EXAMINATION – Case StudyBMO6624Organisational Change Management(Sydney)TRIMESTER 1, 2021Implementing organisational transformation inAuzee Engineering Services (AES)BACKGROUNDToday’s business environment is changing faster than ever before (Michel, By & Burnes,2013; Nonaka, Kodama, Hirose & Kohlbacher, 2014). Business profiles, operations andeven existence are in swift transformation. Ninety per cent of Fortune 500 companiesexisting in 1955 are now defunct, merged or reduced in size. And since 2000, 52 percent of companies then listed in this same index have either gone bankrupt, beenacquired or merged with other firms, or now exist in a reduced capacity. Companies aregetting younger too. In 1960, the average company age on the Standard and Poor’s 500was 60 years. This average has continually shrunk since this time, and is forecast at just 12 yearsby 2020 (Novellino, 2015). At the current rate of replacement, 75 per cent of today’s Standardand Poor’s 500 companies will no longer exist by 2027 (Perry, 2015). Clearly, there has been agreat deal of market disruption over the past 60 years and these changes are becomingincreasingly rapid. These changes also reflect an increasingly unpredictable, dynamic anddisruptive external environment that managers now face. The essential challenge is tomaintain company prosperity to ensure continued viability. In response, managers commonlyrespond to external challenges by adopting large-scale organisational change, better known asorganisation transformation (OT) (Hoyte & Greenwood, 2007; Rouse & Baba, 2006).In Australia,previously held notions of once-a-decade change by managers have been replaced by newrealisations where continuous and transformational change is considered the norm and isregarded as central to organisational success (Graetz & Smith, 2010; Smith, Oczkowski,Macklin & Noble, 2003). The willingness to adopt OT is evident in many large andsuccessful Australian organisations, including Qantas and Coca-Cola Amatil (Coca-ColaAmatil, 2015; Qantas, 2013) and, as the focus of this case, AES.INTRODUCTION TO AESAES is a regional Australian subsidiary forming part of a global multinational group – GoGlobal Engineering Services – with headquarters in Europe; this multinational organisationis a leading global supplier of engineering technologies and services. The company hasoperated in Australia since 1918. The Australian group operations are divided into fourbusiness sectors: mobility solutions, industrial technology, consumer goods, and energy andbuilding technology.AES generates annual revenues totalling about A$1 billion per annum across Oceania. TheAustralian subsidiary employs over 1500 people, working primarily in Melbourne, Sydneyand Brisbane locations. The organisation’s activities cover a diverse range of productgroups that include automotive components and engineering services, security systems,power tools and accessories, aftermarket parts, drive and control technology, solar energy,software innovations, hot water and heating systems, and communication centre services.Table C2.1 summarises key facts about the size of AES operations within the parent company forfinancial year 2013–14.CHANGING WINDS FOR AESUntil the financial year 2009–10, AES was one of the largest suppliers of automotivecomponents and technology to automotive manufacturers worldwide, along withAustralia. From this time, the business landscape underwent rapid adjustments. Globaland local trends in the automotive manufacturing industry, saw falling tariff barriers and newcompetition from manufacturers capitalising on relatively low-cost sources of labour. Theseexternal shifts placed financial pressures on the Australian automotive componentmanufacturing industry that resulted in closures among several automotive componentmanufacturers in Australia (Australian Government Productivity Commission, 2014).Moregenerally, global forces have driven dramatic changes in the demand for motor vehicles.Organisations have responded by increasing the size and scale of production in newlocations. This new competition has placed relentless pressure on traditional automotiveglobal manufacturers, who have focused on finding new ways to reduce manufacturingcosts. In fact, motor vehicle producers in Australia have not survived these increasinglyhighly competitive global and domestic automotive markets. Australia has a long history ofmass car production. Last century, Australia produced cars that were arguably the bestavailable in the world (Mellor, 2014). Global car manufacturers including Ford, GeneralMotors, Mitsubishi, Nissan and Toyota located subsidiaries in Australia to produce cars forthe domestic and export markets (Australian Government)Productivity Commission, 2014). Production realised close to half a million units in the1970s. However, by 2013, the total production of Australian-manufactured vehicles hadfallen to around 200 000 units, with the Australian market becoming dominated by carsimported from Asia and Europe. At this time, Australia’s share of global production wasabout 0.25 per cent, and of that, approximately 40 per cent of locally produced cars wereexported (Australian Government Productivity Commission, 2014). Nevertheless, theremaining car manufacturers in Australia – Toyota, GM Holden and Ford – announcedtheir intentions to cease Australian manufacturing operations. The last locally builtAustralian mass-produced car left the assembly line in 2017 (T. Davis, 2017).The end of masscar production had flow-on effects on Australian automotive componentmanufacturing. This impacted AES directly. Due to the relatively high costs ofAustralian-based manufacture/supply of automotive components, AES was no longercompetitive in global markets. This was due mainly to changing requirements andpreferences of the automotive manufacturing industry globally, such as change ingeographic patterns of demand for new vehicles; global production capacity exceedingdemand of new vehicles; intense competition in local and global markets; changingconsumer preferences; increased automotive manufacturing in developing countries, plus costpressures associated with doing business in Australia. These factors necessitated that AESdevelop a new business model to remain financially viable.SHIFT IN AES’S STRATEGYThe automotive components being manufactured at AES were primarily producedfor export (up to 90 per cent), but due to global cost competition, it was no longersufficiently competitive in export markets. To remain competitive in the global automotivecomponents market, AES shifted approximately 70 per cent of automotive componentsmanufacturing operations to overseas locations in Asia and Europe; these locations beinggeographically closer to end-point customers. This process, coinciding with reduced local carproduction, was completed in 2012.AES’s reduced Australian manufacturing operations hada profound impact on the company. After relocating 70 per cent of its automotivecomponent manufacturing operations to offshore locations, current automotivecomponents manufacturing activities represent just 5 to 10 per cent of its around A$1billion business. As a result, approximately 400 employees were retrenched from theMelbourne facility and AES was on the verge of being shut down.However, instead of shuttingdown, the company chose to transform itself by changing its business model. This processinvolved a redirection towards finding new businesses to replace the existing business.Thesignificant reductions in automotive component manufacturing operations in Australianecessitated diversification through the application of technologies into new products andindustries, other than automotive component manufacturing. To achieve this, the companyhad to actively seek business diversification and subsequent business developmentoutside the automotive industry. The diversification meant taking the existing automotivestyle technology and applying it to a non-passenger motor vehicle environment; forexample, adapting automotive radar and camera detection systems and finding theirapplication to rail transport. Consequently, the company had to adopt a proactive modelto explore and develop niche markets and new products. This was counter to past practices,where AES followed a reactive model determined by customers’ demands.CHALLENGES FACED BY AES IN IMPLEMENTING NEW BUSINESS MODELIn 2012–13, AES’s management considered diversification into other industries,products and markets. Finding alternative businesses was a significant change for AES.Traditionally, employees and management did little upfront work in order to gain newbusiness. Customers were usually in-house or large original equipment manufacturers and thatdid not require matching or negotiating cut-throat competition to get the business. Thestrategic change of clientele now required significant effort to explore new markets andto find new customers. This added further complexity in understanding competitors andmatching their needs to the employees’ existing skills and technological expertise. AEShad to focus on small customers, rather than being an equipment supplier to largecompanies, such as Bunnings. Success in these new markets required employees to bemore customer-oriented and flexible to customer requirements.AES’s management faced hugechallenges. In altering the way it operated, it had no real experience exploring new businessfields. In order to do so, it had to address its employees’ understanding of organisationalpurpose or, more simply, the way they looked at their work, work practices andorganisational structure.EMPLOYEES’ UNDERSTANDING OF ORGANISATIONAL PURPOSETo diversify the business, AES’s employees had to change the way they interpreted anddelivered the current business model, while understanding and accepting the purpose ofa new business model. Almost all of AES’s employees, except office coordinators, areengineers. To comply with the new business strategy, these engineers were required tosource new business, to contribute to new ideas, to work on new opportunities and,overall, to become more flexible in their work practices. These activities required afundamental shift in the way they perceived the nature of their work.EMPLOYEES’ WORK PRACTICESChanges to work practices represented a significant shift for employees. Prior to the shiftin their customer base, applications and systems (software) engineering were considereddistinct areas. Now engineers had to work in both domains. Additionally, engineers were to beexposed to external clients, which presented them with technical and problem-solvingchallenges, along with a need for greater flexibility. Paralleling these changes to workpractices were increased cost pressures and new processes. Engineers no longer waitedfor work to be allocated. Instead, they were required to conduct preliminary discussions and towork with potential clients before they could even hope to secure and start new projects.ORGANISATIONAL STRUCTUREThe new business model also meant downsizing and creating a new organisationalstructure. In terms of organisational structure, a shift was required from a functionalstructure to a customer-focused matrix structure.SUBSEQUENT EMPLOYEE RESISTANCEBeing a longstanding engineering organisation, AES used to employ engineers withpenchant for stability and long-term horizons. In the past, these skilled employees focusedexclusively on single projects having durations over several years. The new business model,encompassing short-term projects, created uncertainty and anxiety among employees. Notsurprisingly, one-quarter of AES’s remaining engineering employees took redundancy orretirement packages and left the organisation. Those employees who left the organisation didnot find themselves fitting with the new business model and felt unsuited to work on newproducts and technologies. Since most of the continuing employees in AES also had beenworking there for a long period (10 years or more), there was a level of dissatisfaction andimplementing the new business model met with resistance from them.LEADING AES THROUGH ROUGH WATERSLike the employees, AES’s management had little experience in implementing the newbusiness model. However, instead of hiring external consultants, it adopted an organicapproach to implementing change. Knowingly or unknowingly, it dealt with the changeimplementation challenges by adopting the following strategies.MANAGEMENT WAS OPEN-MINDEDDuring the change implementation process, management exhibited openness to theuncertainty of its current situation and to inviting new possibilities from its employees.In relationto business diversification efforts, management was not rigid in its approach to capturing newbusiness. Instead, it was open to the idea of new business occurring from as yet unknownsources. It had understood that a significant proportion of new business would emerge fromthis area. As part of its strategy of being open to the unknown, management convincedits board, headquartered in Europe, that its new business plan should includeapproximately 15 per cent of turnover from unknown sources. It did not pursue anyparticular general business fields for new work.In addition to management’s comfort with anuncertain future, the senior management team was very receptive to new ideas generated byemployees. Management’s approach was to work closely with employees and to listen fornew concepts. It encouraged employees to offer opinions with regard to opportunities and toexplore these as far as possible. The engineers tended to follow a scientific approach towardstesting new ideas and were more critical about the time spent on these tasks. Conversely,management was very responsive to new suggestions and opportunities, and developed avision to materialise them. In order to encourage employees to generate new concepts,the management team actively implemented a continuous improvement program knownas CIP; an intranet-based repository where employees could initiate and document a newidea for improvement. Ideas thought worthy of consideration were evaluated atmanagement team meetings. One employee was assigned the task of monitoring the overallprogress of ideas generated through the continuous improvement program.MANAGEMENTPROMOTED ORGANISATIONAL AGILITYAES’s management demonstrated its ability to rapidly respond to changes in theoperational environment. In order to make the organisation agile, management ensured thatthe company became more flexible, risk-taking and only minimally compliant withheadquarters’ strategic and operational plans.Since the new business areas were different fromthe conventional activities previously engaged in by AES, management emphasised theneed for the organisation to become more flexible both at individual and structurallevels. Flexibility at the employee level included variable working arrangements, skilldiversification, expanded job roles and employees having the freedom to drive their owncareers. The flexibility in terms of organisational structure included achieving lean andtherefore cost-effective structure through continuous structural adjustments.During thebusiness diversification process, management encouraged risk-taking to assist withbusiness diversification. Furthermore, being a subsidiary of a European parent company,AES sometimes found itself in a conflicted situation. On the one hand, the company needed tobe agile for success, but on the other hand, the multinational organisational structure,policies and procedures did not support agility. Central directives from headquarters made itdifficult for the Australian subsidiary to act quickly in new business fields. Managementimproved organisational agility through the removal of its processes and procedures or byinsisting that headquarters adopt central changes to meet AES’s new business plans.MANAGEMENT RELIED ON EMPLOYEES TO INITIATE AND ENACTCHANGEManagement valued its existing workforce, afforded them autonomy and acknowledgedand/or acted upon their feedback.To diversify the business, management aimed to extractmaximum benefit from existing employees through motivation and support. It shunned hiringexternal consultants. The new team dynamic was sufficiently strong among the existingemployees, so management did not wish to dilute their motivation by hiring employees fromoutside the organisation. In some cases, employees who had departed the company wereapproached and offered new roles with the organisation.Management also encouraged employee autonomy. Autonomy here refers to the level ofcontrol that employees and teams had over their jobs and day-to-day work activities.Each team had its own project manager responsible for the work. Most of the decisionsconcerning new projects were decided by the project manager and/or project team,rather than management. Moreover, in terms of decision making, employees were generallyindependent. The engineers worked fairly autonomously in terms of deciding forthemselves as to when they would attend the proving grounds or undertake testing. Onlydecisions that impacted on a larger proportion of the organisation were made withmanagement’s input.Another form of management’s reliance on employees related tofeedback. The feedback here refers to employees’ observations, suggestions andcomments about the different processes and structures introduced by management duringthe change process. Feedback channels created an innovation mindset among employeesand encouraged employees with an entrepreneurial spirit. Management acted uponemployee feedback. Where management did not consider it viable to act on employeesuggestions, feedback was at least acknowledged. Management acknowledged feedback byinforming employees in subsequent meetings that it had listened to suggestions, analysed themand given them consideration, and it gave reasons for no action or later implementation.In some other instances, where management was not able to implement a whole idea, itconsidered some elements of the idea to acknowledge employee feedback.MANAGEMENT SUPPORTED KNOWLEDGE-SHARINGManagement supported knowledge-sharing by tapping into the deep pool of tacitknowledge within AES and its worldwide subsidiaries. The deep pool of knowledge refersto knowledge within the organisation, locally and globally, especially within theemployees. It may be knowledge gained through personal interest in technical areas that werenot related to the organisation’s previous business activities. This encouraged theemergence of informal teams that would exchange information about how employeescould work together on new and innovative technologies to win projects in different fields ofbusiness.In order to learn from the experiences of other subsidiaries, AES also sent itsemployees overseas so that they could be cross-trained by these subsidiaries and couldbring back knowledge about different areas of business that had not been previously pursuedby AES. This further contributed to creating networks with employees in overseassubsidiaries and these networks later provided advice to AES. In situations whereemployees faced a specific problem in a new business field, the problem was openedup to subsidiaries worldwide where groups overseas with relevant experience could providesuitable advice. Employees formed weekend groups where they discussed how to take skills,such as sensor technology, to the next level when applied to rail projects. Management wasaware of this and fully supported this approach. Thus, employees shared their ideas andknowledge and further refined them before presenting them to management. Another wayof tapping into the deep pool of tacit organisational knowledge was to utilise the pastexperience of employees gained from previous jobs outside AES. Management respected theexperience of employees gained in other organisations and let them apply thisexperience to assist diversification.AES’s executives understood the power and importance ofinformal teams as it tapped into previously under-utilised skills and knowledge, such asmonitoring software and mobile phone applications. As a way to demonstrate its support forthe informal groups, senior management permitted informal groups to add the additional hoursspent working on projects informally against their regular office hours.MANAGEMENT EXERCISED LESS CONTROLAn interesting and unexpected management practice was the non-directive approachadopted by executives during the transformation. Management kept operations informal bypromoting decentralisation and by not being overly critical about employees’ mistakes.As theorganisation moved into diverse areas, it became relatively more relaxed in terms of howand with whom employees engaged to achieve work outcomes. As a consequence, powerto make decisions was increasingly deferred to the employees. In the new organisationalstructure, many issues, such as budgetary approval processes, became ambiguous anddepended on the employees’ own interpretation rather than relying on clarification frommanagement. Executives did not want to define everything for employees, thus allowingemployees to decide on the best options as appropriate to specific situations. Employees hadreasonable relationships with each other. In circumstances where guidance was needed, theypreferred having informal discussions with their peers and management, rather than goingthrough a formalised process. Thus, the working relationships among employees andbetween employees and management became less formal, with employees taking greaterresponsibility for decision making and outcomes.Generally, instead of management providingconstructive criticism to employees, management encouraged employees to evaluate theirown shortcomings. This approach assisted employees to understand their own positions,to reflect upon their actions and their role, and to identify what they needed to do in future tolearn from their mistakes.MANAGEMENT ENLISTED EMPLOYEE COMMITMENT TO CHANGEIn order to make the transformation succeed, AES’s management prioritised employeecommitment to change. It achieved this through employee involvement in informaldiscussion, communicating decisions to employees proactively and through establishing asense of stability and future certainty among employees.Senior managers usually engagedwith employees through informal discussions. Management considered informal meetingsand a loose structure as an opportunity for employees to feel at ease and to discussopenly opportunities, success and failure. These opportunities also allowed employees torequest support when needed.During the transformation, management also adopted thepolicy of communicating openly and frequently. During regular departmental meetings,management kept employees informed about new initiatives within the organisation, whythese initiatives were necessary, and how employees could play their role in ensuring these ledto successful outcomes. In some cases, executives conveyed provisional information toemployees with the proviso that the situation might change later on. This left employees with asense of being consulted and included during the change process. Those employees onoverseas assignments were also kept informed by management about the possibleimpacts of change on their roles. Meetings with employees on overseas assignments wereconducted through teleconferencing. During those meetings, all expatriates from differentlocations around the world and AES management convened at the one time. Managementremained transparent in making and communicating decisions to its employees.After theclosure of its manufacturing facility, employees became pessimistic about the future ofthe organisation. During this phase, management gave priority to creating stability andcertainty. In order to minimise doubt among employees, executives exerted significant effortinto positive statements received from the Board in Europe indicating that the jobs ofremaining employees would be secure into the future. In an industry where bad news wasoften heard, executives motivated employees by showing them that there was ‘light at theend of the tunnel’. Even if it won only relatively small projects in new business areasinitially, management disseminated positive messages to motivate employees about thefuture possibilities and to reassure them that the organisation was on the right path withregard to defining and supporting a new business model.RESULTSManagement practices adopted during transformation contributed to the co-creation offavourable organisational conditions. The confidence expressed by AES’s directors andpresident in the media with regard to its change efforts, along with the other media reportsabout the organisation, provided the first indication of success in implementing OT. Thesecond measure of success was reflected in the employees’ changed attitudes and behaviourstowards, and consistent with, the new business model (Schein, 2010; Waddell, Creed,Cummings & Worley, 2017). The third success indicator was the generally positive perceptionamong the employees about the capability of transforming AES.
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