Introduction
Change management in organizations is often a complex and risky affair. Firms can be perceived as rational enterprises that are structured and designed to pursue predetermined objectives. Aspects such as routine operations, job roles, well-defined structure, and procedures and standards all define a business. Changing any of these elements may require significant modifications across the entire firm. In this paper, the focus will be on Almarai, a dairy company in the Kingdom of Saudi Arabia (KSA). A massive transformation is needed to help the company navigate several challenges experienced in various segments. A brief background of the company, the problems faced, and a proposed change and its implementation will be examined in detail.
Company Background
Almarai is a dairy products company based in the KSA and considered to be one of the world’s largest vertically integrated corporations in the dairy industry. In the Middle East, Almarai is the region’s largest beverage and food manufacturing and distribution company (Almarai, 2020). The company was founded in 1977 and headquartered in Riyadh, KSA.
During that time, the country’s push for food security was at its peak (Almarai, 2020). Saudi Prince Sultan bin Mohammed bin Saud Al Kabeer determined that there was an opportunity to establish a domestic dairy industry that would supply fresh milk and other dairy products in the country (Fabbe et al., 2019). With no similar firms in the industry or available infrastructure, Almarai would create a domestic industry from scratch to compete in a market that was made up of imported dairy products.
The company has since grown and diversified its core business activities. It employs over 42,000 workers in over 17 branches worldwide (“Almarai overview,” 2018). Additional segments in which it operates include juice, poultry, bakery, and infant nutrition. In countries such as Jordan and Egypt, Almarai functions through a joint venture called International Dairy & Juice (IDJ) in the dairy and juice segments. This approach is also used in the bakery segment where, alongside Almarai’s own operations, Modern Food Industries (MFI) produces 7Days products (“Almarai overview,” 2018).
While joint ventures are the main strategy for growth and expansion, Almarai’s strategic overview also includes leveraging customer insights through the continuous manufacture of high-quality merchandise and services. The mission statement of Almarai is to provide nutritious and quality beverages and foods to improve the everyday lives of the customers. The vision, on the other hand, is to become the preferred choice by clients through market leadership and the making of superior beverage and food products. As such, the vision and mission statements clarify the company’s emphasis on quality as a strategic objective.
Issues Facing the Company
For some years now, Almarai has been faced with a situation where its diversification strategy has failed to produce the desired results. According to Fabbe et al. (2019), Schorderet took over as CEO in 2015 when only three product segments, namely bakery, juice, and dairy, were performing well while the rest were not. Almarai has a remarkable market position that has allowed it to build a long history of reputable brands. Its status in the Middle East countries, including Qatar, Kuwait, and Bahrain means that Almarai is seen as a premium brand whose products easily sell (Mohamad & Asfour, 2020). However, the fact that only three products are registering success means the company has to rethink its diversification strategy.
The literature on diversification strategies and their effects on firm profitability has focused on two theoretical perspectives. According to Kim et al. (2015), these include organizational learning and resource-based theory. Their study, however, focuses on geographic diversification which Almarai has pursued alongside product broadening. They reveal that expanding in poorer countries has a positive implication on profitability while a U-shaped relationship is found when firms move into richer countries.
Almarai’s expansion in states such as Qatar has also failed to produce the desired results in some segments. However, this could be the result of political relations between the KSA and Qatar. Diversification is usually associated with improved firm performance as explained by Sucuahi and Cambarihan (2016). However, the same results are not observed in the case of Almarai.
Principal Reasons for the Problems
The political environment of the KSA is one of the principal reasons some segments are underperforming. Recently, the government decided to implement a plan that allows Saudi nationals to replace foreign expatriates (Fabbe et al., 2019). The government subsidizes its citizens using the riches from oil and gas. However, as the KSA seeks to move away from oil dependency to an enterprise-based economy, it means the citizens will have to work to afford sustenance previously provided through the subsidies. It also means that the foreign population will significantly decline and with it, the foreign market diminishes. Even with the successful segments such as dairy, long-shelf products are preferred by Saudi nationals while the ex-pats prefer fresh products.
Operational inefficiency may also be another principal reason why some segments are underperforming. Fabbe et al. (2019) explain that in 2018, Almarai was experiencing a new reality that the entire KSA was facing, including higher costs. The operational inefficiencies mean increased product prices which do not always please the consumers. Almarai had attempted to raise dairy products price by 14% and experienced an immediate consumer backlash within days in addition to receiving an order from the government to reverse the increase (Fabbe et al., 2019).
This only serves to compound the problems where, despite costly production processes, the company cannot increase prices to sustain its profits. In an age of globalization, managers’ views on diversification determine the actions taken (Bowen et al., 2015). The geographical diversification means the country has established operational bases in other countries. In other cases, the production of raw materials in other countries becomes costly and the only response is a price increase.
Other segments have struggled mainly because the company lacks the appropriate knowledge to produce the products or because it fails to utilize the right channels. A perfect example is infant formula which, despite being attractive, has struggled. A joint venture with Mead Johnson meant that Almarai contributed dairy supply channel while Mead Johnson provided knowledge regarding the pediatric nutrition industry.
The competitors in this segment, for example, Danone, Nestle, and Abbott utilized pharmacies as their distribution channels. Therefore, Fabbe et al. (2019) conclude that a channel mismatch is a primary reason for the poor performance of infant formula even after the joint venture was disbanded and Almarai started producing its own brands. Almarai may have lacked the appropriate knowledge but this could have been gained through the joint venture. While its products remained high quality, the channels used were not the most appropriate ones.
Proposed Change
There are two changes that Almarai needs to accomplish to improve the situation. First, it needs to divest in underperforming segments and strengthen the turnaround ones. As explained above by Kim et al. (2015), diversification works in some economies and not in others. A similar sentiment has been presented by Schommer et al. (2019) who state that diversification tends to boost performance in the lead developed economies but undermine it as institutional development increases.
The perfect example of an organization strategically divesting into nonperforming segments is Weyerhaeuser. In the 2018 annual report, the company states that it has divested from areas such as Uruguay. The reasons for this decision include weather effects, global and regional climate change, higher risks of loss from fires, and availability and price of raw materials (Weyerhaeuser, 2018). Weyerhaeuser is different from Alamrai both in terms of the industry and the reasons for underperformance. However, the fact that divestments have saved its costs and allowed the company to pursue more profitable options means the same strategy can work for Almarai.
The second proposed change is the adoption of new channels for products whose turnaround can be facilitated. Infant formula, for example, is a product that is desirable in the KSA. Almarai’s brand name should guarantee the success of a product heavily consumed in the country. However, the company needs to take the product to where the customers purchase them. In other words, the bakalas are successful channels for dairy and other products because these channels are associated with these products (Fabbe et al, 2019). The pharmacies are the places where the same consumers purchase their infant nutritional products. The resources saved from divesting the underperforming segments could be used to create new marketing networks across the country’s pharmacies.
Change Implementation Plan
Change implementation is a sensitive issue because of the challenge it faces, including resistance to change and failure of the process. It often requires a “do it” orientation as described by Cawsey et al. (2016) for a successful transformation. In this case, the changes proposed may change the face of the company with regard to the markets served and products produced. Additionally, the changes may have significant implications for the company’s future, especially because they alter the firm’s strategies that have previously brought it success. A comprehensive approach to the implementation can be achieved using the PDSA change management tool.
The PDSA cycle comprises four stems, namely plan, do, study, and act. The planning step entails setting objectives based on the observed needs (Donnelly & Kirk, 2015). In this case, Almarai needs to get rid of non-performing segments and boost those that can be revived. Secondly, it will need to find an alternative distribution channel for segments such as infant formula, which is among those whose performance can be improved. The second phase is the plan implementation and recording of the change progress. In this case, the financial performance of the individual segments can be indicators of whether or not the change is succeeding. Patterns are observed, in this case, those that highlight improvements in those areas labeled as struggling.
The third step is studying, which means analyzing the results obtained from the previous step. Here, the objective is to compare the outcomes with the predicted outcomes or the set goals for the change implementation (Donnelly & Kirk, 2015). This step is critical because it informs about the change progress and the need to make any modifications to the plan. The need for a contingency plan is also revealed in this phase. The last step is acting, which means ensuring that the improvements are maintained.
Change Control Mechanisms
The use of the PDSA cycle above allows the adoption of a diagnostic or steering control. This is defined as a traditional managerial control system that focuses on the key performance variables (Cawsey et al., 2016). Struggling segments at Almarai have resulted in the implementation of the changes. Therefore, measurement of the financial and other performance aspects as the basis for controlling the change is the right approach. According to Cawsey et al. (2016), an example of the variables is sales data observed from the implementation of new selling efforts. At Almarai, revenue growth from retained segments and cost savings from divested ones are the primary variables in the steering control system.
The contingency plan is also dependent on the PDSA cycle mainly because the framework allows the firm to check which plans are successfully implemented and those that are not. The contingency is implemented in the last stage of the cycle. One recommended contingency improving international sales, especially after the departure of ex-pats from the country. However, this strategy will require Almarai to invest heavily in international marketing to compete effectively with international dairy products.
Reflection
Completion of this project has provided me with important lessons. The major lesson is that excessive diversification can affect a firm’s performance. The case of Almarai shows that this strategy is a crucial one that helps a company grow, but this reaches a point where it cannot go further. The project has also influenced how I perceive the change in that I now see change as complex and not easy to accomplish. As stated by Fabbe et al. (2019), slight operational changes can cause massive disruptions to multiple processes and business units which have implications on operational costs. Additionally, planning for a change effort could be the difference between success and failure. Planning sets goals and targets and keeps the transformation process focused on them. However, pursuing these targets will require an appropriate control system to ensure the plan is followed and goals are achieved.
References
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