In the Field with Carlsberg
Mobilizing resources in a cost-cutting environment to achieve growth
At a glance
In 2014 Carlsberg Brewery was the fourth largest global brewery by volume and a leader in the regions in which it operated. However, the company faced multiple challenges. First, it had heavily invested in the Russian market in 2008 and as a result one-third of its operating profit originated there. But by 2014 the Russian market was no longer as attractive: there were international sanctions against the country; its GDP was falling, as was consumer spending; the Ruble had been devalued; and the country had imposed both stricter regulations and taxes. Russia was not the only place with an uncertain environment. Carlsberg faced other regulatory changes in addition to digitization and the rise of mega cities and shifting attitudes toward alcohol. Debt was high and revenues were declining, forcing the company to issue a profit warning in August 2014. Finally, with a growing lack of credibility in the market, the supervisory board decided new blood was needed and appointed Cees ‘t Hart as CEO, effective June 2015. Even so, the company had to issue another profit warning two months later. However, the supervisory board was confident the new CEO, with his recent experience navigating a merger of equals between two dairy cooperatives, could lead the effort to improve the company’s cost effectiveness, while it continued to invest in both its long-term capabilities and brands.
The Broader Issue
Companies face increasingly changing and uncertain operating environments. These include, but are not limited to, shifting geopolitical alliances, regulations and taxes; the accelerating application of machine learning and artificial intelligence outside traditional IT fields; and demographic changes such as population shifts from rural to urban environments and more megacities. Leaders have to both adapt their strategies to these new realities and uncertain times and successfully execute them to return value to shareholders. In a turnaround situation, CEOs will also have to add an additional constraint: implementing the strategy using limited resources and possibly while cutting costs.
When adapting the corporate strategy to evolving realities, leaders must keep in mind that it is difficult to fully realize the financial advantages of the new strategy. A key reason for this is the absence of meaningful tracking of long-term performance against plans. And even when companies do track, it is difficult for them to identify whether the gap is due to poor strategy content, poor execution or a combination of both.1
A useful way for leaders to think about tracking strategy against performance is to systematically assess where the company stands on three related dimensions: its financial, strategic and organizational health (see Figure 1). Leaders are used to managing financial health and have well-known tools – ROI, EBIT, EBITDA, etc. – to do so. This is the base upon which they must build. CEOs regularly track financial performance and keep their boards and investors fully informed of the results. If successful, they continue to run the company; if not, in order to fulfill their fiduciary responsibilities and protect investors, boards will look for another CEO.
However, short-term financial performance is not enough to ensure a company’s long-term corporate health. For that, CEOs need to review their strategy and adapt it to changing environments. They need to systematically scan the external operating environment, identify the trends that impact their industry and company, and then develop strategies to adapt to and thrive in the evolving environment. However, it is not simply an issue of getting the content correct, it is also about ensuring awareness and buy-in to that strategy by the rest of the organization. This requires the courage to be open to change as well as to broad involvement in the strategy development process.
This leads automatically to the need for organizational health. McKinsey defines this as its “ability to align around and achieve strategic goals.”2 This softer aspect of management is no less important than the others. To achieve a healthy organization, a CEO must carefully examine its culture and assess where it helps, rather than hinders, to achieve its goals. If, for example, the company has prioritized teamwork and autonomy yet its incentive structure still rewards individuals and imposes decisions in a top-down, authoritative manner, then it will have difficulty achieving its goals, no matter how well communicated they are. Aligning processes and structures with stated strategic goals is key, but it is hard work, and requires honesty and willingness to tackle unstated norms.
Creating a high-performance culture is easier said than done. The framework in Figure 2 can help companies take concrete steps to change their cultures. A CEO should engage the top team and the entire organization to understand which of its behaviors – both old and new – will be helpful or unhelpful in achieving the new strategy. Old behaviors that are not helpful should be left behind, while the helpful ones should be kept and reinforced. Companies should also try out new behaviors. These too will need to be analyzed as the new strategy is rolled out. The helpful ones should be perfected, while the unhelpful ones need to be rethought. CEOs and their teams need to work on this with the company if they hope to achieve a successful change in strategy.
Did it work?
Carlsberg’s new CEO quickly dove into the task. He felt strongly that the company’s success should be based on creating a collaborative culture, unlike the previous management team of two who had taken decisions and then communicated them in a top-down manner. To begin changing this mindset, he invited the company’s top 60 market leaders and functional heads to an offsite teambuilding event. He shared the challenging financial situation the company faced and asked for the team’s perspective and help in finding solutions.
Within six months, the CEO and the top 60 had redefined Carlsberg’s strategy. They first identified the outside forces that would impact the company in both the short and long term. They then translated that strategy into well-defined goals for the overall company as well as the local and regional markets. Furthermore, the CEO shifted the company’s financial value management approach to one that balanced profit, organic growth and volume. Concretely, this meant the company had to generate sufficient cost saving to fund the strategic journey, an initiative known as “Funding the Journey.” Every year as the company evolved, the CEO, with the broad engagement of the team, tracked the progress of the strategic goals and updated the specific market and regional goals accordingly.
By the end of 2017 this approach had paid off. The company had cut costs by more than promised while delivering better than expected profit growth. The execution of its strategy was also on track and had garnered wide support throughout the company as well as externally. Finally, the CEO had laid the foundations of a high-performance culture using a mixture of management development, aligning incentives to targets and implementing a systematic review process.
By encouraging the top 60 actively in the formulation of the strategy and by setting the self-funding aspect as a financial parameter, Carlsberg hit the sweet spot of simultaneously addressing financial, strategic and organizational health.
Leaders can learn from Carlsberg’s journey to turn the company around. Specifically:
- Succesful turnarounds require discipline and simultaneously focusing on the company’s financial, strategic and organizational health.
- Finding a balance between engagement and speed. While engagement is key to proper strategic content and quality execution, those who do not show buy-in within a reasonable amount of time should be let go.
- Developing a high-performance culture that is aligned with the right strategy and organizational processes will improve the delivery of financial results.
1 https://hbr.org/2005/07/turning-great-strategy-into-great-performance, accessed 5 April 2018.
2 https://www.mckinsey.com/solutions/orgsolutions/overview/organizational-health-index, accessed 5 April 2018.