Unit 5 : Real Life Business Scenarios
Real Life Business Scenarios
When talking about organisational resilience, different disruptive events were often used, a case study related to the SwissAir company and another one related to the Philips company and its two main customers Nokia and Ericsson.
Business Scenario : SwissAir
Founded in 1931, SwissAir was Switzerland’s national airline, however it closed down in 2002. For seventy years, SwissAir was considered as the icon of national trustworthiness, reliability, accuracy, timekeeping, quality service, efficiency and financial integrity (Gow, 2007; The Economist, 2001). However, in 2001, SwissAir was about of collapsing with debts of around 17 billion Swiss francs ($13.6 billion) (Clark and Harnischfeger, 2007). The final closure in 2002 may be due to several factors.
•The “Hunter strategy“
During 40 years, SwissAir followed a strategy that was risk-averse, as top managers were reluctant to involve in risky and life-threatening ventures (Knorr and Arndt, 2003). This strategy helped the company to keep its operations and ensure business continuity. In 1997, the CEO was changed who also change the company’s strategy. It was decided to follow a more aggressive appropriating strategy known as the “Hunter strategy” (Steger and Krapf, 2002). This policy pursued to succeed by means acquisition rather than internal growth. Thus, SwissAir was considered “neither big enough to be market leaders, nor small enough to fit into a niche” (The Economist, 2001).
•Executives’ hubris and risk taking
Another factor impacting in SwissAir’s decline was executive hubris. Hubris can be defined as the “exaggerated belief about one’s own judgment that may deviate from objective standards” (Li and Tang, 2010). This is a situation where the senior executives’ valuation and predictions of acquisitions were wrong as they overestimated the real value of the target companies.
•Overreliance on outsiders
The Swissair Group acquired minority holdings in numerous airlines that were generally unprofitable in an effort to become a force in European aviation alongside the three major competitors at the time, Air France, British Airways, and Lufthansa (ILO, 2001).
External environmental factors
The fortune of the company was changed by several external forces. One of the most notable of them occurred in 1998 when flight SR111 crashed off the Atlantic coast of Canada. All 229 passengers on the New York to Geneva flight perished in the catastrophe (Brooke, 1999). The incident damaged the airline’s long-standing reputation for safety and began to have an impact on its capacity to draw passengers (Gosling, 2013). The external restrictions on how the firm may operate were another contributing element. Due to Zurich’s small population of 350,000 and the fact that Switzerland is a non-member of the European Union, Swissair did not fully profit from Europe’s open skies (Kay, 2007; ILO, 2001).
The airline’s operations were severely impacted by the September 11 attacks. The 9/11 attacks significantly changed the situation, setting it permanently on a downward trajectory. The airline was affected by a complex web of factors, including the “market’s post-9/11 weakness, SARS (severe acute respiratory syndrome), the Iraq war, high fuel prices, and, of course, the global economic collapse and chronic recession,” along with others in the sector (Sparaco, 2010, p. 70). The volume of passengers decreased noticeably as a result of these changes. These factors collaborated to speed up Swissair’s demise. In general, the September 11 attacks made previously unnoticed problems with the airline public.
Business scenario: SwissAir
In an effort to turn around the airline’s financial situation, a new plan of action was presented. The fundamental change in the new strategy was a move away from rapid expansion and toward retrenchment through the sale of underperforming businesses. Atraxis was one of the losing subsidiaries that the new CEO began to do rid of while also enhancing in-flight amenities and launching a new business class (Floitau, 2001). This strategy was primarily limited by the inability to cut “costs quickly enough to maintain pace with dropping revenues per passenger” or quickly divest itself of its investments in other struggling airlines like Air Littoral, AOM, and Air Liberté to increase its prospects of survival (The Economist, 2001, p. 55). The inherited issues were much too serious to be fixed in the short term.
The case illustrates that instead of building up slack resources to equip it for rapid shifts in the business environment, the firm overdiversified its portfolio of activities during quiet periods.
Based on Seville (2016)
Business scenario: Philips and its biggest customers, Nokia and Ericsson
Lighting struck a Philips microchip manufacturing facility in New Mexico over ten years ago, starting a fire that tainted millions of cellphone chips. The mobile phone manufacturers Nokia and Ericsson were among Philips’ biggest clients, yet they each responded to the crisis differently. Nokia was able to quickly switch suppliers because to its supply-chain management strategy. Some of its phones were even redesigned to accommodate both American and Japanese chips, keeping its production line mostly unaffected. However, Ericsson relied on Philips’ assurance that production at the factory would resume in a week and took no further action. In addition to losing market share, that choice cost Ericsson more than $400 million dollars in annual earnings. Nokia’s profits, however, increased by 42%. The chips were crucial to the functionality of the phones at the time because both firms were set to introduce new mobile phone designs that needed them.
The semiconductor branch of Philips produced roughly 80 million chips per day in 2000. Philips chips were used in 80% of the mobile phones sold worldwide. Consumer markets also demanded a wide range of other electronic products that needed processors, such as new cars, digital cameras, and portable memory devices, in addition to mobile phones. Due to this rising demand, excess capacity was limited. For makers of mobile phones, a consistent supply of chips was essential because their clientele frequently switched phones for the newest or trendiest model. Suppliers’ reliance on the replacement market increased, making speed to market a crucial sales consideration.
Based on Chegg (2022)
Post Fire: The Nokia Response
Nokia discovered a flag in the system indicating Philips chip inflow a few days after the incident. Nokia started calling Philips about inventory on a daily basis rather than a weekly basis and created a number of tracking applications for the five components Philips made at the factory. Engineers first thought about whether a redesigned chip would provide Nokia access to different vendors. Three of the five components that were available independently of Philips were the subject of the next round of research by the team. Within five days, two suppliers, one in the United States and one in Japan, provided the needed inventory. After increasing production, Philips was finally forced to obtain more inventories from the Shanghai and Netherlands plants.
By the end of the international effort, Nokia had its chips, and as a bonus, the engineers had figured out how to increase output so that, when the facility was brought back online, an additional two million chips could be produced. Nokia was able to avoid any production losses as a result of supply chain disruption because to this excellent initiative.
Post Fire: The Ericsson Response
Until a low-level technician got Philips’ initial notification, Ericsson was unaware of the fire. It was not uncommon for delays to last one week, and “the fire was not seen as a significant calamity.” The top brass continued to be in the dark even after Philips phoned technicians once more on March 31 to admit the previous timeline was unrealistic and the short-term supply of chips was unclear. Before anyone on the executive team learned about the fire, it was early April. The situation was already dire because Ericsson had already taken steps to simplify its supply chain by making Philips its only supplier.
The T36, the first mobile phone with Bluetooth technology, was launched later than planned in part due to a component shortage at Ericsson. Officials at the company estimate direct revenue losses of S400 million, which insurance would help to partially offset. The ongoing confusion in the mobile phone industry was evident, though, and the new phone lost valuable shelf space. Analysts concurred that the ongoing effort in mobile handsets was failing, despite Ericsson changing its shipping design to prevent future shortages.
The Bubble Bursts
The broader dot-corn bubble, which broke in mid- to late 2000, largely caused the telecom boom, which more or less followed suit. A large portion of the tremendous destruction of shareholder value in the telecom industry can be attributed to investments made based on inaccurate projections of market expansion and the corresponding products and services.
Post Bubble: Ericsson and Nokia
Early in 2001, when Ericsson cut around 20% of its workers and outsourced the manufacturing of mobile phones, the bubble began to form. By April 2001, Ericsson had ceased producing mobile phones on its own and had partnered with Sony on a 50/50 basis. Nokia outlasted its rivals in the telecoms boom because it anticipated the downturn and slashed expenses by outsourcing production, hiring, and holding off on new product development. There were layoffs, but they weren’t very substantial. More than 123,000 people worked for the company in 2010, which had net revenues of $58.7 billion (down 19% from 2008) and an operating profit of £600 million, which was down 76% from the previous year. Despite these dismal numbers, the business has expanded significantly since 1999 and has kept its position as the market leader in sales, with a market share of 22.5% in 2012.
The Philips fire cost Ericsson dearly and ultimately led to the discontinuation of its own mobile phone manufacturing. As a result of the company’s failure to recognise how expensive disruptions were to the bottom line, it also became clear that the company’s poor management of its mobile phone brand extended to its operational risk policies. Nokia, on the other hand, was able to manage the effects of the fire thanks to its great insight into its production operations, awareness of the significance of getting items to shelves, and acute monitoring of input supply.
Summary and Takeaways
1. The SwissAir case suggests that, during quiet periods, the company over-diversified its portfolio of activities rather than promoting preparedness and adaptive capabilities to be prepared in advance for sudden changes in the business environment.
2. The Philips case suggests that the underestimation of the effects of the fire at the Philips facilities plant and the overconfidence that everything would be solved within a week was the main cause of the difference in the resilient response of Nokia and Ericsson.
Check your understanding
Business Scenario: SwissAir
1. What do you think was the decision-making process at SwissAir? Should the CEO have been removed earlier?
2.What do you think went wrong with SwissAir’s strategy?
3. Do you believe that the attack on the Twin Towers in September 2001 influenced SwisAir’s decline in the 9/11 weakness?
4. If you were a consultant or an investment analyst called in to evaluate the risk management system at SwisAir, what would you want to see to give the company high marks? List up to 5 most important items.
Business scenario: Philips and its biggest customers, Nokia and Ericsson
1. Now imagine that it is June 2000. What did go wrong for Ericsson? List up to 5 most important items.
2. What was missing in their planning in 1998? List up to 5 most important items.
3. What should Ericsson have done differently in response to the delay in chips?
4. What went right for Nokia? Why? List up to 5 most important items.
5. Did Nokia overstep its bounds in commandeering Philips’s supply of chips?
6. What could Nokia have done better? List up to 5 most important items.
7. If you were a consultant or an investment analyst called in to evaluate the risk management system at a company, what would you want to see to give the company high marks? List up to 5 most important items.
Seville, E. (2016). Resilient organizations: how to survive, thrive and create opportunities through crisis and change. Kogan Page Publishers.
Chegg (2022). Nearly A Decade Ago, Lighting Struck A Philips Microchip Plant In New Mexic. Retrieved from: https://www.chegg.com/homework-help/questions-and-answers/case-questions-nearly-decade-ago-lighting-struck-philips-microchip-plant-new-mexico-causin-q44707640
Latour, A. (2001). Trial by fire: A blaze in Albuquerque sets off major crisis for cell-phone giants. Wall Street Journal, 1(29), 2001.
Mukherjee, A. S. (2008). The fire that changed an industry: a case study on thriving in a networked world. Financial Times, 1(1), 10-12.
Mukherjee, A. S. (2008). The Spider’s Strategy: Creating Networks to Avert Crisis, Create Change, and Really Get Ahead (HB). Pearson Education India.