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Oticon - 268 Managing Change Case Revolution at Oticon...

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Unformatted text preview: 268 Managing Change Case Revolution at Oticon A/S (A): Vision for a ChangerCompetent Organization We told them we were going to take all existing departments away. Nobody could hide anymore as everything would be out in the open. We would be able to look at what they were doing, and they could see what we were doing. This was a shock to a lot of people. They asked, "How are we going to cope with this? Where are we going to sit? is everybody going to look at us all the time? What about people like me who are managers, how are we supposed to talk to our employees privately? And where?" Turban Groth, former middle manager at Oticon Never mind that CNN, the BBC, and other international news bureaus were rushing to Oticon AIS, the Danish manufacturer of high-quality hearing aids in Hellerup, Denmark. The real story was not only the innovative new structure at Oticon, but in- stead the revolutionary new assumptions of what it meant to work and how one worked. At Oticon, management had given employees the power to drive change and the opportunities for cease- lessly pursuing new challenges. Employ- ees would be the ones responsible for setting the pace for change. The question was: Would it work? Source: This case was prepared by Dr. R. Morgan Gould, Research Associate Michael Stanford, ND, and Research Officer Kate Blackmon, London Business School, contributed to the development of this case. Copyright © i994 by the international Management Development Institute (IMD), Lausanne, Switzerland. Lars Kolind, Oticon’s new CEO, was convinced that the best strategy for achiev- ing long—term competitive advantage would be to create a work environment that unleashed individual ability and to design a company proficient in the management of change. Aware of the gamble, he had per- sonally invested over DKK26 million in this strategy, even though the outcome could not be known in advance. Oticon A/S was a niche company with product lines deVoted exclusively to the improvement of hearing. Unlike several of its chief competitors—huge, diversified multinational companies—it manufac— tured and distributed only three main product lines: 1. Behind—the-ear (BTE) hearing aids, which were produced in large series as standard products and used primarily by people with relatively severe hear— ing loss. 2. In-the-ear (ITE) hearing aids, which were produced for individual users, pri- marily people with mild or moderate hearing loss. 3. Systems that eased communication at home, work and in various public situ- ations, including loudspeaker systems and loop amplifiers for schools, churches, etc. OTICON HOLDING A/S Oticon Holding A/S, which had previ— ously served an exclusively financial function, was restructured in 1990 into a group management company to gain more optimal business opportunities, including possible acquisitions in an industry under- going rapid consolidation. (Refer to Ex- hibit 1.) The change provided Oticon A/S with a stronger market focus by giving the subsidiaries greater visibility and support— ing distributors for its hearing aids and accessories in just over 100 countries. Oti- con had sales companies in 13 countries whose main task was to build and main— tain close cooperation with the profes— sional hearing aid dealers; Oticon Export A/S served this same function through in- dependent distributors in the remaining countries. The main functions—research, devel- opment, marketing, purchasing, and pro- duction—«were realigned to meet the new market focus. Module 3 THE HEARING AID INDUSTRY1 THE MARKET Implementing Change 269 The main component of the worldwide au- diology market was the manufacture and sale of hearing aids accounting for 89.8 percent of the $1.13 billion total audiology market in 1993, projected to rise to 90.4 percent by 1998. The market was mature, with compound annual growth projections from 1990 to 1998 estimated at 5 percent per annum (refer to Exhibit 2); some ex- perts, however, estimated growth as high as 6.8 percent per annum. Industry experts anticipated that the industry structure would remain stable, with a host of estab- lished companies participating. A consid— erable number of mergers and joint venture activities were also expected to take place in an effort to expand product lines and technology. The United States historically had been the dominant market for audiology, with projected 1993 revenues of $467 million or 41.2 percent of the market. Europe fol- lowed with $386.6 million (34.1 percent); the Pacific Rim had $149.6 million (13.2 percent); and the rest of the world ac- counted for $130.5 million (11.5 percent). (Refer to Exhibit 2.) Industry experts be» lieved that this market structure would not change much, though higher growth rates were likely to occur in Eastern Europe, Asia, and especially China; the U.S. mar- ket was expected to remain flat through the end of the century. While world rev- enues grew by 9.9 percent in 1987, they 1Market data from Market Intelligence Research Company, 1993. 270 Managing Change EXHIBIT 1 The Oticon Group William Demants & Hustru Die William Ida Emilies Fond Demaantiftung The Oticon Foundation Gulf?" onurlxdaéxon Switzerland Denmark ew ea an Otovox S.A Switzerland Oticon Holding AIS Denmark Otieon New Zealand LTD New Zealand Oticon S.A. Schweiz Oticon S/A Norway Oticon G.m.b.H. Germany Otieon Export AIS Denmark Oticon Espana S.A. Spain 35% ‘ IA M Pty. Ltd. I Australia Oticon AB Sweden Oticon Nederland B.V. Holland Oticon Lydsystemer AIS Denmark Oticon K.K. Japan Oticon France S.A. France Oticon Limited Great Britian Oticon AIS Denmark Oticon INC. U.S.A Otovox Italia S.r.l. Italy Club Hearing Instruments AIS Denmark Module3 ImplementingChange 271 EXHIBIT 2 Worldwide Audiological Market Revenue and Forecast by Product Type 1113:1111: sf Rest-of _ "Rimlf World _ ,,- ‘ its, .11.? . 131-6] 41.5 11.21: :1413 ,- 1’1.2__ _ . “1‘11 ' ‘ 11.0 _- Source: From Market Intelligence, October 30. 1992, “World Audiology Products Market: Market Size/Forecasts by Region.” fell by 3.3 percent in ”SS—chiefly be- cause of the decline in sales of custom hearing aids in the huge US. market. Oti- con estimated that sales figures for 1993 would show a 7 percent decline in the US. market.2 Projections indicated that, because there were a large number of manufactur— ers in the industry—coupled with the gen— eral economic recession of the early l990s—~—prices would remain steady and price competition would continue to be an important dynamic in the market. Differ~ entiation of the product through the addi- tion of value~added features was a key strategy available to manufacturers in this mature market. Sales correlated directly with manufacturers’ efforts to educate end users and to provide technical support to dispensers. 2Personal correspondence with Leif Sorensen. END USERS Hearing impairments were generally of two kinds: conductive impairment, which affected the middle ear and could be reme- died with surgery; and sensorineural ime pairment, which affected the inner ear and cochlear nerve and was not amenable to surgery. Although an estimated 10~20 per- cent of the population had defective hear— ing, only about 5—10 percent of those who could benefit from hearing aids wore them. In addition to overcoming the stigma associated with hearing loss, man~ ufacturers had to overcome physicians’ lack of conviction concerning the thera~ peutic utility of sensorineural devices. Previously incapable of being corrected, sensorineural hearing loss had become possible to correct with hearing aid de~ vices, but the medical community still needed to be convinced. 272 Managing Change TECHNOLOGICAL DEVELOPMENT The major function of a hearing aid was to increase the volume of sound heard by the wearer. Modern electronic hearing aids were composed of a microphone, an am- plifier, and an earphone. The microphone converted sound into an electrical current, the amplifier increased the current, and the earphone converted the amplified signal into sound. Miniaturization of hearing aids made possible the development of the first behind—the—ear hearing aids, replacing tech- nology from the 19503. Recent technologi- cal advances included remote volume control devices, sophisticated sound filter- ing, and multi-channel digital program- ming for different levels of hearing loss and variations in hearing environments. With the introduction of digitally pro- grammable hearing aids, the industry was transformed overnight. Programmable systems allowed the dispenser t0 cus- tomize the hearing aid and to adjust it as the user’s hearing changed. Multi-channel hearing aids treated low-, medium-, and high-frequency sounds differently, using nonlinear amplification. Hearing aid technology was moving to- ward the creation of a single hearing aid that could be adjusted to many types of hearing loss through programming, caus- ing many current products to become ob- solete. Oticon was at the leading edge of developing hearing aids with nonlinear amplification, and sought to become a leader in programmable, fully digitized hearing aids. OTICON’S PRODUCT LINE The hearing aid market was segmented into behind-the—ear (BTE) and in—the—ear (ITE) hearing aids. BTE hearing aids, used for relatively severe hearing loss, were more standardized. They were fitted to the contour of the outer ear and worn behind the ear so that a relatively small number of sizes could fit most people. ITE hearing aids, for mild to moderate hearing loss, were individually designed by taking an impression of the client’s ear and then fabricating a customized shell. The market for BTE hearing aids was stagnant, while the market for ITE hearing aids was con- sidered the higher— growth segment. In 1991, Oticon introduced MultiFo- cus, the world’s first fully automatic hear- ing aid with no user controls. This device, which could treat 70 percent of people with hearing loss, exceeded sales projec— tions by more than 100 percent. As tech— nology moved toward digital signal processing, Oticon added an integrated circuit development team. in one of the largest design centers in Denmark, to de- velop new chip technology. The creation of new products had shorter and shorter life-cycles (currently 4—7 years), but most of them still constituted upgrades to exist— ing Oticon products rather than creating new market segments. COMPETITION Siemens Audiologische Technik (Erlan— gen, Germany), a division of Siemens AG, and Starkey (Minneapolis, USA) were the world’s two leading hearing aid manufacturers, in both volume and market share. Starkey was the leader in ITE hear- ing aids. Oticon AIS was the third largest hearing aid manufacturer in the world. Oticon had cooperated for many years with the other two Danish hearing aid manufacturers, GN Danavox, and Widex AIS, on technical matters-especially concerning issues on standardization. Oti- con exported 90 percent of their produc— tion. Other competitors included Phillips Hearing Instruments, Dahlberg, and Phonak. The hearing aid industry was becoming more competitive, with over 100 compa— nies in the market. Oticon was targeting the high-priced segment of the market, where audiology expertise and reputation differentiated them from low-cost manu- facturers. Lars Kolind sought to enhance Oticon’s market focus by giving greater attention to Oticon’s customers, who were the nearly 5,000 key hearing aid dis- pensers and hearing clinics most commit- ted to end-user satisfaction. The industry practice of close collaboration with physi- cians and medical facilities would con- tinue, but again only with those more professionally focused. DISTRIBUTION Hearing impairment had to be diagnosed by a professional audiologist. Then, the hearing aid device would be purchased from a dispenser—that is, the audiologist, a physician, or a licensed independent hearing aid fitter-who would buy di- rectly from the manufacturer. Increas- ingly, retail outlets were also springing up (similar to those for vision wear), making it more difficult for small independent dis- pensers to compete with large chains. Nevertheless, the number of independents continued to grow, with a nearly tenfold increase of audiologists in the United States alone over the previous decade. Module 3 273 Implementing Change Access to distribution networks was also made through acquisitions. Bausch & Lomb, for example, had recently pur- chased Dahlberg, the manufacturer of “Miracle Bar,” 21 hearing aid with high brand—name recognition in the United States, for its network of 800 franchises and 200 Sears Roebuck Miracle Ear hear ing aid outlets. Oticon similarly sold to chains of hearing aid dealers who were re— sponsible for increasing volume in Europe, the United States, and the Far East. Club Hearing Instruments AIS, a project headed by Soren Holst, was launched in 1992 to service the dealer chains. These chains had their own service departments, marketing, stock control, and distribution systems, eliminating the need for the hearing aid supplier to perform those functions. OTICON’S HISTORY: A STEADY COURSE Oticon was founded in 1904 by Hans De- mant, whose wife was hearing-impaired. When he returned from a visit to the United States, he brought his wife one of the first electronic hearing aids, and soon others were asking for this new product. Demant started importing hearing aids for sale in Europe, operating as essentially a trading company. Oticon began its own production of hearing aids during World War II, remain— ing a family—owned business until 1956, when new management took the company into mass production. Under this same management, the company rose to the number one position in the world by the end of the 1970s. With 15 percent of the world market, and sales in over 100 coun— tries, Oticon had established itself as a leader in miniaturization, the technology used in mass production of behind-the—ear 274 Managing Change hearing aids. “What counted then was miniaturization, and we were very good at that,” said Lars Kolind in looking back at Oticon’s “golden age.” Although Oticon’s second management had proved its effectiveness by becoming number one in the hearing aid market, the company was “conservative” like many others of its era. The functional depart— ments—marketing and sales, finance, manufacturing, and operations—were headed up by directors who, in turn, made up the top executive group responsible for all strategic decisions. “Basically, Oticon had been an extremely conservative com- pany for many years and was still the same when I joined in 1984. We had lots of departments,” reported Torben Groth, who had been a middle manager in those days. The hierarchical structure worked well for the mass production of hearing aids, providing the necessary coordination and control for a manufacturing company. CRISIS AT OTICON “What we didn’t know was that hearing aids would move two centimeters, from behind the ear to right into the ear, and that’s a very long distance,” recalled Lars Kolind. With the advent of in-the—ear products, Oticon was faced with a rapidly declining market share as competitors reaped the benefits of the technological breakthrough. With no ITE product of its own to offer in this changing market, Oti- con was not a player. By 1987, ITE hear- ing aids accounted for just under 50 percent of the world market, while be- hind-the-ear products represented only slightly more than 50 percent. Oticon’s troubles had actually begun in 1979, but the favorable exchange rate be— tween U.S. dollars, the source of most of Oticon’s income, and Danish kroner, where its major costs were incurred, en- abled the company to continually show improved financial performance through 1985. In reality, during the period 1979—1985, Oticon lost a tremendous amount of competitive power. By 1985, a reversal of the favorable exchange rate— the declining value of the dollar against most European currencies—coupled with competitors’ introduction of the ITE prod— ucts put Oticon in a highly threatened posi- tion. Oticon’s market share tumbled from 15 percent to 7 percent; the world cham- pion lost its position as market leader and fell to third place. Some seriously ques- tioned whether Oticon could even survive this disastrous development. Following losses of DKK 4 million in 1986 and DKK 41 million in 1987, Oticon’s Foundation Board decided that new management was needed to overcome the crisis. OTICON’S THIRD MANAGEMENT Lars Kolind was an unexpected choice for CEO as he had had no previous experi- ence in the industry. He had, however, come from a company producing scien- tific instruments (Radiometer) that had gained first place in another niche market. Furthermore, his values, for the most part, corresponded to those of the Foundation Board members. Thus, Lars Kolind and his team became only the third manage- ment of Oticon since its founding in 1904. The previous management, however, remained fully involved in Oticon’s oper- ations. The former CEO assumed a seat on Oticon’s Foundation Board. The for- mer technical director took a position in manufacturing operations. The previous sales and marketing director went to Paris as General Manager of the Oticon subsidiary in France. Only the previous Module3 lmplementingChange 275 EXHIBIT 3 Oticon Financial Performance, 1988—1990 Oticon Holding Group oKK‘t .0085“ _ 1988 1989 * _ ' __‘Nét“fturnover_k_ j __ _ _ , 432,756 . ' 449601 ,r G-rosszprofit-_ f, . 197,125 _ 212910‘ R&D 1 ~ . 11534 ~_ 13 782 , LPiofitOn primary operations ., 8893 - ,- 36.193 V _, Profit befdre tax . , _ __ __ +48 " f_ 22 298 Net profit for the yeer «5, 11C) ._ _ 16 944 "Net cash flow “ ‘ to ,836‘ -‘ 319915, - “ Shareholders equity _ 124,033; 1'37 399, : 4‘ :Tot8l assets year end _ 1 _ __ _ 353,357 ,_ 378 4Z9; "Number-of employees _ - 1,064 - _, 12-11238 Key Figures L __ L- i 'Rettim on enuity‘" ‘33. 9% j; f . Share capital _ , 50 90.0 ‘ ‘ Book Value per 190 9KK 3h8re LL _ Scandmama ‘ ,_ : Western Europe _i ‘ North America ‘ - Asia ' ' “ _ Rest of world finance director retired. Throughout Oti— con’s history, management continuity had been a constant, and the arrival of Lars Kolind would do little to change that tradition. CRISIS MANAGEMENT Lars Kolind immediately introduced dras- tic cost—saving measures and refocused the business on specific key segments. He moved quickly and mercilessly to bring down overhead costs and to cut unprof- itable product lines. Some 10—15 percent of the employees at headquarters lost their jobs. The turnaround was dramatic. Within six months, Oticon returned to profitability, despite heavy losses in the first two quarters of 1988. By 1989, Oti— con reported a profit of DKK 22 million. (Refer to Exhibit 3.) Lars Kolind immediately saw the need to change the market focus. Since quality had become a requirement for participa tion, nearly all competitors were meeting quality standards. Thus, Oticon’s position as a high-quality, high—cost producer no longer assured it competitive advantage. Lars Kolind decided that Oticon should become the preferred partner with the most professional hearing clinics and hearing aid dealers in the world. 276 Managing Change Until 1988, our strategy was to be the biggest, the best, to do everything for everybody. Clearly, this didn’t work for us. So, in 1989, we refocused our business toward those dispensers or retailers who were most interested in providing end-user satisfaction. We decided to concentrate our entire business on the professional end of the retailing business—that is, those dispensers who were concerned about their end users. That was the basis for all the reductions and changes. Our aim was to develop and maintain those activities that fostered customer satisfaction and to eliminate the rest. We are doing exactly the same thing today. Lars Kolind promoted several younger managers who had been middle managers before the change to high...
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