provides a distinct competitive edge for Tim Hortons in the marketplace. » European Partnership – The company’s alliance with the Spar convenience store chain makes Tim Hortons’ coffee and donuts available at 255 locations in Ireland and the U.K. As nearly all of these sites are self-service kiosks, the company has gained valuable experience with this alternative store/distribution model. » Product Innovation – Tim Hortons focuses on continuous development of menu choices to meet evolving consumer tastes and preferences. The company invests in product innovation to keep the menu fresh and responsive to food trends. » Corporate Resources – A staff of 1,800 employees performs corporate functions in Tim Hortons’ main and regional offices (five in Canada and two in the U.S.), distribution centers, and manufacturing facilities. The central team supports operations, finance, human resources, information technology, legal services, research and development, training, real estate acquisitions, franchising, purchasing, and marketing. Corporately owned and operated restaurants and an innovation center are used for the purposes of training and product/market development. Also, Tim Hortons University serves as a training center for franchisees. Leadership is provided by Marc Caira, President and CEO since July, 2013, who has extensive food and executive experience. Tim Hortons also has a Franchisee Advisory Board made up of 16 restaurant owners from across the chain and management which meets quarterly to discuss issues impacting the industry or chain. Weaknesses » Iconic Canadian Brand – Tim Hortons’ brand and products are little known outside of Canada’s borders. » Quick Service Market Position – Tim Hortons operates in a sector with the lowest average bills of all restaurant categories. This makes it more difficult to increase revenues and positively impact same-store sales growth. » International Merger – After merging with Wendy’s International in 2006, the combined company separated just 3 years later, when TLD Group, Ltd. repatriated itself to Canada. This raises concerns about the company’s impending acquisition by G3 Capital. » International Presence – All of Tim Hortons’ key rivals have a significantly larger global presence than the Canadian restaurant chain. » Competitiveness in New England – The company’s entry into the New England region of the U.S., facilitated by the acquisition of Bess Eaton restaurants, did not achieve desired results. Intense competition from entrenched competitor, Dunkin’ Donuts, is the primary reason that Tim Hortons was unable to establish a foothold in New England. Despite this disadvantage, the majority of Tim Hortons’ international locations are located in remaining northeastern U.S. states, including Rhode Island and Maine. » Financial Issues – Tim Hortons has strong financial performance, yet its records do indicate some problem areas. • Debt Exposure – Tim Hortons’ current ratio is 1.0, and its quick ratio is 0.4. These liquidity ratios indicate a weakness in the firm’s ability to meet its current financial needs, particularly its short-term obligations, without relying on period sales. The company’s debt-to-equity ratio is 132.9%, which signifies that leverage depends more on borrowed funds than shareholder contributions. In addition, interest expense rose 16.6% in 2013 to $35.5 million. And long-term obligations nearly doubled to over $1 billion. These indicators suggest that funding the company’s debt burden and liquidity issues could impede or pose a challenge for Tim Hortons’ growth plans. • Same-Store Sales Growth – Measured at a modest 1.1% in Canada and 1.8% in the U.S., this positive performance indicator is below Tim Hortons’ 2013 target of 2-4% in Canada and 3-5% in the United States. • Earnings per Share – EPS are also below target levels, which means that corporate market stakeholder expectations are not being met. • Employees per Store – Referring to the table on page 4, Tim Hortons’ restaurant operations require more employees per store than the industry average – in both Canada (by 62%) and the U.S. (by 47%). This is an indicator of operating inefficiencies and is perhaps partially due to stores remaining open 24 hours per day. Coupled with the company’s unionized workforce (which tends to elevate wages rates), it also means that Tim Hortons’ labor costs are higher than the industry’s as a whole. Labor is one of the industry’s highest line items, and this inequity can negatively impact Tim Hortons’ competitiveness. • Revenues – Again referring to the table on page 4, Tim Hortons’ revenues per store ($725,913) lag those realized in the U.S. by 4.4%. In addition, although total revenues are increasing at a 4.3% rate, restaurant sales are only going up by 1.8% (approximately $40.3 million). Meanwhile, franchise revenues are up $94.8 million (or a combined 28.7% over 2012 levels). (Refer to the table on page 2.) Competitive Advantages The above internal environment analysis reveals that Tim Hortons’ brand and position in the Canadian market provide the company with a competitive advantage. Focusing on service quality for the customer base, Tim Hortons also achieves intense loyalty within the domestic market. The company’s financial strength and low cost threshold also enable it to sustain a price point advantage over its competitors. • Perform an external environment analysis of the domestic and international restaurant industries. Construct a summary of the company’s opportunities and threats. Five distinct forces in every industry have the potential to influence a firm’s profitability. In the quick service restaurant industry, the threat of new entrants is low and is likely to exist only for individual stores on a local level. A large, but fragmented customer base shields the company from the effects of powerful buyers. In addition, suppliers have limited influence on industry dynamics. However, the level of intense rivalry is heightened by the threat of substitutes (a condition which is accentuated by changing consumer demands) and the motivation and intentions of major competitors. The graphic on the next page summarizes the strength of these five forces in Tim Hortons’ competitive environment. A summary of industry opportunities and threats follows. Opportunities • Acquisition – In August of 2014, plans are being made for the company to be acquired by G3 Capital, the Brazilian private investment firm that is majority owner of Burger King. The new company will become the third largest quick service food restaurant chain in the world, with 18,000 locations in 98 countries and combined international sales of $23 billion dollars. Even operating largely as two separate entities (independently managing its franchise relationships and brands), Tim Hortons will benefit from the new partner’s global expansion experience and hopes to be able to move its iconic Canadian brand more quickly and efficiently to a new global customer base. • International Expansion – To hit the company’s ambitious growth targets, successful expansion in foreign markets is essential. • United States – Tim Hortons’ entry into the U.S. market is considered a “must-win” battle by the company’s top management team. The limited service sector in the U.S. is comprised of fast casual and quick service restaurants. Customers in this category are looking for good service, good value, convenience to their home or work place, favorite types of food, and healthy menu items. - Fast Casual Sector – This sector accounts for only about 5% of the total limited service sector. But fast casual sales grew 11% in 2013, which is a much faster rate than the industry average. This is the only restaurant category seeing an increase in the number of customer visits. - Quick Service Sector – This sector is also growing faster than the industry average. • Emerging Economies – Growth rates in emerging economies make these developing markets an appealing target for firms trying to expand their international presence. As home base of acquirer G3 Capital and the location of the coffee farms Tim Hortons sources from, South America might be a logical market to target the company’s international expansion efforts. China is also attractive because it has become the second largest economy in the world, with growth estimates that exceed those in Western nations. The BRIC countries tend to be less affluent than the populations of advanced nations. So, companies with low cost strategies would have an advantage over companies entering these regions with premium or differentiated strategies. • Gulf Cooperation Council – Tim Hortons plans to open 120 new locations in the GCC region by 2018, including Bahrain. The company currently has 38 locations in the region. • Europe – Tim Hortons has a small presence in Ireland and the U.K. and should consider expanding in Europe based on some name recognition for products sold at its self-service kiosks. • Domestic Expansion – In 2013, commercial food revenues grew by 4.7% in Canada, 1.1% faster than in the U.S. Restaurant growth can occur through an increase in the average bill amount and/or an increase in foot traffic. Foot traffic is considered a better indicator of a successful strategy. But as food prices continue to rise, there is a reasonable expectation that increased bills can also contribute to increased sales. • New Product Development – To achieve Tim Hortons’ ambitious performance targets, product and menu innovation is a priority. It helps the company anticipate or respond to evolving consumer tastes, and it enables the differentiation of product offerings. • Consumer Food Trends – Locally-sourced meat and produce, natural ingredients, ethnic flavor profiles, gluten-free cuisine (non-wheat noodles and pastas), healthy children’s meals, healthy nutritional options, and dark roast coffee are all ingredients and food categories experiencing an uptick in consumer demand. • Expanded Food Choices and Combination Meal Offerings – New products can be used to generate renewed interest or new business at existing restaurants. • Industry Trends – Several favorable industry conditions align with Tim Hortons’ restaurant business model and create marketplace opportunities for the company. • Restaurant Share of the Overall Food Dollar – This has risen from 25% in 1995 to a current high of 47%. The modern population eats out – frequently. • Snack Segment – Morning, afternoon, and evening snacks constitute the industry’s fastest growing day segment. Consumers purchase quick bites from fast food restaurants while “on the go” outside of traditional meal times. • Behavioral and Demographic Shifts - Aging Population – The older segment of the population is healthier and wealthier than ever before. - Younger generations – This demographic, with its increased purchasing power and busier lifestyle, frequently grabs food at quick service restaurants (especially at snack times). - All ages – Due to advancements in communications and information technologies, there is an increased desire or expectation from the public for immediate and purposeful access to information. • Technological Developments – Mobile and digital technologies offer new ways to engage and attract consumers. Nearly all consumers are connected through their mobile devices, which presents the company with new payment options, tools to reward customers, and opportunities to enhance service levels. • Quick Service Category – This sector is largely recession proof and has high customer loyalty levels. 39% of quick service customers return to their favorite restaurants more than once per week. In Canada, the quick service restaurant market represented 64.7% of all meals and snacks sold in the food service industry and generated $22.6 billion in sales in 2013. Again, this sector is growing faster than the industry average. Threats • Acquisition – G3 Capital will become 51% owner of Tim Hortons in the proposed $12.5 billion merger. Even operating largely as two separate entities, the new owner will have strategic objectives that the company will need to fulfill, along with an expectation of shareholder returns. Based on previous merger difficulties with Wendy’s, the success of this acquisition is not guaranteed. • Market Saturation – Some analysts believe that Tim Hortons has saturated its home market in Canada. Meanwhile, all of its competitors are also seeking ways to expand in their home and foreign markets. • Competition – Tim Hortons faces tough competition domestically and internationally. Increased competitive rivalry is being fueled by inconsistent economic growth (which is lagging behind post-recession recovery expectations) and evolving consumer tastes. Even where it has a strong hold on Canada’s quick service segment, competition is heating up. This is particularly true for the breakfast category, where a number of chains are looking to capture more market share. In the quick service category, Tim Hortons also competes with grocery and convenience stores. Fast casual restaurants also compete with full service restaurants. Furthermore, Tim Hortons’ expansion efforts, both within Canada and beyond its borders, are likely to escalate rivalry from direct competitors attempting to protect or capture larger market shares. • Industry Trends – Several industry trends are working against Tim Hortons’ efforts to expand the business. • Number of Visits – This industry indicator of restaurant traffic is stagnant, and experts estimate less than 1% growth for the next few years. • Wholesale Food Price Gap – Food prices rose 7.1% in the past 12 months. Menu prices, which rose only 2.4% over the same period, are not being passed along to the consumer. • Home Cooked Meals – In Canada, all age groups are having more sit-down meals at home. The older segment of the population eats out less frequently than other demographics. • Conduct a competitive comparison between Tim Hortons and its biggest competitors in Canada and the U.S. What are the strategic implications of this analysis? Tim Hortons has traditionally competed with typical coffee and baked goods chains. However, with its stronger presence in the breakfast and lunch segments, the company faces increasing competition with restaurants in the broader quick service category (e.g., hamburgers, submarine sandwiches, pizzas and tacos). Its main competition in Canada and the United States comes from Starbucks, McDonalds and Dunkin’ Donuts. The table below compares Tim Hortons’ menu capabilities with those of its major competitors. This comparison is followed by an assessment of factors and resources that will influence Tim Hortons’ rivals’ ability to compete and respond to the company’s growth initiatives. Menu Variations Tim Hortons Starbucks Dunkin’ Donuts McDonalds Coffee Quality “Best-in-class” – premium and dark roast blends Bolder tastes Customizable > 30 blends/flavors Roasting facility Fewer blends High quality and flavor McCafe Espresso-based beverages Less customizable Baked Goods Centralized production Large variety Pastries, fresh and packaged 52 varieties of donuts Other baked goods Beverages Variety and choice Customizable blended beverages Ready–made drinks Hot and cold beverage alternatives Fountain soda, shakes, fruit-based smoothies Breakfast Breakfast sandwiches – 57% Can. share Oatmeal, yogurt, fruit, and sandwiches Breakfast sandwiches Egg-based sandwiches – 29% U.S. share Small Meal Soups, chili, sandwiches, crispy chicken Fresh salads and sandwiches Healthy options Chicken salad sandwiches with sides and combos Distinct meal options – burgers, fries, salads, wraps Snack Pastries and baked goods Pastries, fruit, and small pkg. snacks All day donuts and breakfast items Ice cream based desserts Price Lowest costs Highest prices Medium point Low price point Menu Variations cont. Tim Hortons Starbucks Dunkin’ Donuts McDonalds Other S. Am. coffee partnership C.A.F.E., ethical sourcing, environ. stewardship, corp. responsibility Loyal customers Aggressive U.S. and international expansion plans Menu innovation Value platform Leading quick service retailer Competitive Resources Tim Hortons Starbucks Dunkin’ Donuts McDonalds Stores 4,546 223,305 10,083 35,000 In Canada 3,588 1,555 4 1,400 Countries 5 62 32 119 Franch.-owned 99.5% 40% 70% 80% Global Revenue Cdn$3.3 US$14.9 billion US$7.4 billion US$29.1 billion Global Growth 4.7% 12 % 3% (target 3-5%) U.S. Revenue US$6.7 billion US$8.8 billion Global SSSG 1.1% (Canada) 7% (5% trans, 2% bill) -0.4% 0.4% U.S. SSSG 1.8% 3.4% (-21%) Op. Inc. $621 million US$2.5 billion +3% (target 6-7%) Op. Margin 18.9% (+ 4.5%) 16.5% (+10%) EPS Growth 8.9% 4 % Other G3 Capital acquisition Litigation reduced operating margin to -0.2% for 2013 Experimenting with coffee trucks on college campuses Wholly owned subsidiary – Dunkin’ Brands Unlikely to compete in Canada More affordable franchise offers ROICC 11.4% (target high teens) STRATEGY • Using the results of your analysis, assess Tim Hortons’ strategic objectives and five-year strategic plan. Does the analysis reveal any flaws in the company’s direction? Make recommendations to strengthen the company’s strategy and to improve its chances of achieving success. Tim Hortons has defined aggressive growth and financial goals. The company’s top imperative is to deliver profitable growth, measured by same-store sales, operating profit improvement, and sustainable earnings per share (EPS) growth. Transitional investments and positioning for business success are planned in 2014. From 2015 to 2018, Tim Hortons has the following goals: o 11-13% compounded annual growth rate, o cumulative free cash flows of approximately $2 billion, o operating income generated through the U.S. segment of up to $50 million, and o 800 or more new locations in North America and the GCC. While the company has revenue growth that exceeds the industry average, the analysis shows that most of this growth is generated through franchise rent, royalties, and fees. And while Tim Hortons’ profit margins are strong, it is not achieving the levels of profitable same-store sales growth that is desired. This also follows for EPS growth. The ability to realize free cash flows in the range of $2 billion is particularly concerning. Both cash and current assets are down in 2013, and liabilities have risen (see Exhibit 3 in the case). Therefore, corrections are necessary to achieve the goals outlined above. In addition, capital will be essential to build the number of new restaurant sites in Tim Hortons’ plans. Generating $50 million in operating income from the U.S. is realistic, as this represents just 8% of the company’s current operating income through 19% of its stores. However, if retained earnings (which fell by 47% in 2013) are unavailable for expansion efforts, this capital will have to come from additional debt, shareholders’ equity, or capital from acquirer, G3 Capital. In Tim Hortons’ “Winning in the New Era” Strategic Plan for 2014-2018, the company envisions a rejuvenated Canadian business that is the growth engine for the period. The aim is to have a profitable U.S. business that is ready to be aggressively scaled by 2018. The firm plans to build on its established, growing international presence and to create above-market-average total shareholder returns. Tim Hortons’ plans are based on four core ideas, which are outlined in the tables below. Using the strategic analysis performed above, strategic fit with the environment is assessed. Then, discussion and recommendations follow for each of the core points in the strategic plan. Same-Store Sales Strategy Components Strategic Fit Day category segments Hot and cold beverage category Snacks between meals Capability, but potential for segment growth is unknown Strength matched with opportunity Marketing Branding New advertising/marketing campaigns Strength to overcome stagnant conditions (threat) Strength matched with new opportunities to use technological tools Product innovation Differentiation in U.S. Strength matched with opportunity Tim Hortons’ same-store sales growth is underperforming. Because average bills in the quick service segment are low, an increase in SSSG figures must come from an increase in restaurant traffic. To be the fuel for the company’s expansion, it is critical to overcome stagnant traffic trends. As the table above confirms, targeting same-store sales growth through segment focus, marketing, and product innovation has strategic fit with both the company’s strengths and conditions in the external environment. The only component that cannot be confirmed with information provided by the case material is growth in the hot and cold beverage segment. Concentration on this category should proceed if market data supports a growing and profitable trend for these menu items. Targeting snacks between meals is one of the strongest growing segment opportunities matched with Tim Hortons’ core competencies and ability to cater to “on-the-go” customers. The development of new menu items in this category, coordinated with marketing, has the greatest potential to draw customers into existing stores. With the company’s centralized production and distribution system, local sourcing is not a strong option. However, the introduction of natural ingredients, healthy and nutritional menu items, gluten-free pastry options, and trending ethnic flavor profiles fits with the growing consumer demand for these types of products. Prepared and frozen “bites” fits with the distribution system as well as the growing snack segment. As the company makes its new menu selections, it will be important to consider the following factors: o Is the product exciting enough to be a powerful draw for customers? o Does the quality and price create value for the customer and have the potential to enhance brand loyalties? o Does the product category occupy uncontested space? o Can the product be prepared and served quickly and conveniently? o Can the product be formulated in ways that protect it from imitation? o Can the excitement for the new item parlay into new markets and create opportunities to capture a distinct following (especially in the U.S.)? The key is to innovate, differentiate, and create value and to compete on speed, price, and convenience variables. Product differentiation is particularly important for U.S. expansion, as it increases the company’s prospects of pulling competitors’ customers into Tim Hortons’ stores. The ability to aggressively grow in the U.S. depends upon the company’s ability to generate enthusiasm for the brand. Brand management and marketing are crucial elements to the strategy. The company has enormous opportunities to employ new technologies to effectively market. Social media tools can be used to increase brand awareness and customer loyalty. Perhaps a digital version of the “Roll up the Rim to Win” campaign can be developed. In addition, branding under “Tims” rather than “Tim Hortons Café and Bake Shop” can translate into the perceptions of quickness and convenience as well as better relate to the concept of snack time. This distances Tim Hortons shops from the Starbuck’s sit down model and slower, customized ordering system. The brand name can shape Tim Hortons’ image in new markets and potentially build customer loyalty. These efforts will protect domestic share and impact same-store traffic, but they may also drive growth in new markets. New/Existing Markets Strategy Components Strategic Fit Scale Canada – W. Canada, Quebec and major urban markets U.S. – aggressive and rapid expansion Competitive advantage to expand and protect domestic market share Expansion opportunities in neighboring country to overcome weak international presence cont. New/Existing Markets Strategy Components Strategic Fit Brand Strength in domestic market to overcome global weaknesses and pursue international opportunities Tim Hortons’ strategy to broaden its international presence and establish a profitable U.S. business that can support a scaled launch by 2018 require a thoughtful action plan to proceed. Domestic expansion under the current business model can proceed with the understanding that strengthening Tim Hortons’ position in Canada serves to deter competitors and to protect the home market against rivals with the resources to do harm. The next logical step is to increase the company’s presence in the U.S. The appeal of this market derives from the size and health of the neighboring economy in addition to its physical proximity to Canada. But due to competitive conditions, and rivals with both resources and strong reasons to defend market space, Tim Hortons cannot proceed without caution. Broaching the U.S. marketplace, the following factors should be considered when deciding how to move forward: o How can the brand be shaped to facilitate success in new markets? o Does brand awareness precede or coincide with new locations? o How can Tim Hortons’ name recognition along the U.S. border be expanded into new areas? o How can the company’s “We Fit Anywhere” strategy be used to identify the most effective and feasible locations and store formats? o What low-cost/broad-coverage alternatives can promote brand awareness and name recognition in new areas? o How do local conditions, preferences, and growth rates impact the company’s marketing decisions? o Is there an opportunity to capture market share in this market with a superior product? Recall that in addition to good service, good value, favorite food types, and healthy menu items, quick service customers are looking for convenience to their home or work place. One of the most promising approaches for Tim Hortons to consider is the use of alternative store formats, many with which the company already has experience. [Note: even though alternative store formats are outside of the company’s successful store ownership model, it is uncertain if the Canadian franchise model will work effectively in the U.S. or other nations.] Selective placement of kiosks, co-locations (partnerships), food trucks, or pop-ups has the benefits of quickly and widely building brand awareness at a lower cost, while testing local environments for market receptiveness to menu items and branding decisions. It might even be possible to initiate a “cult-like” following in communities with alternative and innovative service techniques. Do the company’s prominent menu items (such as coffee, hot breakfast sandwich, new snack items) offer superior value, quality (flavor), or price advantages to directly compete with powerful entrenched rivals? Younger customers, like college students, are an ideal demographic due to their snacking trends, sensitivity to price points, and potential for life-time loyalty. Thus, finding the “nooks” where this demographic can be serviced is a promising approach. And again, this is a distinctively different way to meet the needs of “on-the-go” customers than the fast-casual methods of some competitors. This is particularly important because the U.S. market has more competition and much more fragmentation than Canada’s. A precision micro-market strategy may be the way to discover unoccupied space under the immediate radar of competitors. Moves into new territories will eventually draw attention and competitive reactions from powerful rivals, especially if their shares are threatened by Tim Hortons’ actions. The company can expect more direct and aggressive competitive behavior if rival strongholds are at stake in areas where multipoint competition exists. (Tim Hortons’ key rivals simultaneously compete in similar product areas. For Starbucks, the most important similarities are in coffee and pastries; for McDonalds it is meals and prices; for Dunkin’ Donuts, it is coffee and donuts.) In addition to the U.S., Tim Hortons has existing plans to aggressively expand in the GCC during the plan period. This follows the logic of expanding in markets where some inroads have already been made. However, in consideration of other international opportunities beyond Canada, the U.S., and the GCC, it is important for the company to conduct further global analysis to understand regional growth rates and market distinctions. Then, its strategy can be defined. It is probably most fitting to select a transnational international strategy that pursues both global efficiencies and local responsiveness. However, decentralized decision making based on the needs of individual markets weighs more heavily, so the multidomestic features of the international strategy should take precedence over achieving global efficiencies. (This is consistent with Tim Hortons’ different brand presences in each of its three existing jurisdictions – Canada, the U.S., and the GCC.) Finally, the firm should select international markets based on pursuing the most promising opportunities that best fit with the company’s strategy and core competencies. Additional considerations, derived from the analysis above, include conditions in Europe and opportunities in emerging nations. » All of Tim Hortons’ competitors are either already present or are expanding into Europe. Starbucks is struggling to capture share in Europe due to intense competition. If the Starbucks’ coffee brand cannot compete in Europe, does Tim Hortons offer anything that can? Are the company’s competitive advantages (price, menu, value, convenience) suited to the circumstances? Is something working in Ireland and the U.K. that can be transferred to wider European markets? Are locations available to serve the unmet needs of consumers? Further market research is needed to make strategic decisions about expansion in Europe, but these are significant issues to examine. » The analysis also draws attention to less affluent, developing nations where the company is capable of competing on price advantage. Tim Hortons’ Coffee Partnership and impending affiliation with G3 Capital (based in Brazil) shed light on potential opportunities to expand in South American markets, beginning with Brazil. To have an international presence, Tim Hortons needs financial resources, organizational capabilities, store saturation, product innovation, and brand recognition to compete with some of the world’s largest and best known quick service companies. The forthcoming merger with Burger King should help, but how the merger will pan out is uncertain (if the company’s experience with the Wendy’s merger is any indication). And the company’s ability to create a competitive advantage on a global scale is unproven. The importance of a successful merger with G3 Capital is clear. The primary advantage of the partnership will be the infusion of capital and corporate resources that will be necessary to achieve the company’s pressing objective of international growth. Growth in New Ways Strategy Components Strategic Fit Standard restaurant design Capacity Throughput Corporate resources to match market opportunities Equipment Menu items The redesign of restaurant space to maximize capacity and throughput is consistent with the goal of enhancing convenience for “on-the-go” customers discussed above. New store design also supports the flow of increased traffic required to grow same-store sales. Interior and exterior elements should be designed in ways that reinforce brand decisions and support new menu categories and product innovation. It is advisable to avoid meal categories (such as the company’s newer crispy chicken items) that resemble products at its larger competitors. Such moves will unnecessarily draw the rivals’ attention, particularly if introduced in U.S. Furthermore, complex menu innovations for the dinner market change the food operation of the kitchen. New equipment in this case is not the restraining factor – it is the length of time required to prepare the food that deviates from the other consistent strategy components described above. Based on the analysis, it is the most fitting strategy to focus on simplified “best-in-class”, appealing, and trend-conscious food and drink categories that are easy to eat on the run. This means that the simplicity of food preparation, speed of order service, competitiveness of price, and delivery of a value offering to the customer looking for these features should shape all strategic decisions, including kitchen and restaurant design. Core Competencies Strategy Components Strategic Fit Business strengths Vertical Integration Supply Chain Capabilities and opportunities are uncertain. Strengths exist, but specific opportunities are unknown and ability to apply beyond current operations is uncertain cont. Core Competencies Strategy Components Strategic Fit Franchise system Strength not certain to match conditions in international markets While exploiting core competencies in new ways is a sensible strategic approach, specific opportunities to take advantage of supply chain management skills and to integrate vertically are beyond the scope of this case. It should be noted, however, that Tim Hortons’ skill set is not necessarily applicable to all of the capabilities required for vertical expansion. There is no evidence that backward integration (acquiring and running supplier operations) is advisable. In fact, it may reduce the company’s flexibility to respond to ever-evolving consumer food trends. On the other hand, vertical integration can contribute to gains in market power over rivals, as the firm develops the ability to save on its operations, avoid sourcing and market costs, improve product quality, possibly protect its technology from imitation by rivals, and potentially exploit underlying capabilities in the marketplace. The success of the company and brand is currently linked to its franchise system. (As discussed above, all but a few of Tim Hortons’ restaurant sites are franchise-owned.) However, the strength of the company’s franchise system may not succeed in markets where its value is not perceived or where the market is saturated with well-known fast food restaurants. Therefore, newer store formats and cooperative arrangements should be given strong consideration, especially to facilitate flexibility and quick movement into new convenient locations. This may become a key to successful international expansion as it also provides valuable knowledge of new market conditions and enhances performance. In conclusion, Tim Hortons’ guiding mission is to deliver superior quality products and services for its guests and communities through leadership, innovation, and partnerships. Its vision is to be the quality leader in everything it does. This case analysis provides a strong foundation to support clear strategic choices. While some may emphasize a different strategic approach, Tim Hortons’ 5-year strategic plan is solid. And taking into account the component weaknesses and recommendations presented in this section, an integrated and coordinated set of commitments and actions can be developed to exploit the company's core competencies and competitive advantages, pursue promising marketplace opportunities, overcome internal weaknesses, and minimize competitive threats. Tim Hortons Inc. Ind. Rest. Performance Stores Finl Comp Case 20: W. L. Gore – Culture of Innovation INTRODUCTION This case spotlights W. L. Gore & Associates, a company that is an outstanding example of corporate entrepreneurship in action. Founded in 1958, this firm was far ahead of its time in recognizing the intrinsic value of human capital. Using workforce knowledge and skills to sustain a competitive strategy based on internal innovation, W.L. Gore has become a successful modern business, well-known for maintaining a unique organizational culture which fosters individual potential and creativity. This case illustrates advanced human resource and strategic management concepts. The case material describes the guiding principles that go back to the company’s beginnings and shape W.L. Gore’s culture of innovation, the flat lattice structure that supplants a typical organizational hierarchy and authority channels, the uniquely-transformational leadership qualities of the organization, how the firm uses commitments to define associate responsibilities and work, and the decision-making tools that steer internal processes. The following questions use the resource-based model of above-average returns to structure a review and discussion of the extraordinary practices used by W.L. Gore to achieve success. • Determine if W.L. Gore’s business formula corresponds with the theories of the I/O model of above-average returns or the resource-based model of above-average returns. Explain your response, and outline the steps for the model that best reflects W.L. Gore’s situation. • Define W.L. Gore’s tangible and intangible resources, and discuss their value to the organization. Identify the capabilities and core competencies that support the company’s competitive advantages. • Evaluate the firm’s decision-making capabilities. How does W.L. Gore locate attractive industries and select its strategic approach when pursuing promising market opportunities? • Consider W.L. Gore’s competitive strategy. Assess the fitness of the firm’s organizational structure and controls to help the company achieve its strategic objectives. Can you identify any problem areas that may develop as the company faces oncoming competitive forces? ANALYSIS • Determine if W.L. Gore’s business formula corresponds with the theories of the I/O model of above-average returns or the resource-based model of above-average returns. Explain your response, and outline the steps for the model that best reflects W.L. Gore’s situation. The industrial organization (I/O) model of above-average returns emphasizes the external environment’s dominant influence on a firm’s strategic actions. It suggests that the industry in which a company chooses to compete has a stronger impact on performance than the choices and actions made by the company. This model is less representative of W.L. Gore’s situation than the resource-based model of above-average returns, which credits the firm’s internal resources and capabilities with high performance. At W.L. Gore, a unique combination of resources and capabilities work together to prevent competitor understanding and imitation of its chosen strategy and allow the company to deploy competitive advantages in a variety of attractive industries. The resource-based model of superior returns contains the following steps. 1. Identify the firm’s resources. 2. Determine the firm’s capabilities. 3. Determine the degree to which the firm’s resources and capabilities produce a competitive advantage. 4. Locate an attractive industry. 5. Select a strategy which best matches the firm’s unique capabilities with the most promising market opportunities. • Define Gore’s tangible and intangible resources, and discuss their value to the organization. Identify the capabilities and core competencies that support the company’s competitive advantages. The first three steps in the resource-based model of superior returns are (1) identifying the firm’s resources, (2) determining the firm’s capabilities, and (3) determining the degree to which the firm’s resources and capabilities produce a competitive advantage. These steps are used below to outline a discussion of W.L. Gore’s organizational resources, capabilities, and competitive advantages. Resources. Resources are inputs into a firm’s production process. Tangible resources are assets that can be observed and quantified. However, there are restraints on the value of tangible resources, and they can be difficult to leverage into additional value. On the other hand, intangible resources are less visible and may not be quantifiable. These assets are rooted deeply in the firm’s history, accumulate over time, and are relatively difficult for competitors to analyze and imitate. For W.L. Gore, both types of resources are featured in the table below. Tangible Financial Resources With $3 billion in annual sales in 2012 (up 50% since 2007), W.L. Gore has the financial resources to support deliberate and continued global growth and a full range of strategic capabilities. Organizational Resources The value of W.L. Gores’ small, clustered, and integrated business units is underscored by the firm’s guiding principles, support functions, informal lattice structure, cross-functional teams and processes, and its sponsor, leadership, feedback, product champion, and decision-making systems. Tangible Physical Resources Gore has 30 offices worldwide and manufacturing operations in 5 countries. The company also has a unique alliance with DuPont, which provides advantageous access to the most critical element in all of Gore’s products, PTFE. Technological Resources The company’s pool of advanced technological know-how includes more than 2,000 patents worldwide, with applications in a diverse range of industries. At any given time, W.L. Gore has hundreds of projects in various stages of development, and associates throughout the organization have unlimited access to experiment and work with available materials and equipment. Intangible Human Resources 9,500 empowered associates operate in a uniquely-collaborative work environment. The company’s adaptable, informal communication networks and high level of knowledge intensity (shared across team, product, and division lines) are the foundation for its highly-productive and inventive human capital. The effectiveness of the company’s motivated workforce stems from flexible, strong, and trusting relationships and the binding commitment and responsibility of individuals. Self-awareness fuels independence and enables associates to set their own limits. Innovation Resources Evidence of W.L. Gore’s capacity to innovate is found in the company’s resume of high quality, unique, and differentiated products – which are predominantly the result of organic, internal innovation. Social capital and dabble time, either self-driven or “gifted”, are central to idea development and emerging sources of novel (or breakthrough) innovations. Reputational Resources From its product reputation (which makes W.L. Gore a leader in secondary branding and facilitates cooperative marketing), to its high levels of associate satisfaction and retention (which consistently places the company amongst the nation’s “Best Companies to Work For”), to its legendary entrepreneurial culture and management philosophy (manifest in individual freedoms and collaborative, knowledge-sharing associate relationships), W.L. Gore has a solid combination of reputational resources from which to secure and maintain sustainable competitive advantages. This case demonstrates how competently-managed human intellect can be converted into useful innovative products to create value. W.L. Gore operates without job descriptions or reporting structures, which gives associates freedom from structural restraints. Through its non-traditional management methods, the company has attained an abundance of intangible resources embedded in unique patterns of routines. They are a superior source of capabilities that can distinctly enhance W.L. Gore’s competitiveness in the marketplace. Capabilities and Core Competencies. A capability is the capacity for a set of resources to integratively perform a task or activity. Capabilities usually occur within a functional context. But because of the company’s lattice structure, emphasis on collaborative teamwork, and intangible workforce knowledge and skills, W.L. Gore’s capabilities supersede traditional functional boundaries. Rather than being defined by customary value chain activities, skill sets revolve around the company’s human capital and core technologies. They provide the basis for the company’s core competencies, which are heavily focused on new product development and the result of leveraging a workforce capable of continuous learning. The company’s specific capabilities and core competencies are outlined below. Capabilities Core Technology Human Capital - Functional expertise - Attracting and retaining top talent - Technical disciplines - Setting and meeting commitments - Rigorous patent protection of intellectual property - Project management - Cross-functional teams - Research and development - Autonomous work - Peer review - Sponsor support Core Competencies - Leveraging core technologies - Discovering new applications for ePTFE - Matching technology to consumer needs - Discovering commercial uses for high-value new products - Evaluating opportunities in terms of business results - Maximizing potential from new products - Patience to drive and commitment to achieve long-term success - Autonomous strategic behavior - Internal innovation Competitive Advantage. The core competencies identified above are resources and capabilities that serve as a source of competitive advantage, which is the ability of a firm to outperform its rivals. W.L. Gore’s competitive advantages begin with the company’s deep knowledge and mastery of ePTFE. The knowledge, skill, scope of responsibility, and range of activities of the empowered workforce at W.L. Gore promote action and produce ideas. The company also has unfettered communication throughout the organization, high-functioning collaboration, intricate relationship networks, and fluidity across business units, teams, divisions, and facilities. It has a productive and profitable organizational model – perfectly suited to foster internal innovation. W.L. Gore’s product mix of highly differentiated quality products and applications establish diversified positioning in the marketplace. The company expertly exploits the link between associate engagement, autonomous teams, and business success to deliver a continuous stream of novel innovations for newly created markets. Finally, the value of the organizational culture based on Bill Gore’s deeply ingrained management philosophies must be recognized as a strong source of competitive advantage. It holds the top priority in W.L. Gore’s mission statement and nurtures the entrepreneurial spirit, ownership, and global, long-term perspective which are critical to the firm’s ongoing success. Maximizing the power of knowledge intensity provides the company with strategic flexibility to respond to rigorous demands and to pursue unique opportunities in today’s dynamic and uncertain business environment. Finally, to the degree that W.L. Gore’s integrated resources and capabilities are distinctively valuable, rare, non-substitutable, and inimitable, Gore’s competitive advantages rank relatively high in sustainability. • Evaluate the firm’s decision-making capabilities. How does W.L. Gore locate attractive industries and select its strategic approach when pursuing promising market opportunities? W.L. Gore uses a variety of tools to enhance the quality of decisions made within the firm. To begin with, the company has low barriers to experimentation and provides ready access to equipment and materials for development purposes. In addition, it has a high tolerance for mistakes. These factors contribute to an internal environment that continuously generates new ideas. The company believes that its fluid problem-solving teams preclude the bureaucracy that typically interferes with organizational decision-making. As ideas develop and support emerges, peer reviews serve to check the ongoing fitness of projects. Through consensus-based decision-making practices, associates solicit feedback and commitment to projects prior to adoption, which keeps them safely below the “Waterline”. Consulting with other associates before taking action prevents decisions that can cause serious damage to the company and facilitates subsequent implementation. The company is seeking to discover ideas that align W.L. Gore’s unique capabilities with the largest, most attractive needs in the market. It conducts market studies to test the viability of new products and concepts. In choosing amongst various new business propositions, the company employs a rigorous discipline to narrow down the most promising opportunities, sometimes allowing years for concepts to take shape. W.L. Gore uses its “Real, Win, Worth” criteria to assess opportunities and market potential and to determine if genuine customer problems are being solved that merit premium pricing. Reiteration of these three reality check points resolves key uncertainties and ensures that unique and valuable projects with potential to produce a sustained technological advantage rise to the top. Projects requiring large capital investments are not approved unless there is a reasonable expectation of sufficient long-term pay-off (adequate return on investment) and are delayed until all uncertainties are eliminated. The purpose is to leverage opportunities in terms of real business results. Associates invest company money as if it was their own – and in a sense, for owner-associates and due to profit-sharing practices, it is their own. To be attractive to W.L. Gore, an industry must present opportunities that can be exploited by the firms’ specific set of resources, capabilities, and core competencies. It is with intense focus on core technology that the company selects the industries within which it participates. The company competes in a wide variety of diversified markets, including fabrics, electronics, medical devices, consumer products, pharmaceuticals, polymer processing, and fuel cells. One of the more unique aspects of W.L. Gore’s strategy is that there is no “core business”, but rather, “core technologies” upon which industry and strategy selection takes place. Quite contrary to most strategic models (including the resource-based model of above-average returns), the company’s strategy is set prior to industry selection. The energy of the organization goes into finding the next big thing in the marketplace that connects W.L. Gore’s technological competencies with a premium consumer need. Through this approach, the company unleashes the power of unlimited innovation, secures highly-differentiated positioning in the marketplace, and maximizes the fit between the firm’s unique capabilities and the most promising market opportunities. STRATEGY • Consider W.L. Gore’s competitive strategy. Assess the fitness of the firm’s organizational structure and controls to help the company achieve its strategic objectives. Can you identify any problem areas that may develop as the company faces oncoming competitive forces? Competitive Strategy. In sum, W.L. Gore has a competitive strategy to create high-quality, high-value, differentiated goods. Corporately, the company employs a diversification strategy, with four divisions serving completely different industries to protect against business swings in any one industry and to provide multiple investment avenues. Using a related constrained diversification strategy with a moderate to high level of diversification, W.L. Gore shares activities and transfers core competencies across organizational boundaries to achieve the benefits of operational and corporate relatedness. Organizational Structure. Strategy and structure have a reciprocal relationship. When aligned properly, strong performance results. A differentiation strategy calls for decentralized decision-making responsibility and authority. It also needs a structure through which a strong technological capability can be developed and strategic flexibility can flourish to enhance competitiveness against rivals. These traits boost the ability to take advantage of opportunities created by evolving markets. To support creativity and continuous pursuit of new products and new sources of differentiation, jobs in this structure should not be highly specialized. A lack of specialization means that workers should have a relatively large number of tasks in their job descriptions. Few formal rules and procedures also characterize this structure. Low formalization, decentralization of decision-making authority and responsibility, and low specialization of work tasks combine to create a structure in which people interact frequently to exchange ideas about how to further differentiate current products while developing ideas for new products that can be crisply differentiated in the future. W.L. Gore’s non-hierarchical leadership and non-traditional authority structure satisfy (and in some ways, exceed) these requirements. The company does not use job descriptions, direct reports, or assignments to direct workforce activities. W. L. Gore’s undefined, complex, and flexible internal working relationships play an important role in facilitating the integration and teamwork required to implement its innovation-based strategy. W.L. Gore’s flat lattice structure, cross-functional product development teams, and shared values encourage internal innovation and product differentiation. W.L. Gore achieves effective integration of the functions involved in internal innovation efforts without formal structural elements. Resource allocation, activity coordination, and communication throughout the organization foster integration and autonomous strategic behavior. Continuously diffusing knowledge capital and promoting internal innovations takes W.L. Gore into new markets and creates new value for the firm. The level of autonomy, innovativeness, risk taking, and proactiveness within the organization suggest that the company sustains an entrepreneurial mind-set as another source of internal innovation and growth. The company’s collaborative, cross-functional product development teams sustain powerful new product development processes that tailor unique core competencies to the needs of the market and easily commercialize new products. Ongoing, face-to-face communication characterizes how W.L. Gore’s teams function to promote integration for the purpose of generating new product design ideas. In addition, the company’s focus on marketing and R&D furthers these efforts. W.L. Gore’s culture also fosters internal innovation to support the company’s strategy of continued growth. One of the company’s guiding principles is for associates to make and keep their own commitments. The combination of freedom (dabble time) and resources (raw materials) produces viable new products. For innovation to be an effective growth strategy, continuous diffusion of new knowledge and technological know-how are required. And the analysis above provides strong evidence of W.L. Gore’s knowledge-sharing capabilities. Organizational Controls. Properly designed organizational controls provide clear insights into behaviors that enhance firm performance. It is difficult for a firm to successfully exploit its competitive advantages without the use of effective financial and strategic controls. The case provides no content on financial performance, but reports that W.L. Gore has been profitable every year since its inception and has approximately $3 billion in revenues. Financial controls are largely objective criteria used to measure the firm’s performance against target levels, previous outcomes, competitors’ performance, and industry standards. It is important to take corrective action when actual results fall short of expected results. Strategic controls verify that firms are using appropriate strategies to exploit their competitive advantages and existing conditions in the external environment. While we can assume that the company monitors ongoing operational performance, its focus is clearly on “the next big thing”. Confident in its strategy to find and satisfy high-value markets, the firm is content to spend its resources on the search for new opportunities. W.L. Gore’s strategic controls are highly focused on learning and growth and on examining the fit between what the firm might do (as suggested by opportunities in its external environment) and what it can do (as indicated by its internal organization in the form of its resources, capabilities, and core competencies). Recommendations. As the dynamics of competition accelerate, the knowledge and skills of a company’s workforce are perhaps its only truly sustainable source of competitive advantage. W.L. Gore’s non-traditional mind-set contributes to the firm’s strategic competitiveness by building the company’s flexibility, innovation, and responsiveness to constantly changing conditions. The company is indeed in a uniquely advantageous position in the landscape of today’s businesses. However, some potential pitfalls do exist. They are discussed below and address the speed of technological change in today’s marketplace, the importance of social capital, and the value of maximizing the performance of diversified units through the use of financial controls. The rapid diffusion of new technologies in today’s marketplace puts a competitive premium on quick development and continual introduction of innovative products. Firms must move quickly to use their knowledge in productive ways. W.L. Gore’s strategy of deliberate growth through internal innovation is perfectly suited to the perpetual innovation of new, information-intensive technologies. The company’s culture fosters idea-generation and evaluation, which leads to the organic invention of new products and creative extensions of existing product lines. And while patience is one way that W.L. Gore secures long-term success, it does slow down the process of making decisions on critical issues that impact the enterprise’s long-term operations. In addition, the firm’s complex lattice structure (which depends upon interpersonal interactions, self-commitment to group responsibilities, and natural leadership) can impede quick decisions needed to resolve time-critical issues. Therefore, there is potential at W.L. Gore to miss opportunities that require speed to match the pace of technology in the marketplace. As the environment becomes increasingly complex, it would be helpful to have criteria established to measure the company’s decision-making speed and effectiveness to signal if or when the company becomes competitively disadvantaged. Continuous product innovation demands that people throughout the firm interpret and take action based on information that is often ambiguous, incomplete, and uncertain. Even in the face of constant change and uncertainty, W.L. Gore, like all firms, is tasked to continuously identify the most attractive strategic opportunities to pursue. The company has an entrepreneurial mind-set to develop innovations that can exploit opportunities in the marketplace. But while the company may simultaneously look to the external environment to identify new opportunities, the basis for its new products is always W.L. Gore’s core technologies. In addition, the quality of information used for new product development is enhanced when sources outside of the firm (e.g., customers and suppliers) are assimilated in the process. To strengthen the firm’s strategic competitiveness, there may be an argument for some degree of reorientation to market-driven ideas. How can the new product development process and internal innovation be improved so that some sources of new products ideas are market-generated? How can external social capital networks be expanded to boost the company’s capacity to uncover new emerging fields or markets? In addition, should the company be monitoring opportunities with enormous potential that have been shelved due to lack of passion, product champion, or interest? W.L. Gore’s strategic flexibility might be enriched by assembling a team that is responsible for elevating attention to important projects that run the risk of being neglected or urgent projects that run the risk of missing out in the marketplace. Additionally, along these lines, the company may want to consider expanding beyond its PTFE and ePTFE technology to overcome any competitive limitations linked to its focus on a single core technology. Finally, recall that organizational controls guide the use of strategy, indicate how to compare actual results with expected results, and suggest corrective actions to take when the difference is unacceptable. Operational effectiveness increases with a proper balance of strategic and financial controls. Determining the most appropriate balance varies by type of strategy. It is common for companies and business units using a differentiation strategy to emphasize strategic controls (such as subjective measures of the effectiveness of product development teams). Also, corporate-wide emphasis on sharing among business units (as called for by a related diversification strategy) results in an emphasis on strategic controls. In this regard, W.L. Gore sufficiently recognizes the importance of strategic controls. However, because strategic controls can be difficult to use with extensive diversification, financial controls are valuable for companies and business units of large diversified firms. The company operates in very diverse fields (fabrics, electronic products, medical products, and industrial products). Accounting-based measures, such as return on investment (ROI) and return on assets (ROA), as well as market-based measures, such as economic value added (EVA), are examples of financial controls that could benefit W.L. Gore. Primarily focused on “the next big thing”, the company may be just leaving money on the table if it is not addressing existing operational issues to maximize performance. The use of better financial controls would be another way to positively impact the company’s results and success. W.L. Gore Solution Manual Case for Strategic Management: Concepts and Cases: Competitiveness and Globalization Michael A. Hitt, R. Duane Ireland, Robert E. Hoskisson 9781305502147, 9780357033838
Download
Close
Close
