This scenario summarises the development of a company called Rock Bottom through three phases, from its founding in 1965 to 2008 when it ceased trading.
Phase 1 (1965–1988)
In 1965 customers usually purchased branded electrical goods, largely produced by well-established domestic companies, from general stores that stocked a wide range of household products. However, in that year, a recent university graduate, Rick Hein, established his first shop specialising solely in the sale of electrical goods. In contrast to the general stores, Rick Hein’s shop predominantly sold imported Japanese products which were smaller, more reliable and more sophisticated than the products of domestic competitors. Rick Hein quickly established a chain of shops, staffed by young people who understood the capabilities of the products they were selling. He backed this up with national advertising in the press, an innovation at the time for such a specialist shop. He branded his shops as ‘Rock Bottom’, a name which specifically referred to his cheap prices, but also alluded to the growing importance of
rock music and its influence on product sales. In 1969, 80% of sales were of music centres, turntables, amplifiers and speakers, bought by the newly affluent young. Rock Bottom began increasingly to specialise in selling audio equipment.
Hein also developed a high public profile. He dressed unconventionally and performed a number of outrageous stunts that publicised his company. He also encouraged the managers of his stores to be equally outrageous. He rewarded their individuality with high salaries, generous bonus schemes and autonomy. Many of the shops were extremely successful, making their managers (and some of their staff) relatively wealthy people.
However, by 1980 the profitability of the Rock Bottom shops began to decline significantly. Direct competitors using a similar approach had emerged, including specialist sections in the large general stores that had initially failed to react to the challenge of Rock Bottom. The buying public now expected its electrical products to be cheap and reliable.
Hein himself became less flamboyant and toned down his appearance and actions to satisfy the banks who were becoming an increasingly important source of the finance required to expand and support his chain of shops.
Phase 2 (1989–2002)
In 1988 Hein considered changing the Rock Bottom shops into a franchise, inviting managers to buy their own shops (which at this time were still profitable) and pursuing expansion though opening new shops with franchisees from outside the company. However, instead, he floated the company on the country’s stock exchange. He used some of the capital raised to expand the business. However, he also sold shares to help him throw the ‘party of a lifetime’ and to purchase expensive goods and gifts for his family. Hein became Chairman and Chief Executive Officer (CEO) of the newly quoted company, but over the next thirteen years his relationship with his board and shareholders became increasingly difficult. Gradually new financial controls and reporting systems were put in place. Most of the established managers left as controls became more centralised and formal. The company’s performance was solid but unspectacular. Hein complained that ‘business was not fun any more’. The company was legally required to publish directors’ salaries in its annual report and the generous salary package enjoyed by the Chairman and CEO increasingly became an issue and it dominated the 2002 Annual General Meeting (AGM). Hein was embarrassed by its publication and the discussion it led to in the national media. He felt that it was an infringement of his privacy and
civil liberties.
Phase 3 (2003–2008)
In 2003 Hein found the substantial private equity investment necessary to take Rock Bottom private again. He also used all of his personal fortune to help re-acquire the company from the shareholders. He celebrated ‘freeing Rock Bottom from its shackles’ by throwing a large celebration party. Celebrities were flown in from all over the world to attend. However, most of the new generation of store managers found Hein’s style. to be too loose and unfocused. He became rude and angry about their lack of entrepreneurial spirit. Furthermore, changes in products and how they were purchased meant that fewer people bought conventional audio products from specialist shops. The reliability of these products now meant that they were replaced relatively infrequently. Hein, belatedly, started to consider selling via an Internet site. Turnover and profitability plummeted. In 2007 Hein again considered franchising the company,but he realised that this was unlikely to be successful. In early 2008 the company ceased trading and Hein himself,now increasingly vilified and attacked by the press, filed for personal bankruptcy.
Required:
(a) Analyse the reasons for Rock Bottom’s success or failure in each of the three phases identified in the
scenario. Evaluate how Rick Hein’s leadership style. contributed to the success or failure of each phase.
(18 marks)
(b) Rick Hein considered franchising the Rock Bottom brand at two points in its history – 1988 and 2007.
Explain the key factors that would have made franchising Rock Bottom feasible in 1988, but would have
made it ‘unlikely to be successful’ in 2007. (7 marks)
(a) The product life cycle model suggests that a product passes through six stages: introduction, development, growth, shakeout,maturity and decline. The first Rock Bottom phase appears to coincide with the introduction, development and growth periodsof the products offered by the company. These highly specified, high quality products were new to the country and werequickly adopted by a certain consumer segment (see below). The life cycle concept also applies to services, and the innovativeway in which Rock Bottom sold and marketed the products distinguished the company from potential competitors. Not onlywere these competitors still selling inferior and older products but their retail methods looked outdated compared with Rock Bottom’s bright, specialist shops. Rock Bottom’s entry into the market-place also exploited two important changes in theexternal environment. The first was the technological advance of the Japanese consumer electronics industry. The secondwas the growing economic power of young people, who wished to spend their increasing disposable income on products thatallowed them to enjoy popular music. Early entrants into an industry gain experience of that industry sooner than others. Thismay not only be translated into cost advantages but also into customer loyalty that helps them through subsequent stages ofthe product’s life cycle. Rock Bottom enjoyed the advantages of a first mover in this industry.Hein’s leadership style. appears to have been consistent with contemporary society and more than acceptable to his youngtarget market. As an entrepreneur, his charismatic leadership was concerned with building a vision for the organisation andthen energising people to achieve it. The latter he achieved through appointing branch managers who reflected, to somedegree, his own style. and approach. His willingness to delegate considerable responsibility to these leaders, and to rewardthem well, was also relatively innovative. The shops were also staffed by young people who understood the capabilities of theproducts they were selling. It was an early recognition that intangible resources of skills and knowledge were important to theorganisation.In summary, in the first phase Rock Bottom’s organisation and Hein’s leadership style. appear to have been aligned withcontemporary society, the customer base, employees and Rock Bottom’s position in the product/service life cycle.The second phase of the Rock Bottom story appears to reflect the shakeout and maturity phases of the product life cycle. Theentry of competitors into the market is a feature of the growth stage. However, it is in the shakeout stage that the marketbecomes saturated with competitors. The Rock Bottom product and service approach is easily imitated. Hein initially reactedto these new challenges by a growing maturity, recognising that outrageous behaviour might deter the banks from lending tohim. However, the need to raise money to fund expansion and a latent need to realise (and enjoy) his investment led to thecompany being floated on the country’s stock exchange. This, eventually, created two problems.The first was the need for the company to provide acceptable returns to shareholders. This would have been a new challengefor Hein. He would have to not only maintain dividends to external shareholders, but he would also have to monitor andimprove the publicly quoted share price. In an attempt to establish an organisation that could deliver such value, changeswere made in the organisational structure and style. Most of the phase 1 entrepreneur-style. managers left. This may havebeen inevitable anyway as Rock Bottom would have had problems continuing with such high individual reward packages ina maturing market. However, the new public limited organisation also demanded managers who were more transactionalleaders, focusing on designing systems and controlling performance. This style. of management was alien to Rick’s approach.The second problem was the need for the organisation to become more transparent. The publishing of Hein’s financial detailswas embarrassing, particularly as his income fuelled a life-style. that was becoming less acceptable to society. What had onceappeared innovative and amusing now looked like an indulgence. The challenge now was for Hein to change his leadershipstyle. to suit the new situation. However, he ultimately failed to do this. Like many leaders who have risen to their positionthrough entrepreneurial ability and a dominant spirit, the concept of serving stakeholders rather than ordering them aroundproved too difficult to grasp. The sensible thing would have been to leave Rock Bottom and start afresh. However, like manyentrepreneurs he was emotionally attached to the company and so he persuaded a group of private equity financiers to helphim buy it back. Combining the roles of Chairman and Chief Executive Officer (CEO) is also controversial and likely to attractcriticism concerning corporate governance.
In summary, in the second phase of Hein’s leadership he failed to change his approach to reflect changing social values, amaturing product/service market-place and the need to serve new and important stakeholders in the organisation. He clearlysaw the public limited company as a ‘shackle’ on his ambition and its obligations an infringement of his personal privacy.It can be argued that Hein took Rock Bottom back into private ownership just as the product life cycle moved into its declinestage. The product life cycle is a timely reminder that any product or service has a finite life. Forty years earlier, as a youngman, Hein was in touch with the technological and social changes that created a demand for his product and service.However, he had now lost touch with the forces shaping the external environment. Products have now moved on. Music isincreasingly delivered through downloaded files that are then played through computers (for home use) or MP3s (for portableuse). Even where consumers use traditional electronic equipment, the reliability of this equipment means that it is seldomreplaced. The delivery method, through specialised shops, which once seemed so innovative is now widely imitated andincreasingly, due to the Internet, less cost-effective. Consumers of these products are knowledgeable buyers and are onlywilling to purchase, after careful cost and delivery comparisons, through the Internet. Hence, Hein is in a situation where hefaces more competition to supply products which are used and replaced less frequently, using a sales channel that isincreasingly uncompetitive. Consequently, Hein’s attempt to re-vitalise the shops by using the approach he adopted in phase1 of the company was always doomed to failure. This failure was also guaranteed by the continued presence of the managersappointed in phase 2 of the company. These were managers used to tight controls and targets set by centralised management.To suddenly be let loose was not what they wanted and Hein appears to have reacted to their inability to act entrepreneuriallywith anger and abuse. Hein’s final acts of reinvention concerned the return to a hedonistic, conspicuous life style. that he hadenjoyed in the early days of the company. He probably felt that this was possible now that he did not have the reportingrequirements of the public limited company. However, he had failed to recognise significant changes in society. He celebratedthe freeing of ‘Rock Bottom from its shackles’ by throwing a large celebration party. Celebrities were flown in from all over theworld to attend. It seems inevitable that the cost and carbon footprint of such an event would now attract criticism.Finally, in summary, Hein’s approach and leadership style. in phase 3 became increasingly out of step with society’sexpectations, customers’ requirements and employees’ expectations. However, unlike phase 2, Hein was now free of theresponsibilities and controls of professional management in a public limited company. This led him to conspicuous activitiesthat further devalued the brand, meaning that its demise was inevitable.
(b) At the end of the first phase Hein still had managers who were entrepreneurial in their outlook. It might have been attractivefor them to become franchisees, particularly as this might be a way of protecting their income through the more challengingstages of the product and service life cycle that lay ahead. However, by the time Hein came to look at franchising again (phase3), the managers were unlikely to be of the type that would take up the challenge of running a franchise. These weremanagers used to meeting targets within the context of centrally determined policies and budgets within a public limitedcompany. Hein would have to make these employees redundant (at significant cost) and with no certainty that he could findfranchisees to replace them.At the end of phase 1, Rock Bottom was a strong brand, associated with youth and innovation. First movers often retaincustomer loyalty even when their products and approach have been imitated by new aggressive entrants to the market. Astrong brand is essential for a successful franchise as it is a significant part of what the franchisee is buying. However, by thetime Hein came to look at franchising again in phase 3, the brand was devalued by his behaviour and incongruent withcustomer expectations and sales channels. For example, it had no Internet sales channel. If Hein had developed Rock Bottomas a franchise it would have given him the opportunity to focus on building the brand, rather than financing the expansionof the business through the issue of shares.At the end of phase 1, Rock Bottom was still a financially successful company. If it had been franchised at this point, thenHein could have realised some of his investment (through franchise fees) and used some of this to reward himself, and therest of the money could have been used to consolidate the brand. Much of the future financial risk would have been passedto the franchisees. There would have been no need to take Rock Bottom public and so suffer the scrutiny associated with apublic limited company. However, by the time Hein came to look at franchising again in phase 3, most of the shops weretrading at a loss. He saw franchising as a way of disposing of the company in what he hoped was a sufficiently well-structuredway. In effect, it was to minimise losses. It seems highly unlikely that franchisees would have been attracted by investing insomething that was actually making a loss. Even if they were, it is unlikely that the franchise fees (and hence the moneyimmediately realised) would be very high.