Continental AG Company Liberating Entrepreneurial Energy Report (Assessment)

Introduction

Changes in strategy are not deliberate, they state, but emerge from a pattern of consistent decisions. Companies are influenced by internal and external environments and have to adapt to new demands and requirements stipulated by the industry. The case of the German-based company, Continental AG, demonstrates that a company has to adapt to new environment and foreshadow changes and new industrial demands. Inability to do so will result in profit loss and low productivity, increase competition and dissatisfaction of staff. Managers who believe that their firms are immune to the turbulent forces of global change do use strategic approach, especially at the implementation stage.

Often, however, the use of incautious incrementalism in strategy formulation or design generates failure archetypes. Upon close analysis, the rationale underlying incautious incrementalism may turn out to be as undiscriminating and impractical as a halfway compromise between contradictory opposites. The paper aims to single out the main causes of failure and the effectiveness of the solutions developed by Continental. Also, recommendations will be given on how to improve and introduce change management.

Background Information

During 1990s, Continental AG was faced with fierce price wars caused by a strategic attempt to achieve fast growth through economy of scale. “Continental slipped into the red in just two years” (Wit & Meyer 2004, p. 739). Takeovers had a negative impact on Continental and threaten its further growth and profitability. Also, poor profits among some divisions and acquisition activity threatened the existence of Continental and its future. Some changes in variables were within a firm’s control, a consequence of prevailing operating policies and managerial decisions. Pulling and pushing on these internal levers could also affect the firm’s performance (Mintzberg et al 2004).

To evaluate a change in strategy, its results had to be anticipated and considered, along with changes in the business environment, with respect to matching resource capabilities, stakeholder concerns, and organizational goals. These tasks were difficult to chive because Continental relied on “bureaucratic and centralistic structure and culture” (Wit & Meyer 2004, p. 740). Depending on the sales volume that a firm anticipates, it adjusted its sales force, supplies and distribution, equipment, and facilities to match the scale of its production.

Thus, coherent and consistent actions were not taken by its production, marketing, personnel, distribution, and procurement managers in order to create a shared vision of the intended production scale. Internal problems involved “lack of awareness of the sources, poor management of internal competition and suppression of decentral innovative potential” (Wit & Meyer 2004, p. 740). Sharing common perceptions about a firm’s strategy was an important step toward coordinating implementation plans and managerial behavior (Drejer, 2002)

Continental AG: Main Issues

Main issues can be described as poor strategic management and lack of strategic approach, poor management of change and risk assessment techniques. Piecemeal tactics can undermine strategy, but they are secondary. It may be possible to improve performance through efficient tactics, but it is better to design an efficient strategy that will expel counterproductive tactics. Examples of counterproductive tactics are those coercive moves that increase rivalry among competitors, without a real payoff, either direct or indirect, for the industry incumbent who initiates such moves. It is atypical of an industry or market leader to initiate such moves.

To design strategy, Continental had to learn to search for and to identify patterns of change over time. To practice strategy design and to act proactively, any company should replace transaction-driven calculus with analysis and risk assessment. Creating the organizational capability of and ambiance for learning will lead to a truly sustainable advantage (Drejer, 2002)

Problem Identification

Poor strategy formulation and inability of Continental to introduce change resulted in low profits and increased competition. To do so successfully, corporate leaders should install organizational processes that can help them understand how the environment might be changing and what the effect of likely consequences will be. Otherwise, despite their current strengths, business firms are unlikely to be able to meet the challenges of the emerging high-technology and deregulated global economy. Predicting a world in which technology and collective and competitive patterns change at an unprecedented rate is hard enough. Moving ahead of it is simply larger than the extended talents and resources that are now available in any of the world’s leading firms (Mintzberg et al 2004).

The inability of Continental to respond to threats and external influences was caused by internal problems and ineffective corporate-level strategy. Corporate level strategy evolves from humble beginnings and specific disciplines, such as strategic management and operational research, into a bandwagon that is attracting numerous researchers and practitioners (Pittengrew et al 2006). The demand for corporate-level strategy planning in business has been increasing for two reasons: first, there is abundant evidence that the strength of the US economy is declining or at least stagnating. Second, using scenarios as a strategic tool provides a handsome return on the investment it requires. The demand for reengineering is beginning to outstrip the supply of business analysts.

Another set of problems was caused by lack of change planning and contingency planning. Following Clegg et al (2006) change management strategies need more people capable of generating strategic change. The technology of planning constitutes a superior approach to designing corporate and business strategies. Firms can use it in formulating and analyzing strategic situations productively (Thompson and Martin 2005).

Because of its multidisciplinary nature, it can help professionals and managers in a variety of applications, namely, capital budgeting, career planning, competitive analysis, crisis management, decision support systems (DSS), macroeconomic analysis, marketing, portfolio management, and product development. Although scenarios have been used mostly to forecast future corporate environments, scenario-driven planning is increasing of interest to functional managers in diverse business areas (Pittengrew et al 2006).

Changes in strategy should be capable of modification in case of rapid response from rivals firms. Managerial plans and strategies are supposed to be resilient about all possible combinations of global developments. As will be stressed in the course of our narrative, mid-level strategic scenarios eminently deserve to be undertaken. Consequently, Continental dwells at great length on the techniques appropriate to the generation and analysis of midlevel strategic planning rather than on the extreme cases of global or local planning. Forecasting is an indispensable management tool but for the short term only. Forecasts of future trends are seldom value-free (Gardiner, 2005).

Often, they are meant to be self-fulfilling prophecies, to marshal resources and efforts toward stated goals and objectives. Alternatively, they are self-defeating prophecies that create action to avoid the negative consequences of the status quo. For innovation is not so much a process of gradually reducing uncertainty (processing information) in moving toward a prescribed goal. Rather, it is a process through which uncertainty is intentionally increased when circumstances demand the generation of chaos from which new meaning can be created. This process is full of discovery, surprise, and redundancy. Senior managers at Continental, in forcing the project members to challenge their most deeply held assumptions, forced them not to process information but to create it (Thompson and Martin 2005).

Discussion Section: Solution

Taking into account theories by Prahalad & Doz (1987) and Porter (1985), Continental developed a successful strategic approach which helped it to complete on the market and solve its daily problems. In discussing changes in strategy regarding content, strategy researchers focus on shifts in business strategy as well as incorporate strategy. Those focusing on changes in corporate strategy define strategic change as the realignment in a firm’s selection of market domains and in the resource allocation among them (Ansoff, 1981).

Those researchers focusing on changes in business strategy define strategic changes as the alterations in competitive decisions within particular market domains (Whittington, 2000). But whatever their focus, strategy theorists propose formal mechanisms both for environmental monitoring and for managing changes in strategy. According to Ansoff, existing mechanisms are not industry-specific but relate to the velocity or rate of environmental change. Ansoff, one of the founders of strategic thinking, points out that such diverse industries as aerospace, banking, and semiconductors have developed and used essentially the same strategic management systems.

Each system is responsive to a particular velocity, which a firm, no matter in what industry, must confront. To choose the system a firm needs, first, the velocity of its environment is diagnosed. Second, its managers select the system appropriate for this velocity. Hence the prevalent emphasis is on the notion of environmental turbulence and its levels.

The main strategies involve striving for technological leadership and the aim to meet market demands, acquisition and entrepreneurship. In its turn, entrepreneurship leads to internal competition and allows the company to improve product lines and increase productivity (Whittington, 2000). To gain a depth of perspective, Continental proposes to work initially backward from the strategy to the data to the underlying assumptions.

The first step is to proceed from the strategic direction already contemplated to uncover the basic assumptions embedded in the manager’s choice of a strategy. Selecting the best strategy rests on identifying an acceptable set of assumptions. Once negotiated among strategy-team participants, and between at least two dialoguing teams, this composite set of assumptions becomes the explicit foundation of strategy design. It enables strategy options to be appraised in classical decision theory terms. The second step is to discover new strategies for consideration as potential solutions and to do so creatively (Whittington, 2000).

In order to overcome internal problems and improve internal management, Continental introduces central coordination of decentral activities. This strategy allows Continental to support the necessity of problem framing. Some of these provide an indication of how to frame organizational problems in practice, often through a process of uncertainty dilution (Whittington, 2000). The unique solution developed by Continental was a decision to appoint entrepreneurs to key positions. Such is the process used in strategic assumption surfacing and testing, a noteworthy approach to strategy making. This provocative approach opens up some interesting avenues worth exploring.

Under the condition of environmental turbulence, problem framing becomes at least as important as problem-solving. Conventional problem-solving techniques address well-structured problems. Strategic planning methodology proceeds from stakeholder assumptions to data to strategy design (Gardiner, 2005). The ability of Continental to use the internal resource to introduce change demonstrates maturity and strong leadership of the Board.

Recommendations

An alternative route exists. In discussing changes in strategy regarding the process of strategic change, researchers also focus on shifts informal management systems and structure as well as transformations of organizational culture. In the process approach, it helps to think of an organization as a set of processes put in motion to change or turn it around for the better. This approach contrasts sharply with the more static view of an organization as a fixed entity and unit of analysis.

Changes in the external environment indicate shifts in consumer values or competitive dynamics, whereas changes in the internal environment indicate shifts in organizational structure or managerial capability. In order to meet the needs of the customers, Continental has to plan its strategy in accordance with buyer needs and risk assessment analysis. The interaction among conventional functions can speed up the movement toward decentralized management. In the past, power had been concentrated at the top to improve integration and control. This in turn will permit managers at the lower levels to take on more operating responsibility.

Conclusion

The case of Continental vividly portrays that a company should pay special attention to strategy formulation and change planning. A failure to meet external and internal needs can cause low productivity and poor performance. An increased understanding of a firm’s business environment, strategy, operations, and interdependencies, can lead to an improved definition of objectives and more pertinent standards for the measurement of managerial success. Complex problems cannot be solved without deep substantive knowledge of the problem at hand. No matter how skilled analysts may be in their respective fields, they will not be able to tackle problems involving economic issues, for example, unless they understand economic systems.

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