Case: Building a Winning Culture in the Times of Financial Adversity

Abstract:

This case illustrates a CEO-led organizational transformation driven by stretch goals,

performance measurement, and accountability. When Kasper Rorsted became CEO of Henkel,
a Germany-based producer of personal care, laundry, and adhesives products, in 2008, he was
determined to transform a corporate culture of "good enough" into one singularly focused on
winning in a competitive marketplace. Historically, Henkel was a comfortable, stable place to
work. Many employees never received negative performance feedback. Seeking to overturn a
pervasive attitude of complacency, Rorsted implemented a multi-step change initiative aimed
at building a "winning culture." First, in November 2008, he announced a set of ambitious
financial targets for 2012. As financial turmoil roiled the global economy, he reaffirmed his
commitment to these targets, sending a clear signal to Henkel employees and external
stakeholders that excuses were no longer acceptable. Rorsted next introduced a new set of five
company values—replacing the previous list of 10 values, which few employees could recite
by memory—the first of which emphasized a focus on customers. He also instituted a new,
simplified performance management system, which rated managers' performance and
advancement potential on a four-point scale. The system also included a forced ranking
requirement, mandating that a defined percentage of employees (in each business unit and
company-wide) be ranked as top, strong, moderate, or low performers. These ratings
significantly impacted managers' bonus compensation. In late 2011—the time in which the
case takes place—Henkel is well on its way to achieving its 2012 targets. Having shed nearly
half its top management team, along with numerous product sites and brands, Henkel appears
to be a leaner, more competitive, "winning" organization.

Keywords: Performance Measurement; Performance Appraisals; Human Resource

Management; Values; Organizational Transformations; Pay For Performance; Strategy
Execution; Values and Beliefs; Work-Life Balance; Organizational Culture; Human
Resources; Performance Evaluation; Compensation and Benefits
My Details:

Name: Vaibhav Rajendra Patil

Working as a Project Officer at Tata Memorial Hospital

Email: vaibhavp107@gmail.com

Phone: 9821976345

Conference Sub-Theme: General Management “Skills for Future Businesses”

Introduction:

Who – the protagonist

Kasper Rorsted, appointed CEO of Henkel in 2008. He was the company’s youngest ever
CEO and as a native of Denmark, the first to be born outside Germany or Austria.

What?

Fritz Henkel founded what would become modern-day Henkel in 1876 to manufacture a new
laundry detergent. By the 1920s, the company had become a leading German detergent
producer and diversified into glues. Most of the company’s infrastructure was destroyed in
World War Two, but Henkel re-opened several plants to sell personal care products as well as
detergent and adhesives. By 2008, sales had grown to €14 billion across 125 countries.

Why?

When Kasper took over, Henkel was reporting comfortable growth and profits, but many
analysts, and some company executives, saw Henkel as complacent and lacking a competitive
spirit. One insider referred to Henkel as ‘the happy underperformer’.

When?

To catalyse the organisation and signal his commitment to change, Rorsted called a press
conference in November 2008 to announce a set of ambitious four-year financial goals for
sales growth, EBIT margins (earnings before interest and taxes), and EPS (earnings per
share).

Kasper knew that his ambitious financial goals could only be achieved by transforming the
complacency at Henkel into what he called a ‘winning culture’. This comprised two major
initiatives: redefining Henkel’s vision and values, and implementing a new performance
management system to strengthen management capabilities and increase accountability.

Key quote

‘Staying where we are is no longer an option. We either move up or move down: we either
become relevant or we will be made irrelevant.’ – Kasper Rorsted
Literature Review:

Performance measurement is on today’s management agenda. Different measurement

frameworks and methodologies, such as the balanced scorecard, the performance prism and
the business excellence model, are being adopted the world over. Interest in the topic
pervades the public arena, as well as the private and public sectors, with governments
introducing performance league tables for schools, hospitals, universities and local
authorities. Software vendors, consultants and conference organisers have also recognized the
massive market interest, hence the growing plethora of reporting packages, consulting
products and performance measurement conferences. Research data suggests that most
organisations currently use some sort of performance measurement system in order to
implement their business strategy. However, many of these systems deliver a fraction of their
potential benefits as they tend to be poorly designed and implemented. Why? Because far too
often when managers re-engineer their organisation's measurement systems they simply
restructure their existing measures into a new measurement framework.

A belief is the acceptance of a statement or claim as true. Depending on the circumstances

and the individuals involved, beliefs can develop quickly or slowly, and individual
experience plays a large role in what one believes. For example, employees working for a
manager with an established track record of providing clear direction and holding workers
accountable for their assignments are much more likely to believe what their manager says
than those working for a manager who says one thing but then routinely does another.
Individual beliefs tend to be substantiated by facts, circumstances, and experience. Because
of this, beliefs can be changed by the introduction of new facts, changing circumstances, and
evolving experience.

Values on the other hand are much more deeply rooted than beliefs. Values reflect what one
feels is important in their life. At an individual level, values could include concepts such as
caring, empathy, or trust, among many others. At the organizational level, examples of
values might include accountability, customer service, and safety.

Business leaders are vital to the creation and communication of their workplace culture.
However, the relationship between leadership and culture is not one-sided. While leaders are
the principal architects of culture, an established culture influences what kind of leadership is
possible
Leaders must appreciate their role in maintaining or evolving an organization’s culture. A
deeply embedded and established culture illustrates how people should behave, which can
help employees achieve their goals. This behavioural framework, in turn, ensures higher job
satisfaction when an employee feels a leader is helping him or her complete a goal. From this
perspective, organizational culture, leadership, and job satisfaction are all inextricably linked.
Leaders can create, and also be created or influenced by, many different workplace cultures.

To understand the meaning of organisational culture, we must first understand the meaning of
culture. “Culture is the set of important understandings that members of a community share
in common.” It consists of a basic set of values, ideas, perceptions, preferences, concept of
morality, code of conduct etc. which create a distinctiveness among human groups.

When we talk about culture, we typically refer to the pattern of development reflected in a
society’s system of knowledge, ideology, values, laws, social norms and day to day rituals.
Depending upon the pattern and stage of development, culture differs from society to society.
Moreover, culture is passed on from generation to generation.
Research Methodology:

A Qualitative approach was followed for this paper which included several case studies,
readings, videos and a variety of syndicate group exercises (Stratified Random Sampling)
were used throughout the research exercise. This helped us arrive at the outcome which
outlined what it meant to have a winning culture in times of financial adversity.

The hypothesis that was developed is: Culture has a significant impact on the performance of
the organisation.

Analysis:

The challenge: Henkel faced several serious issues. For instance, while reporting solid sales,
it was less profitable than its industry peers – by a margin of up to 10 percentage points.

But the majority of employees did not see any need for change. In fact, one analyst
commented that it was characterised by “complacency and lack of competitive spirit”.

Mr Rorsted determined to change the way the company was run and to create “a winning
culture”.

The strategy: Mr Rorsted and his new, young team set about introducing changes that would
include both tangible financial and performance targets, and an overhaul of company culture.

Ambitious targets: In November 2008, Henkel announced challenging targets for 2012 that
would improve performance but would also energise the organisation by creating a sense of
urgency.

Targets included an increase in pre-tax profit margins to 14 per cent; in earnings per share;
and in sales, to above the market average. In addition, the share of sales in emerging
countries would be required to rise from 33 per cent to 45 per cent by 2012.

Efficiency and focus: With more than 1,000 brands, at least 200 production sites globally,
and three separate business units, Henkel was ripe for proposed efficiency measures. These
included cutting the number of brands in order to put more marketing resources behind its
strongest labels; consolidating manufacturing sites; and shifting tasks to shared service
centres.
New vision and values: Henkel had a vision statement and a set of company values. But they
were neither well-known nor relevant to either day-to-day decision-making or evaluation of
employee performance.

In 2010, Henkel replaced the original list of 10 values with five new ones – such as: “We put
our customers at the centre of what we do.” To make sure these were communicated to the
48,000 employees, more than 5,000 workshops were held in which managers and teams
discussed how the new values could apply to their work and how they could build a more
positive company culture.

Performance management: Henkel introduced a process to evaluate consistently the

performance and potential of all management-level employees. They would be ranked on
relative performance, which significantly affected managers’ bonuses. Each individual is
reviewed in “development roundtables”, interactive meetings where managers review and
evaluate their direct reports across teams to create a broader perspective on their
achievements, development needs and promotability.

Conclusion:

What Happened: For fiscal 2012, Henkel’s global sales are forecast to exceed €16bn ($20bn),
a rise of more than €2bn since 2008, and reach its profit margin target of 14 per cent.
Emerging markets now represent 43 per cent of global sales, and more than 50 per cent of
employees work in those territories. The number of brands is less than 400 and
manufacturing sites have been consolidated by around 25 per cent.

Key lessons: To boost performance across a company, communicate a clear strategy that is
backed up by setting ambitious targets.

Simplify your vision and values, and take time to communicate them to all employees to
ensure they provide practical guidance, especially when tough decisions may be needed.

To focus everyone on successful execution, use performance management systems that link
the evaluation and compensation of key employees to achievement of the new strategy.

The null hypothesis that company culture has a significant impact on the performance of the
company proved to be true.
References:

1) Franco-Santos, M. (2007). “Theoretical perspectives on performance-based pay”, in MSc

Course Notes, Centre for Business Performance, Cranfield School of Management.

2) Heras, M., Sierra, V. and Cusumano, J. (2006), "A Set of Requirements For Analysis of
Performance Measurement Systems", presented at the Fifth International Conference on
Performance Measurement and Management.

4) Manuel G. Velasquez (2002), Business Ethics: Concepts and Cases, Prentice Hall.

5) S. K. Bhatia (2002), Business Ethics and Managerial Values, Deep and Deep Publications.

6) Alan Kitson, Robert Campbell (2008), The Ethical Organization, Palgrave Macmillan.

7) Guido Palazzo, Franciska Krings, Ulrich Hoffrage (2012), Ethical Blindness, Journal of
business ethics, Springer.

8) Muel Kaptein (2012), Why Do Good People Sometimes Do Bad Things? 52 Reflections
on Ethics at Work, SSRN.