Management failure at Marks and Spencer
For over a century Marks and Spencer (M&S) has been regarded by many as a legendary retailing organisation. Both M&S’s management style and its individual leaders have been acknowledged as exemplars of ‘best practise’ (Mellahi et al, 2002). Peter Drucker (1974) described M&S as a ‘managerial giant in the western world’. Tse (1985) noted that M&S ‘has been widely recognised as one of the best managed companies in Europe … as far as management excellence of the firm is concerned, with the consensus being almost total in the trade, as well as in government and specialist circles’.
However, since 1998, the situation had somewhat altered, and the company began to experience a decline in its sales, profits and market share. Its once legendary reputation has been reduced at both home and abroad, where for example it has been fined by the French courts and severely criticised for its attitude and behaviour towards its workers.
The aim of this report is to explore how the unthinkable happened by identifying the reasons behind the difficulties experienced by M&S from a management failure perspective.
II. Perspectives on management and organisational failure
Sheppard (1994) notes that the meaning of failure can be problematic. While academics define the term in alternative ways, there is little consensus about what the term exactly means. For the purpose of this essay failure will be defined as events or conditions that could lead to severe market-share erosion (Starbuck, Greve and Hedberg, 1978). Symptoms include declining demand, sharp declines in sales and reduced or negative profitability (D’Aveni, 1989).
There are two dominant perspectives on organisational failure. The industrial organisation (IO) perspective locates the causes in the external environment. The IO literature claims that the management of failing firms are the unlucky victims of external circumstances, and that the failure does not necessarily imply management ineffectiveness or inefficiency. Instead it can be a result of a range of primary causes, such as changes in customer demand, competitive rivalry from new or existing competitors, destiny of organisations and the natural selection process (Aldrich, 1979; Aldrich and Pfeffer, 1976; Amburgey and Rao, 1996; Campbell, 1969; Hannan and Freeman, 1978), and technological uncertainty as a result of product and process innovations (Slater and Narver, 1994). Read why security is a team effort
Balderston (1972) argues that organisational failure is a natural and objective phenomenon, which is a requirement to the effective operations of markets. Life-cycle theory advocates the belief that organisations follow the path of ‘inexorable and irreversible movement towards the equilibrium of death’. Individuals, family, nations and civilisations all follow the same grim law whereby they rise and fall to extinction. This cycle is also reflected in the ‘Wheel of Retailing’ (Hollander, 1960), which is based on the notion that organisations commence as low cost/low price businesses, but that as the business develops so it ‘trades up’ and adds services, ambience and other more expensive attributes, which raise its profile. As a result, it therefore becomes vulnerable to leaner, newer entrants, which offer shoppers the lower prices they desire.
Alternatively, organization studies (OS) literature stresses internal factors as being at the heart of failure (Cameron et al., 1988). Advocates of OS literature criticize the IO perspective in that it presumes objectivity by ignoring the effects of internal factors and the misperception of organizational members in responding to external changes (Mellahi et al., 2002).
The OS perspective presumes that failure is a result of management’s lack of vision and the lack of will and ability to respond effectively and make adjustments to reverse the negative effects triggered by external factors. The main internal causes of internal failure cited in OS literature are an escalating commitment by management to pre-existing strategies and routines (Bateman and Zeithaml, 1988; Staw, 1982), blinded perception by management to their weaknesses and strengths, customers demands and competitors (Zajac and Bazerman, 1991), Management malfunctioning (Argentini, 1976), strategic paralysis (D’aveni, 1989), threat rigidity effects (Staw, Sandelands and Dutton, 1981) and structural inertia (Hannan and Freeman, 1984).
OS literature indicates that successful companies are susceptible to failure for a number of reasons. Miller (1990) argues that ‘success can breed over-confidence and arrogance’. Kelley and Amburgey (1991) note that ‘over time successful routines develop into habits. As habits, the routines become traditions, and hence, the effect of preserving the firms way of doing things.’ The result is that organisations that were once the most successful in the past become the most vulnerable to failure in the future (Whetten, 1988) because they are conditioned to exploit their old advantages and less likely to explore or react to new ones (Mellahi et al., 2002). In essence, IO literature argues that failure is related to internal inadequacies in dealing with external threats.
III. External factors at M&S
Section three identifies the significant changes that took place in M&S’s external environment and changes in the competitive landscape during the 1990s.
The beginning of the M&S crisis lies in the radical changes that took place in the competitive landscape. This change saw a host of revitalised and newer competitors for the core of M&S markets. Existing retailers in the UK, such as Next transformed themselves in the 1990s into strong price and quality competitors to M&S. New retailers across the price /quality spectrum, many of whom were international retailers such as Gap and Zara also captured an increasing proportion of the market, bringing new and exciting approaches and concepts to retailing. Older department stores re-invented themselves as brand-led boutiques collections e.g. Debenhams, while in food Tesco broke through the quality image, which was once previously held by M&S (Mellahi et al., 2002). These retailers were much more in tune with the changed consumer desires and behaviours of the 1990s. In short M&S managers were confronted with a radically tough market place over the 1990s with more stronger, aggressive and confident competitors.
Traditionally M&S was averse to marketing because of its total conviction in the M&S brand offering. As a result advertising was confined to new store openings and did not promote either the brand or its products (Mellahi et al., 2002). This was in stark contrast to a much more advertising focussed retailing sector in general by the mid 90’s where retailers began to dominate the top advertising spends amongst all companies. Similarly the refusal to take debit and credit cards increasingly had the effect of curbing sales, in what was becoming a predominantly credit and card based economy. Although M&S management were repeatedly advised against their refusal to accept these cards by their customers with the issue also being highlighted at numerous AGM’s, it was not until 1999 that the CEO announced the reversal of this policy. Even this change did not happen immediately, as it took the company nine months before its systems were able to accept the cards.
A lack of out of town stores (a growing trend among retailers in the late 1990s) and a tactical mistake in purchasing more high-street space from Littlewoods in 1998 (Mellahi et al., 2002) combined with a delivery system that did not guarantee product availability late in the day and store environments that were unchanged in twenty years are further examples of a lack of awareness of the changed external environment. Competitors were located in new locations serviced by world-class logistics systems and regularly re-modelled and re-designed retail stores.
One of M&S most publicised issues was its adherence to its buy British policy (Bevan, 2002). The freeing of trade with China and the expansion of production capacity in the Pacific-Rim opened up a large influx of high quality and significantly cheaper goods. As a result designer clothes became more affordable to customers who would normally have purchased M&S’s clothes. Ironically, M&S was well placed to take advantage of this shift in industry sourcing because of its strong connections with China and other Pacific-Rim countries alongside a buying office and director based in Hong Kong. However, M&S was strategically reluctant to make this change to its buying policy and continued with its buy British policy. In the mean time other competitors were not as rigid or principled and as a result the prices charged by M&S became higher and less competitive. This was further exasperated by the strong appreciation of the sterling from 1996. Price and quality differentiators between M&S were reduced even further leaving customers to question the benefits of such a policy.
M&S were landed with a double-edged sword in that on the one hand the buy British policy earned them a distinctive market statement but on the other an increasingly non-competitive pricing. As the company sought to tackle this issue by cutting its reliance on British suppliers, it became a PR disaster with the trade unions, press and suppliers condemning the changes.
The 1990s saw vast technological change in the retailing sector, especially in terms of computerised systems for managing the supply-chain. This had the effect of creating a level playing field amongst retailers. M&S previously led the way with simple non-paper based systems which relied on internal trust and trust with suppliers. This technological change allowed competitors, especially late movers within the sector not only to catch up with M&S but also to surpass them by introducing the latest technology and concepts. In light of this technological advancement, M&S continued to rely on its older systems and approaches (Mellahi et al., 2002).
IV. Internal factors at M&S
The previous section identified changes in M&S’s external environment. Section four focuses on M&S internally and the failure of management to respond effectively to these changes.
M&S’s past was characterised by a long and continued success, which led to an overwhelming belief in the company’s management paradigm (Mellahi et al., 2002). As put by Tse (1989) ‘the M&S brand of management’ was of fundamental importance and had bred a culture, which was resistant to change. Further a study by Mellahi et al (2002) revealed that interviewees reported that past success bred arrogance, conceit and a sense of invincibility. Top management tended to underestimate the effect of the external changes in the industry landscape and at times disbelieve external reports and studies (Johnson and Scholes, 2002) .
Centralised management systems combined with complex and bureaucratic reporting structures not only resulted in poor communication but more importantly the management board became distanced from external environment and the emerging realities of changes in consumer needs, wants and shopping habits.
Several people, positions and departments became powerful and prestigious because of the long-run success of the company. The formation of these elite groups proved to be detrimental as these individuals/groups became more concerned with protecting the status quo rather than embracing change for the benefit of M&S (Mellahi et al., 2002). In effects because these groups felt they had so much to lose internally, they became the vanguard of the old paradigm. These managers/departments became obstinate and conceited resenting challenges and ultimately isolating themselves from reality.
M&S HRM practise became another contributing internal factor. M&S policies traditionally focussed on internal promotion, job security and careful selection of individuals to fit certain career tracks. The internal recruitment and promotion model was believed to be a key contributor to past success, however became a handicap when they needed to change (Mellahi et al., 2002). When change was required, managers were unable change from the long-established routines and challenged new problems with old routines and procedures. It was impossible for many who had grown up in the M&S system to appreciate that it no longer worked, and because of their lack of experience and the rigidity of previous practises, they were unable to embrace change and undertake new practises. In effect they were using old medicine for new illnesses. The company’s ideals and practises had frozen the company in a bygone era.
Finally there was political unrest inside M&S over the lack of relationship between the chairman and his deputy, and issues of succession (Bevan, 2002). The political in fighting diverted management focus from the crisis at a critical moment in the company’s history. Where the focus of management should have been completely on the issues at hand, they were more preoccupied with internal fighting.
The previous analysis discussed the two perspectives surrounding the failure of M&S. Whilst changes in the external environment was contributory to the company’s failure, the internal inertia had a critical bearing on exasperating these.
The boardroom struggle resulted in executive incapacity, lack of decisiveness and low external credibility, which subsequently led to corporate inertia and thus delays in understanding and then dealing with the challenges.
Blinded by its previous success, and its over confidence in its management paradigm, it failed to scan the external environment for threats to its position. Changes in the external environment were either ignored, denied and in particular the organisation became victims to path dependency and lock in.
Fooled by the fallacy of its once prestigious reputation and brand name, the management assumed that this would insulate them from competitive pressures. As a result the management did not have the vision or the will to embrace change.
After the crisis hit the company, its rigid structure, the bureaucracy of reporting and a complex mode of operations failed to provide the board of directors with accurate information about the crisis. The board has been described as being in stuck in a bygone era, isolated from the real world.
The case of management failure at M&S follows the work of Levine (1978) and Witteloostujin (1998) in demonstrating that both internal and external factors are important at any crisis. In the case of M&S, the management failed to change in response to changes in the environment. More importantly, the failure to react and the vision to implement change were exacerbated by political instability and vulnerability of groups within the organisation, who fought to defend the status quo rather than progress the company.
While literature from organisational theory has been used to discuss the case of management failure at M&S, a striking parallel can be drawn between the near downfall of M&S and the demise of the world’s largest empires. M&S, which was hailed as ‘a managerial giant in the western world’ by Peter Drucker (1974), can be compared to the Ottoman Empire, which was among the world’s most powerful empires in the 16th and 17th centuries. At its apex the Ottoman Empire stretched from the Persian Gulf in the East to Hungary in the North West; and from Egypt in the South to the Caucasus in the North. The downfall of the Ottoman Empire was also largely as result of changes in the external environment, and internal inadequacies in dealing with them.
The Ottomans failed to keep up technologically with its European rivals. While the industrial revolution had swept through Western Europe, the Ottoman Empire was still relying mainly on medieval technologies. This echoes how M&S were still relying on older simple technologies while its competitors were using advanced technology to manage their supply chains.
Poor communications, combined with complex and bureaucratic reporting structures made it very difficult for the Constantinople (the centre of the empire) to control its provinces. This also meant that the Sultans were largely uninformed of changes that were sweeping across the empire. This is characteristic of M&S, which had complex and bureaucratic reporting structures, which was one of the reasons the top management team were less well informed about changes in the external operating environment.
In any effort to modernise or reform the empire, the Sultan was always opposed by the powerful military and religious elite who did not want to lose their traditional powers. Similarly, M&S managers resisted change because they had vested interests in the current status quo, and change may have meant them losing their authority and privileges.
Years of power and success had led to a state where the rulers became isolated from the real world and spent most of their time in the opulence of their magnificent palaces. In a sense they became distanced from the external environment similar to the top management team at M&S who were sitting in their comfortable surroundings of the Baker Street Offices frozen in a bygone era, and isolated from the changes in the outside world.
In essence the parallels that can be drawn between the collapse of the Ottoman empire and the demise of M&S, was the failure to scan the external environment, and when they did they were unable to accept and embrace change either as a result of sheer complacency or the fact that they wanted to defend their status quo. The ruling class were far away from the external reality, and were unable to accept that the system they had grown up in no longer worked.
In essence the similarities that can be drawn are that certain individuals and groups had vested interests and therefore resisted change. The rulers were isolated from reality and as a result unable to detect changes in the external environment. Years of success had also led to a state of complacency among the leadership, and when crisis did finally take place, the leaders were more concerned with political infighting over issues of succession rather than diverting their attention to the more pressing matters.
Although the parallel between the demise of empires and large organisations echoes Boulding (1950) ‘Life-cycle theory’ it would be quite cynical to suggest that any organisation that becomes very large and successful, with an empire like status is susceptible to management failure and therefore collapse. Although there is a strong evidence to suggest this, for example the fall of previous empires, such as the Greeks, Romans, and Persians and many large organisations for which failure was unthinkable for example Enron, and Bearings Bank. However it is possible for management to learn a lesson from history.
There are companies whose management are constantly scanning their external environments for changes and look at their own internal strengths and weaknesses to best exploit opportunities. These organisations are constantly able to reinvent themselves, and embrace change, going against the status quo. For example companies like Nokia, which began as a deforestation company is now a leading manufacturer of mobile communications technology. Further, companies such as UPS began to realise that they were losing market share, as their competitors were perceived as being more advanced and also realised that the package industry market was becoming saturated. As a result of successful environmental scanning, the company made some strategic acquisitions, moved into the supply chain industry and rebranded themselves as a fast moving technologically advanced company.
Peter Drucker was famously quoted as saying that the only constant is change! Therefore companies must be willing to accept that no matter how successful they may have been in the past they must constantly be in tune with the changes in the external environment and leverage their internal competencies to facilitate and exploit this change. It seems that M&S has been willing to change and may be turning around its misfortunes with the success of the new George Davies ‘Per Una’ range and the fresh approaches of a powerful new team at the top.
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