Read the Magdi Batato at Nestle case in your textbook on page 317.Please respond to the following prompt:

  1. Should Magdi go ahead with SAWTs now?
  2. What advantages could SAWTs bring to the Nestle´ Malaysia factories? What are the potential downsides?
  3. Analyze Magdi’s proposed idea using the Organizational Alignment Model (environment, strategy, structure, systems, task, and people) and identify potential problems of alignment.
  4. As a contingency plan while he awaits and contemplates your advice, please assume he wants to go ahead and implement SAWTs. Design an implementation plan for the introduction of SAWTs using the Organizational Change framework.

Read the Magdi Batato at Nestle case in your textbook on page 317. Please respond to the following prompt: Should Magdi go ahead with SAWTs now?What advantages could SAWTs bring to the Nestle´ Malaysi
Magdi B atato A t N e stlÉ M a laysia ( A): Introducing T ea m-Based P r oduction Tom Gleave and Professor Martha Maznevski prepared this case as a basis for class discussion rather than to illustrate either effective or ineffective handling of a business situation. Copyright © 2011 by IMD – I nternational I nstitute f or M anagement D evelopment , Lausanne, Switzerland ( ). No part of this publication may be reproduced, stored in a retrieval system or transmitted in any form or by any means without the prior written permission of IMD . In June 2005, Magdi Batato, executive director of production for Nestlé Malaysia, was frustrated. He had spent the last four months trying to convince the Nestlé Malaysia Production Management Committee to adopt a new approach to organizing production improvement: team-based management with goal alignment across teams and increased team autonomy. However, the committee had yet to reach a consen sus on whether or not to endorse such an initiative. Batato was a 14-year Nestlé veteran with an excellent track record in leadership and productio n in several countries. He had been transferred from South Africa in September 2004. Soon after arriving, Batato concluded that his biggest challenge was to ensure the long-term sustainability of the seven local factories, despite their above average performance compared to other Nestlé factories. His experience and research convinced him that this approach was the best way to make the next performance leap. He did not face active resistance, but there was a seemingly endless parade of reasons to “ examine the options further, ” to “ wait for better conditions. ” Working in semi-autonomous teams required internal motivation and initiative, so forcing the Committee to move might backfire. Some of their reasons for delay – for example, that people here were not used to working this way – suggested moving slowly. Besides there was no urgent need to turn productivity around. But Batato knew that implementation took time. He had already been in Malaysia for nine months of what was likely a maximum five-year assignment. In South Africa his production improvements looked like they were losing ground, and Batato believed this was because he had been transferred away before he had had a chance to institutionalize them. He wanted to push ahead, but how could he do so without jeopardizing the effectiveness of the changes? Maybe he should just be more patient. Overview o f N estlé S .A. Nestlé S.A (Nestlé) traced its roots to the 1860s when Henri Nestlé, a German pharmacist living in Vevey, Switzerland, developed a formula for babies who were unable to breastfeed. The product was an immed iate success and was quickly sold throughout continental Europe and the UK. Nestlé built on this success by developing an increasing number of branded food products, such as Milo and Nescafé, that were sold in a growing number of countries. After World War II the pace of growth251 quickened, in part through the acquisition of a wide range of branded category leaders. The company organized the bulk of its activities around product-based strategic business units (SBUs), including baby food, coffee and beverages, breakfast and infant cereals, chilled dairy, chocolate, and ice cream. Each SBU was supported by operations, sales and marketing, finance, innovation and technology, and R&D functions, all of which cascaded down from the corporate headquarters to the “ market ” (country) level, from where they were again cascaded down to individual factories, field sales offices and laboratories. The company ’ s overseas operations enjoyed a great deal of operating autonomy, particularly with respect to the products it developed so that local factories could better meet local market preferences. By 2005 , Nest lé had become the world ’ s large st manufacturer and marketer of foods, with worldwide revenues topping CHF 86.8 billion and earnings before interest, tax and amortization (EBITA) of CHF 11 billion. 1 Of the 250,0 00 people who worked for the company, the majority were employed at some 500 factories spread across more than 80 countries. Many of these employees spent the bulk of their careers at Nestlé, as evid enced by the fact that the average tenure of service upon retirement was 27 years. Magdi B atato’ s J ou rney: F rom K nowledge E xpert t o Practice E xpert The E arly D ays Magdi Batato was born in Cairo, raised in Lebanon and moved to Switzerland, where he graduated from the Ecole Polytechnique Fédérale de Lausanne with a mechanical engineering degree and a multidisciplinary PhD that combined thermodynamics with human physiology. Batato then worked for a consultancy before joining Nestlé ’ s headquarters in Vevey in 1991, where he was initially a corporate advisor on energy- and environment-related matters. Batato was quickly recognized there as a strong leader with potential for operational responsibilities. He was invite d to join a high profile group of “ centrally based expatriates, ” the members of whom were viewed as key talents within the company ’ s global management development pipeline. In 1995 Batato was transferred to Germany where, as the newly appointed head of production, he was expected to bolster the 225-person seasonings and soup factory ’ s operational capabilities. Batato ’ s predecessor, a 50-year Nestlé veteran who had spent the past 30 years working at the factory, was due to retire. Batato was expected to bring innovation and process improvements to the factory. Off t o L ebanon … After two years in Germany, Batato had achieved a number of improvements in the factory ’ s key performance indicators (KPIs) with relatively straightforward incremental innovation. He was then transferred to Lebanon, where Nestlé Waters held a minority stake (49%) in a local bottled water factory. As the factory manager, he found his new assignment a challenging one. Batato recalled: Most of the employees in Lebanon had taken on a “ survival mindset. ” They were trying their best to serve the customer with high quality, but they were distracted by a variety of factors. This wasn ’ t surprising when you consider that multiple races and multiple religions had been living side-by-side in an environment that had been fraught with conflict for years. So I set out to develop a more performance driven and customer-focused mindset, starting with252 the natural leaders whom the other employees respected. For example, one engineer was our “ Mr. Fix-It ” guy whenever any operational issue arose. But he was working a lot of overtime and putting himself and others under pressure because he was fixing so much for us. I promoted him to a manager, with a large enough salary that it compensated for his lack of overtime pay. I helped him learn to coach others to fix things so he would not have to do so much himself. The arrangement worked well because he gained the esteem of colleagues and he helped other workers become more productive. In Lebanon I really learned the importance of getting people on board for performance and the customer, even to make production changes. … A nd T hen t o S outh A frica After four years of implementing such mindset changes and performance improvements, the Nestlé Waters joint venture was performing better. In 2001 Batato was posted to Estcourt, South Africa where, as factory manager, he was expected to turn around the once high- performing coffee and beverages factory. The factory comprised six mini business units (MBUs), one each for the separate processing and filling/packing functions related to the three main product lines: spray dried coffee, Milo and Nesquik. Each MBU ran three shifts. In the past, the factory was considered a “ best-in-class ” operation. After the dissolution of apartheid in 1994 its performance began to suffer. At that time, people ’ s roles and responsibilities across South African society shifted, creating confusion, inefficiency and heightened emotions in plants like Nestlé ’ s. Batato ’ s predecessor had developed a program called “ Pulling Together ” to facilitate the employees ’ relations with one another and to focus on performance. Batato built on Pulling Together with a program “ Working Together ” to cultivate a more businesslike mindset among the employees, focusing on business performance and customer requirements. He hoped this would eventually replace the emotional mindset that pervaded the operation. He encouraged employees to analyze situations in a methodical and dispassiona te manner, and he helped staff see the problems in terms they could relate to. For example, he showed one group of employees that financial losses of a certain number of units of spray dried coffee equated to so many lost South African rand (R) which, by extension, equated to the value of so many cows a local tribesperson could buy or sell. Because he took this approach with many different aspects of the business, employees began to dub him “ Mr. Fact, ” a nickname he did not mind because “ the employees became more businesslike and dispensed with much of the emotional baggage that had been undermining their performance. ” In addition, Batato tried to align the reward system with performance. He identified top performing MBUs and awarded them prizes valued up to R30,000 (around US$3,333 at the time), to divide among the people in the unit. As he later discovered, however, the process underlying the drive for operational performance improvements was too unstructured and the rewards were not as well received as he had originally envisioned. He need ed to find another way to put mindset and practice together to increase performance. Discovering S emi-Autonomous W ork T eams Around this time, Batato was introduced to the idea of semi-autonomous work teams by a consultant. 2 This was a system of empowering production teams to set goals and improve their own performance, within a structure of goal-alignment interlocked throughout the plant. The key was to link motivation, group accountability and competences with business performance in a complete socio-technical system. “ I jumped at the opportunity, ” Batato remembers.253 In this system, the measur ement, reporting, analysis, and continuous improvement aspects of production are supported by semi-autonomous work teams (SAWTs). SAWTs are frontline production teams who are aligned with the management of the company and the plant, but who determine their own goals and directions for improvement. They are held accountable for results and rewarded based on meeting their own goals and their contributions to the overall goals of the plant. Through coaching and empowerment, they are encouraged to take initiatives to enhance performance whenever possible, and are support ed with training and resources for self-management. To achieve their goals, SAWT members must develop competences in production and problem-solving continuous improvement techniques to increase consistency and reliability and eliminate waste. They must also learn to work together in a collaborative way to ident ify targets for continuous improvement, and to accomplish those targets. Batato and the consultant began in November 2003 by training the department heads in the main ideas behind SAWTs. Because of the importance of coaching in the model, these department heads then trained lower level production supervisors and frontline workers. Over the next six months , the Estcourt management and staff focused on aligning the goals of each MBU to those of the factory, the market office in Joha nnesburg, and the customers. Teams initiated service-level agreements between themselves and their value stream partners to align goals vertically and horizontally, to maximize overall performance of the MBU and the factory, and to reinforce a customer mindset among everyone ( refer to Exhibit 1 , Goal Alignment in Coffee Production ). Exhibit 1 Semi-autonomous Work Teams and Goal Alignment at Nestlé Estcourt Example: Coffee Production Source: Company information SAWT offices were created on the production lines, which in turn reported to their respective production business units. Each team office tracked the agreed-upon KPIs and prominently displayed them. Teams updated KPI displays on a daily, weekly or monthly basis. They identifi ed key production problems, proposed solutions, and tracked indicators until problems were solved. Once Batato and the consu ltant were satisfied that employees had adopted the routines and social systems for SAWTs, they introduced the more rigorous manufacturing and problem- solving techniques of continuous improvement. These included deep cause-effec t analysis, pareto analysis, flow charts, check sheets, histograms, process control charts, and so on. Supervisors became coaches rather than authoritarian leaders; they met regularly with their SAWTs to monitor their progress, facilitate their improvements, train them in new methods, communicate regarding alignment, and reinforce empowerment and the teams ’ taking respo nsibility for their performance. These responsibilities and improvements were “ cascaded up ” through management, while coaching was “ cascaded down ” with each successive layer coaching the layer below regarding manufacturing processes and performance focus.254 Batato also revised the factory ’ s reward systems. Earlier he had offered relatively large cash payouts to a few teams that had achieved large improvements in performance, consistent with his original goals. Now, to be aligned with the philosophy of SAWTs and continuous improvement, he offered a larger number of soft rewards (such as public recognition and product vouchers) to more teams that had achieved smaller incremental gains. He also spons ored various parties and barbecues for the winning teams, which he learned was very motivating to them. At the same time he developed a more formal performance management system that supported specific individual- and team-based goals. The strong workers ’ union at the factory made it difficult to disci pline underperforming employees without such a system, and in addition the system was now aligned with the SAWT philosophies. Ten months after introducing SAWTs to the Estcourt factory, Batato and his team saw improveme nts across quality, speed, service, and people-focused measures. Batato was impressed with the combination of tools. People working in the factory were much more customer- and business-focused. The continuou s monitoring and coaching meant that problems were identified and resolved quickly. The reward systems “ struck a good balance between having carrots and sticks to encourage performance. ” Batato’ s J ourney C ontinues t o M alaysia In August 2004, just when he was beginning to see results in Estcourt, Batato was transferred to Nestlé Malaysia. Nestlé ’ s Malay sian operations dated back to 1912 and had since grown to employ some 4,000 people, the majority of whom worked in the six multi-product factories based in Malaysia proper as well as one multi-product factory based in Singapore. As executive director of production, Batato assumed responsibility for the seven factories, producing a wide range of food items for the domestic market and several markets throughout Southeast Asia and the Middle East. Unlike the operations he had encountered when he first arrived in Germany, Lebanon, and South Africa, Nestlé ’ s Malaysian operations were running smoothly, with all seven factori es achieving between 75% and 90% of their target KPIs. This performance was grounded in a strong management team, sound product development and branding policies, and strong IT support. Batato also found that local management had nurtured a very positive relationship with employees. This was partly through maintaining open communication and policies that tried to prevent negative impacts during times of adversity. For example, in 2000/2001 Nestlé Asean had implemented an industrial structure, strategically shifting production among plants so that ingredients and products were each produced in larger batches in fewer plants. As a result, Nestlé Malaysia had shut down some operations in two factories and increased volumes in other operations. The company offered its employees transfers to other operations to minimize permanent layoffs. This and othe r actions helped the company develop a reputation for being a “ trusted employer ” no t just by the employees themselves, but by other workers in the country who aspired to work there as well. Despite Nestlé Malaysia ’ s operational success, Batato believed there was room for improvement in operati onal performance, particularly for those production lines with KPIs hovering around the 75% range. This view was reinforced after his initial visits to the factories. He found that two long-simmering issues had not been sufficiently addressed by previous management. On the one hand, many frontline employees had given Batato the impression, through indirect hints and veiled references, that their supervisors and managers did not understand the difficulties they often encountered on the front line. On the other hand, many supervisors and managers maintained a belief that the abilities and predispositions of the frontline employees limited the performance potential of the factories. Clearly there was room for improvement!255 Introducing S AWTS i n M alaysia? In February 2005, at the monthly meeting of the Production Management Committee (PMC), 3 Batato introduced the idea of SAWTs as a possible means for tackling these issues. Most PMC members were intrigued by the new concepts and were cautiously positive about the ideas when the consultant came and addressed them. They acknowledged the initial results that Batato had achieved in South Africa. But many members were reluctant to endorse a similar initiative in Malaysia. One reason was that, even though plenty of positive improvements had been realized, the progress made at the Estcourt factory had not lived up to original expectations. Batato acknowledged this concern, and believed the main reason for the slow progress was his transfer to Malaysia at a time when the reforms still had not fully taken root. The PMC members also expressed a lack of urgency for change in Malaysia. Existing performance levels at the factories were already high compared with all factories in Asia, Africa and Oceana. PMC managers were worrie d about “ change fatigue ” set ting in with frontline employees and their supervisors, given that they had implemented separate worldwide IT system and cultural change initiatives driven out of head office in recent years. These initiatives, coupled with Nestlé Malaysia ’ s 2000/2001 consolidation activities, made some managers skeptical about the ability or desire of the employees to absorb further changes. PMC members also observed that implementing these practices would face different challenges in different factories. On the one hand, four factories were running smoothly and were not expecting any new plant and equipment upgrades in the coming years. Moreover, since these factories were performing well already, introducing these practices here where they were not urgently needed would increase the performance gap with the other factories. Leading improvement there would mean working against a lot of resistance. Shouldn ’ t they address the more problematic factories first? On the other hand, two factories suffered from capacity constraints and needed new investment. This could present an opportunity for change, but it meant adding another layer of complexity on top of the already constrained workforce. Wouldn ’ t it be better to add the new capacity first, then worry about improvement? Finally, the overall social context of Malaysia raised concerns among several PMC members. As a multirac ial, multireligious society comprised of a majority Malay community (50%), along with Chinese (24%), indigenous (11%), and Indian (7%) communities, Malaysia ’ s working environment was inherently diverse across cultural, religious and linguistic dimensions. 4 Thi s resulted in differences in attitudes and behaviors toward the role of work in people ’ s lives, as well as how work should be managed. For example, while all of Malaysia ’ s main ethnic groups had strong family orientations and a high degree of respect for parental authority, variations in degree existed across the groups. This had important implications for the nature of the relations hips formed between the subordinates and their supervisors. As a consultant explained: Malaysia has one of the highest hierarchy scores anywhere in the world as well as relatively high scores on collectivism. The result is a well-established deference to hierarchy between subordinates and their superiors, and a commitment to not standing out in a group. At a practical level, these front line workers prefer to wait for orders before doing anything. They are also not naturally expressive when solicited for new ideas on how to improve things. This clearly goes against what we try to do with SAWTs in manufacturing  – we want the shop floor to take ownership of their work and become proactive in identifying operational improvements and innovations. The situation is a considerable contrast to South Africa, where hierarchy scores are relatively moderate.256 There were also apparently large differences in attitudes and behaviors exhibited by employees who worked at the five urban factories compared with those who worked in the two rural factories. According to a number of PMC members, the urban factories were staffed by employees who were more willing to accept changes than their counterparts working at the rural factories. Adnan Pawanteh, factory manager of Shah Alam, on the outskirts of Kuala Lumpur, explained: The operating environment in Malaysia is complex. The dominant Malay population is conservative in nature and perhaps more paternalistic than the Chinese or Indians. They tend to have strong rural roots, as the “ balik kampung ” phenomenon shows. This is when millions of Malays return to their small hometowns – or “ kampungs ” – during holidays and festivals, leaving the cities like ghost towns. By contrast, the overseas Chinese come from an immigrant legacy. The early arrivals had to survive as a minority in a country with different cultural, linguistic and religious norms. This led them to congregate mainly in the cities where they could then trade with each other. The same is true for the Indians. They, too, are descendants of immigrants and have had to adapt to survive, be they Muslims or Hindus. At the same time, they carry on some traditional values, including some vestiges of the old caste system, which can mean some people they feel they are predestined to assume certain roles in society. It had been four months since Batato first suggested to his PMC colleagues that Nestlé Malaysia implement a new approach to produc tion management based on SAWTs. Most of the PMC members had seen the potential benefits such approaches could provide, as shown by the initial positive results achieved at Estcourt as well as at other Nestlé factories in South Africa. At the same time, many members continued to express reservations about the suitability of SAWTs for Nestlé Malaysia ’ s operations. There was a lack of urgency for such changes, the changes might create further performance gaps among existing operations, and the new management approaches would not fit well within the sociocultural context of the Malaysia working environment. Considering t he O pti ons Sensing he had reached an impasse, Batato needed to decide what to do next. One option was simply to cease advocating the implementation of SAWTs and focus on othe r ways to improve the company ’ s operating performance. Another option was to persist in trying to persuade those who remained unconvinced of the merits and suitability of such an initiative in Malaysia. He also considered pushing his ideas more forcefully and directing the implementation more authoritatively. He did not actually need the PMC ’ s approval if top management agreed with the direction. Moving too quickly could sabotage the whole impleme ntation by going against its basic principles, but moving too slowly could be just as dangerous by not giving the time for and attention to implementation. In either case, the long-term sustainability of Malaysia ’ s operations would be at risk and Batato ’ s reputation as a “ rising star ” wit hin the company would be affected. A wrong move would come back to haunt Batato and his colleagues. 1 Figures are for fiscal 2004. Source: Nestlé 2004 Annual Report. 2 The consulting firm was Competitive Dynamics International, , which has implemented its Mission-directed Work Teams program in many companies globally, in addition to multiple Nestlé sites.257 3 The 15 member PMC was composed of Batato, senior managers from key support functions (including industrial performance, innovation and technology, and R&D), as well as the seven factory managers. The group typically met once per month to discuss high priority issues related to production. 4 The World Factbook, Malaysia. Central Intelligence Agency.

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