innovation and change case study

Case Study: Innovation and Change

at Harvey Norman

Prepared by Nicole Brown January 2012

Table of Contents Part 1: HNHL’s Need for Innovation _____________________________________________ 1

Part 2: HNHL’s Vision and Strategy for Innovation __________________________________ 2

Part 3: HNHL’s Competencies and Culture for Innovation ____________________________ 4

Part 4: HNHL’s Learning for Innovation __________________________________________ 7

Part 5: HNHL’s Change Process ________________________________________________ 10

Reference List _____________________________________________________________ 12

Appendix 1: Timeline of changes since HNHL’s inception ___________________________ 17

Appendix 2: Attempt to Obtain Primary Data ____________________________________ 18

Innovation and Change Case Study Prepared by Nicole Brown (2012) Page 1 of 16

Part 1: HNHL’s Need for Innovation Innovation can be defined as major changes to goods, services or processes that enhance competitive position, performance, knowledge or capabilities (Reynolds & Hristov 2009). Innovation is needed for long-‐term performance and company survival (Sund 2008), especially during times of environmental uncertainty (Drechsler & Natter 2008) and increased economic pressure (Chesbrough 2007). In an uncertain environment, companies use innovation to understand new customer needs and to explore new opportunities to increase profit. Innovation in the Australian retail sector has generally followed international precedents, triggered by ‘technological advances, changing consumer preferences and competitive pressures’ (Productivity Commission 2011, p. 7). Rapid changes in the retail industry have occurred during the past five years due to the economic environment, and changing consumer preferences and consumer spending (NAB 2012). Harvey Norman Holdings Limited (HNHL) is a public company that operates superstores under a franchise system where consumers can purchase electrical goods, furniture, computerised communications, bedding and flooring (Harvey Norman 2008a). The HNHL business lifecycle appears to be in a period of decline similar to an economic depression, reflected by profits dropping twenty per cent during the first quarter of the 2012-‐13 financial year (Bell 2012). According to HNHL Chairman Gerry Harvey, business performance has been affected by the strength of the Australian dollar, intense competition, deteriorating economic confidence and price deflation in key categories (Black 2012). Consistent with the view that innovations must consider the environment (Mumford 2000), HNHE have adapted to the changing retail landscape. HNHE’s ‘Omni Channel strategy’ seamlessly integrates the customer experience online and in bricks-‐and-‐mortar stores (Harvey Norman 2012). In 2012 HNHL launched a digital store where online purchases can be collected from bricks-‐and-‐mortar stores (Harvey Norman 2012), and this demonstrated HNHL’s:

1. Ability to bring innovative services to the market, which is essential for a company’s long-‐term success (Mumford 2000).

2. Responsiveness to their strategic environment, given consumer’s researching Harvey Norman products online increased by twenty-‐five per cent (Huntley 2012).

However, Pretty (2012) identified two key indications that HNHL is not as innovative as other Australian retailers:

1. The physical appearance of Harvey Norman stores have remained stagnant for decades, while other retailers have enhanced the customer experience with cafes, do-‐it-‐yourself workshops, and entertainment for customer’s children.

2. Harvey Norman has been slow to adopt new information tools, such as online consumer relationship management software (Phillips 2012).


Part 2: HNHL’s Vision and Strategy for Innovation When faced with change, sharing a vision assists a company to move from its current reality to its future aspirations (Mirvis, Googins & Kinnicutt 2010). To create an innovative organisation, leaders must clearly envision their ultimate goal (Price 2007). Clearly articulated vision statements also improve a company’s performance by enhancing employee and customer satisfaction (Kantabutra & Avery 2010). Vision statements provide organisations with a sense of direction during turbulent conditions (O’Brien & Meadows 2003). Direction would be very timely given HNHL’s current challenges, yet HNHL does not appear to have a vision statement. The absence of a vision statement matches HNHL’s reputation for erratic disclosure and corporate governance (Kirby 2012). Given that embedding a new vision into the organisations’ strategy generally takes several years (O’Brien & Meadows 2003), HNHL’s ability to survive the current challenges is further compromised. Although not linked to a vision statement, HNHL’s strategic objectives define the company’s overall purpose and explain how value will be added to different parts of the company (Johnson, Scholes & Whittington 2008). HNHL’s two strategic objectives are detailed below (Harvey Norman 2010, p. 4):

1. “Provide outstanding service and to understand and deliver the needs of our customers;

2. Provide long-‐term sustainable growth for our shareholders through the operation of our integrated, retail, franchise and property system”.

The second strategic objective was refined in 2012, when the term ‘omni channel’ was used to describe the addition of digital services to the existing integrated retail, franchise and property operations (Harvey Norman 2012). This corporate strategy addresses the need for innovation because:

• Transferring successful bricks-‐and-‐mortar marketing strategies to the digital environment diversifies HNHL’s retail income (Alum & Majumdar 2011).

• HNHL’s digital services are expected to generate a hundred million dollars by 2014 (Lafrenz 2011).

• Digital services have lower operating costs than brick and mortar retailers (Jones 2012).

• The internet is a disruptive technology that requires a new business model (Ewing 2012), particularly because HNHL’s digital services compete with their franchisees (Jones 2012).

Prior to the development of the current corporate strategies, HNHL’s mission statement outlined the company’s purpose, set future goals and described working conditions (Mirvis, Googins & Kinnicutt 2010) as shown in table 1 on page three. The key differences between HNHE’s mission statement and their corporate strategy are mainly attributed to timing. The mission statement aspired to world domination, and was developed in 2008 following HNHE’s expansion into international markets (Harvey Norman 2008a). In contrast, the corporate strategic objectives address the need for innovation because they were developed in 2010 in response to declining business performance (Harvey Norman 2010).


In 2012 HNHE’s year-‐on-‐year profit plummeted by almost forty per cent and the divided paid to shareholders was only four cents (Harvey Norman 2012), compared to fourteen cents per share in 2008 (Harvey Norman 2008b). Consequently, HNHE’s current image does not match their mission to “generate superior returns for shareholders” (Harvey Norman 2008a) or their strategic objective to “provide long-‐term sustainable growth for our shareholders” (Harvey Norman 2010). HNHE’s poor business performance might be related to the absence of a vision statement because companies generally experience slower growth without a well-‐formulated vision (Baum, Locke & Kirkpatrick 1998). Table 1: Components of Harvey Norman’s mission statement

Mission statement component HNHL’s mission statement

Company’s purpose Generate superior returns for shareholders.

Future goals Be recognised as a world leader in delivery of retail services in the fast moving consumer goods sector.

Environment provided for staff Create an inspiring workplace.

Adapted from Mirvis, Googins and Kinnicutt (2010) and Harvey Norman (2008b).


Part 3: HNHL’s Competencies and Culture for Innovation This section will demonstrate HNHL’s commitment to innovation as a core business process based on three main examples:

1. Strategic focus of Human Resources.

2. The high performing business culture that promotes learning.

3. HR processes that enhance staff competency, including recruitment strategies, performance management and reward systems.

1) Strategic focus of Human Resources

HRM has the most critical role in promoting innovation in an organisation (Chen & Huang 2009). Innovation from HRM practices enhances a company’s competitive advantage because innovative capacity is determined by employee’s competency and motivation (Jime´nez-‐Jime´nez & Sanz-‐Valle 2008). Figure 1 below illustrates that the HRM’s strategy for innovation must be developed in conjunction with senior management to meet the organisation’s strategic objectives, and the HRM strategy must flow through to HRM processes that support innovation (de Leede & Looise 2005). It is evident that HR at HNHL adopted the strategic focus illustrated in Figure 1, because the General Manager of HR (Harvey Norman n.d.) plans future HR needs to meet the organisation’s strategic objectives (Bartol et al. 2005). Innovation has a significant impact on HNHL’s workforce. Innovative strategies adopted to ensure HNHL’s survival during an economic downturn resulted in 642 fewer full-‐time equivalent (FTE) employees in the year ending 30 June 2012 (Harvey Norman 2012). During this period senior HRM staff made strategic decisions about re-‐training, redeployment and redundancy of existing employees.

Figure 1: The relationship between innovation and HRM. Adapted from de Leede and Looise (2005).


2) Organisational Culture Organisational culture is defined as shared attitudes, beliefs and values which govern behavioural responses to environmental stimuli (Tellis, Prabhu & Chandy 2009). Culture is a primary determinant of innovation because corporate culture constantly guides employees to strive for innovation when the environment is conducive to creativity (Ahmed 1998). HNHL’s success has been attributed to the corporate culture’s emphasis on people (Alam & Majumdar 2011), and Price (2007) argues that believing in individuals is the core of innovative corporate culture. Furthermore, because the franchisees have a vested interest in success (Alam & Majumdar 2011), HNHL’s innovative corporate culture also promotes caring and accountability to contribute innovative ideas (Price 2007). Although the HNHL culture is broadly characterised by Gerry Harvey’s entrepreneurial spirit, HNHL’s culture is multi-‐faceted because each franchise operator has a different management style (Alam & Majumdar 2011). HRM staff and franchisees at HNHL enhance innovation by selecting external candidates that fit the organisation’s high-‐performing culture (Jiménez-‐Jiménez & Sanz-‐Valle 2008).

3) Specific Human Resources Activities

a. Recruitment Strategies

Recruitment identifies and attracts appropriately qualified candidates to effectively fill job vacancies at minimal cost and in compliance with legal requirements (Bartol et al. 2005). Recruitment practices that support innovation include advertising externally roles that provide security to multi-‐skilled people who fit to the corporate culture (Jiménez-‐Jiménez & Sanz-‐Valle 2008). HNHL’s broad recruitment strategy supports innovation because HNHL hire competent staff with expert product knowledge and highly developed skills in customer service and sales (Alam & Majumdar 2011). Although HNHL’s franchisees manage their staffing autonomously (Alam & Majumdar 2011), Chairman Gerry Harvey stresses that employing competent staff is vital to increasing sales (Black 2012). However, HNHL does not necessarily attract the most ambitious people because individuals can only own one franchise (Hubbard et al. 2002).

b. Performance Management

Performance management policies and practices concentrate on individual employee performance to ensure organisational objectives are achieved (Bartol et al. 2005). Specific performance appraisal practices that promote innovation include group appraisals based on long-‐term development aims, and active participation of employees with constructive feedback (Jiménez-‐Jiménez & Sanz-‐Valle 2008). HNHL’s franchisees deal directly with their sales staff’s performance (Hubbard et al. 2002). However, HNHL’s performance management processes are based on Gerry Harvey’s fundamental belief, which is to “help your people get the most out of themselves” (Alam & Majumdar 2011, p. 184). Appraisal feedback motivates employees to work innovatively by identifying gaps between performance and targets (Shipton et al. 2006).


c. Reward Systems

HRM practices foster organisational innovation by recognising and rewarding employee’s innovative activity (Jiménez-‐Jiménez & Sanz-‐Valle 2008). However, Shipton et al. (2006) argue reward systems undermine intrinsic motivation and therefore limit individual creativity. Incentive systems that reward information hoarding and individualistic behaviour can also reduce organisational learning (Bell, Mengüç & Widing 2010).

HNHL’s head office staff salaries are not incentivised (Walsh 2002). In contrast, HNHL’s franchisees are essentially highly incentivised employees because their remuneration is determined by their sales performance (Hubbard et al. 2002). This approach to rewarding innovation is consistent with the finding that incentives should be based on individual competence, overall team performance and long-‐term goals (Jiménez-‐Jiménez & Sanz-‐Valle 2008).


Part 4: HNHL’s Learning for Innovation This section will define organisational learning, explain why learning is needed for continual innovation, describe specific ways HNHL learn, and identify potential learning opportunities that would support further innovation. This section will conclude with an assessment of HNHL’s effectiveness at continuously innovating and learning. Organisational learning is defined as the process of developing new knowledge and insights from the common experiences of people within an organisation, and acquiring, transforming and exploiting this new knowledge to enhance organisational innovation (Jiménez-‐Jiménez & Sanz-‐Valle 2008). On this basis, organisational learning is a precursor to innovation. Core competencies define the collective learning within an organisation, and tangibly contribute to a company’s strategic success by delivering greater efficiencies than competitors (Alam & Majumdar 2011). The way HNHL collectively learns is demonstrated by their core competencies. For instance, the franchise system provides access to new markets and the company’s strong management and leadership that is difficult to replicate (Alam & Majumdar 2011). The following four examples demonstrate other ways HNHL shares accumulated corporate knowledge across the entire business. 1. Information systems

According to Shipton et al. (2006) innovation is promoted and sustained by managing the creation, transfer and implementation of knowledge. HNHL’s superior information systems are an essential source of organisational learning that promotes innovation by providing centralised control and comparison (Hubbard et al. 2007). On a daily basis HNHL receives trading information from individual store franchisees (Hubbard et al. 2002), and this demonstrates effective creation and transfer or knowledge. HNHL also provides feedback to assist franchisees to run their businesses more profitably (Hubbard et al. 2002), and this demonstrates implementation of knowledge. Knowledge transfer is also demonstrated by HNHL’s global management system which reduces costs and improves profitability by providing stores and franchisees with all merchandising related information (Alam & Majumdar 2011).

2. Mergers and acquisitions

Processes and routines that support knowledge transfer are essential for mergers and joint ventures (Gratton 1996). HNHL demonstrated effective knowledge transfer when they acquired Rebel Sport in 2001, vastly improved the company performance, and greatly profited from the sale of Rebel Sport in 2006 (Hubbard et al. 2007). HNHL’s standardisation-‐adaptation approach transferred core competencies and achieved a consistent brand image (Alam & Majumdar 2011).


3. Downsizing

In 2011 HNHL closed several retail outlets that were not reaching sales targets due to the strong Australian dollar, intense competition and price deflation (John 2011). These store closure demonstrated HNHL’s ability to respond to their external environment by making internal changes. HNHL also demonstrated effective communication by specifying the reductions in employee numbers, and openly requesting voluntary redundancies (Thompson & Macdonald 2012).

4. Diversifications

Although HNHL began as a furniture retailer, they pursued a broad differentiation strategy (Alam & Majumdar 2011). HNHL’s market diversification has generated strategic depth by acquiring businesses in unrelated industries (Kotler et al. 2010). In addition to product category diversification, HNHL diversified revenue sources through property developments and investments (Alam & Majumdar 2011), and expanded into diverse territories interstate and internationally. HNHL’s diversification could not have occurred without risk-‐taking to seize external opportunities (Conway & McMackin 1997), and this demonstrates HNHL’s capacity for organisational learning and innovation.

New opportunities for organisational learning at HNHL can be determined by identifying weaknesses in knowledge discovery, diffusion, and application (Yukl 2009). The following three examples demonstrate ways that HNHL can enhance organisational learning: 1. Maximise opportunities for knowledge transfer:

At present, knowledge acquired by individual franchisees is not necessarily implemented by other HNHL franchisees due to geographical distances and limited networking opportunities. However, HNHL have observed vast improvements in franchisee performance when franchisees have run several businesses in different parts of Australia, due to working with different people (Walsh 2002). On this basis, HNHL can be more supportive of knowledge transfer by facilitating existing franchisees’ rotation to new locations for mentoring by others within the organisation. Furthermore, mentoring and career development enhance innovation (Ceylan 2013).

2. Invest in training and development:

Training systematically equips employees with skills and knowledge needed for innovation (Jiménez-‐Jiménez & Sanz-‐Valle 2008) and competencies to achieve performance objectives (Bartol et al. 2005). At present, direct training for HNHL franchisees is limited and failure rates of new franchisees are above sixty per cent (Alam & Majumdar 2011). On this basis it is evident that HNHL needs to invest in training to up-‐skill new franchisees and support organisational learning. Higher levels of innovation are achieved on a sustained basis when training is combined with exploratory learning from new and different experiences that have a clear purpose (Shipton et al. 2006).


3. Maximise opportunities for new knowledge discovery:

HNHL can improve their capacity for organisational learning by creating a supportive environment where assumptions can be challenged (Conway & McMackin 1997). At present, HNHL franchisee’s competitive work environment is not conducive to transferring individual learning to the organisation. Bell, Mengüç and Widing (2010) contend organisations can create work environments that support organisational learning by encouraging risk taking and tolerating mistakes.

Learning organisations continually transform by facilitating active learning among individual employees (Garavan 1997). The expectation for individuals at HNHL to continually learn and innovate is articulated by Gerry Harvey’s insistence to “find the best way to do it and keep on searching” (Alam & Majumdar 2011, p. 184). Despite many indications that HNHL is continuously learning how to respond to the external environment with innovative internal changes, HNHL cannot be described as a truly committed learning organisation. To become a more effective learning organisation, HNHL must continue to maximise opportunities to discover and transfer new knowledge, invest in training and challenge every aspect of the status quo (Graetz et al. 2006).


Part 5: HNHL’s Change Process The organisational change process involves intentionally thinking, acting or operating differently to adapt to the external environment (Pardo del Val, Martínez-‐Fuentes & Roig-‐Dobón 2012), remain competitive and satisfy customer expectations (Price & Chahal 2006). Since HNHL was established in October 1982 many organisational changes have occurred, as illustrated in the timeline in Appendix 1 (Harvey Norman 2008a). This section will focus on changes that occurred due to HNHL’s domestic and international growth strategy. Internal company forces and external environmental forces that enabled change will be discussed. Barriers that hindered organisational change will also be discussed. Although strategies to overcome barriers will be suggested, barriers should not be seen as a negative part of the change process (Mabin, Forgeson & Green 2001). Barriers are necessary because they balance change with stability (Macri, Tagliaventi & Bertolotti 2002). Major organisational changes occurred six years after HNHL was established, when retail stores locations expanded beyond New South Wales (Harvey Norman 2008a). By 2004 there were HNHL stores in all Australian states and five other countries in Europe and Asia (Alam & Majumdar 2011). The geographical expansion of HNHL’s retail outlets can be described as a developmental change that involved HNHL “doing more of, or better than, what currently exists” (Price & Chahal 2006, p. 239). HNHL’s geographical changes were driven by the following external forces: 1. Customer needs: Expanding domestically was driven by similar customer needs in

different parts of Australia. For instance, demand for computers in Australia grew by 12% per annum between 1999 and 2006 (Stockport 2006). Furthermore, the strong demand for retail outlets was illustrated by consistent increases in Australian consumer spending in the personal and household goods sector between 2003 and 2009 (Alam & Majumdar 2011).

2. Opportunities in developing nations: International expansion offered HNHL a bigger

customer base, due to larger populations (Stockport 2006) and the increased wealth of developing countries in Europe and Asia (Walsh 2002).

Internal driving forces that enabled HNHL’s geographical expansion included organisational growth, pressures for increased performance and managerial aspirations (Senior & Fleming 2006). Ambitious Australian franchisees were given the opportunity to autonomously manage overseas HNHL stores (Walsh 2002) and the manager’s income depended on the store’s performance (Stockport 2006). The success of international expansion was due to giving international HNHL store managers sufficient power to lead the change (Kotter 1995). HNHL’s international expansion was also enabled by anchoring changes in the company culture (Kotter 1995). HNHL was very committed to facilitating cultural training for international employees, in addition to sales and product knowledge training (Stockport 2006).


Senior and Fleming (2006) argue personal barriers to change occur because individuals perceive change as a traumatic process. Personal barriers reflect an individual’s inability or unwillingness “to discuss or to accept organizational changes that are perceived in some way damaging or threatening” (Huczynski & Buchanan 2001, p. 887). Two individual barriers that hindered HNHL’s geographical diversity strategy included:

1. Difficulties encouraging successful franchisees to relocate to stores in hardship areas of Australia (Walsh 2002). These individuals could potentially fear the unknown and the loss of power bases and rewards (Senior & Fleming 2006).

2. Perceived lack of skills for Australian franchisees to manage HNHL stores in culturally and linguistic diverse countries (Stockport 2006). Alam and Majumdar (2011) contend cultural barriers can be more important than technical obstacles to foreign expansion.

HNHL’s organisational capacity was the main process barrier that hindered geographical expansion. For instance, HNHL lacked crucial local knowledge about consumer preferences and customs and government trading regulations in overseas markets (Stockport 2006). HNHL’s business operations also lacked the capacity to remain profitable in challenging business conditions due to the global economic downturn, rising currency exchange rate variations and inflationary pressures (Stockport 2006). For instance, in Singapore HNHL’s high rental costs and tight profit margins limited their capacity to be competitive in the electronic goods market (Stockport 2006). The following two examples describe strategies HNHL used to overcome the personal barriers limiting their international expansion: 1. Up-‐skilling successful Australian franchisees to manager international stores. For

instance, Glen Norman had been working as a successful Australian franchisee, and was supported by HNHL to develop language fluency prior to his appointment as the Managing Director of HNHL’s Slovenian store (Walsh 2002).

2. Embarking on joint ventures with locals overcame HNHL’s organisational capacity

limitations. Local partners provided vital market intelligence which supported store integration (Alam & Majumdar 2011).

To overcome the individual and process barriers to HNHL’s growth in new and emerging markets, it is recommended HNHL create a powerful change coalition that works effectively together to lead change (Kotter 1995). The teams should include locals with retail expertise (Alam & Majumdar 2011). It is also recommended that HNHL closes stores in locations where HNHL lacks the organisational capacity to trade profitably (Alam & Majumdar 2011). These recommendations to overcome barriers to HNHL’s continued geographical expansion have been limited by difficulty accessing primary data. HR staff members at HNHL’s head office were not forthcoming with information despite email requests (see Appendix 2) and numerous telephone messages. It was also difficult to obtain secondary data about HNHL due to the company’s lack of transparency and corporate governance, as illustrated by their thin financial statements and the absence of press releases (Hubbard et al. 2007).


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Appendix 1: Timeline of changes since HNHL’s inception

Year Major Change(s)

1982 First HNHL retail furniture store opened in NSW with a low-‐cost strategy.

1987 HNHL floated on the stock market.

1988 Opened HNHL store in QLD.

1992 Opened HNHL store in ACT.

1993 First HNHL computer superstore opened.

Opened HNHL store in VIC.

1997 Opened HNHL stores in WA and NZ.

1998 Acquired competitor’s Joyce Mayne, Loygtan Group and Vox stores.

1999 Re-‐launched Joyce Mayne as Domayne.

Opened HNHL store in Slovenia, SA and TAS.

2001 Opened HNHL store in Singapore.

Acquired Rebel Sport.

2002 Reached approximately 150 stores and 470 franchisees.

2003 Changed strategy to focus on greater product variety and customer service.

Opened HNHL store in Ireland.

Opened Mega Flooring and Home Renovations stores.

2004 Opened Space stores.

Opened HNHL store in Malaysia.

2005 Launched Joyce Mayne for country and regional stores.

2006 Sold Rebel Sport at a significant profit above acquisition price.

2008 Global Credit Crisis.

2012 Closed six HNHL stores and re-‐branded five acquired Retravision stores.

Adapted from Harvey Norman (2008a), Alam and Majumdar (2011) and Harvey Norman (2012)


Appendix 2: Attempt to Obtain Primary Data

innovation and change case study

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