Question 1. Critically discuss: a) the forces in the external environment that made it crucial for change in the company; b) the changes undertaken; and c) the role of the change agent in this! By doing so please use the appropriate theory to substantiate your arguments! Case study 3 The rise and fall of Yukos! The CEO and strategic direction setting One of the key features of the Yukos organizational transformation was the role played by its CEO, Mikhail Khodorkovsky. He was the driving force for change, innovation and the adoption of Western techniques. He was young, in his thirties, and a progressive thinker. He invited expatriates on to the board, into the management team and appointed them in key organizational positions, where transfer of know-how was important. This external environment and create competitive advantage. However, key decisions were under the supervision of one man Khodorkovsky himself who adopted a traditional Soviet command and control style of management. This had the negative effect of encouraging people to bypass other managers and go directly to Khodorkovsky because thats both a necessary and sufficient condition of your success (Russian senior manager, Yukos). Khodorkovsky both developed the strategy for the business and communicated it to the organization. This managerial approach was adopted in a testing scenario for the business. Yukos, and more generally the Russian oil industry, was in a crisis of declining oil production amidst the chaos of privatization. This was exacerbated by a lack of alignment of regional management structures, the constant theft of oil and widespread corruption. These company and industry circumstances demanded a tight control of business operations. Only a select group of managers at Yukos were given some discretion in decision making named the clan by employees of the company. This comprised a cadre of trusted people who were friends and relatives that Khodorkovsky felt he could rely on. Those not in the clan were perceived by other employees as insignificant and easily replaceable, and for this reason it was of no use to anyone (Russian middle manager, Yukos). Over time, however, it became increasingly clear that a centralized approach and reliance on the clan was not sustainable in the long term. It wasted intellectual capital, as there were no incentives to build teams and share knowledge, because only one mans approval was required. Khodorkovsky had recognized this problem and was beginning to address it. The jailing of Khodorkovsky in 2003 came too early for the full implementation of delegated decision making, leaving Yukos in crisis. Yukos success Yukos was universally regarded as the leading Russian oil company with respect to the operational capabilities required for survival in a market economy. Organizational transformation was comprehensive complex restructuring programs were implemented rapidly, emulating Western business practice and leveraging the expertise of the expatriates recruited. The general view was that Yukos had made a remarkable transformation in a very short period of time. A key priority was to increase production rates: The Russian oil industry was in a deep slumber. Yukos led its revival (Western top manager, Yukos). The company achieved oil production growth rates far in excess not only of its Russian peers, but also the Western oil majors. Profits were unmatched by any major oil company in the world, assisted by lower production costs than Exxon or its Russian competitors. The Yukos senior management team further enhanced the attractiveness of its stock by introducing more transparency by inviting Westerners on to its board, and undertaking better management of investor relations. Khodorkovskys objective was to list the company on the New York or London stock exchanges in order to increase the market capitalization of the company and to gain better access to the international financial markets. On the Russian market they were already number one by market capitalization and were attracting the attention of Western companies, such that they were in talks in 2003 with potential Western partners with a view to selling off parts of the company. However, it was not surprising that some of the many new business processes had not had time to become fully embedded in the organization. Yukos may have had a veneer of Westernization sufficient to convince investors of its high value and to artificially boost its market capitalization but new business processes coexisted side by side with bureaucratic routines from the Soviet past. A change in the external environment Unfortunately, by 2003 it was becoming increasingly clear that Yukos competitive advantage was not sustainable. Externally imposed measures by the state resulted in the CEO being put into jail and the company broken up. Despite all the internal change measures undertaken by Khodorkovsky in order to satisfy Western investors and meet the requirements of a market economy the organization appeared to have disregarded, or played down, the need to react to local environmental signals. Yukos was extremely innovative, which is demonstrated by its successful organizational transformation. Indeed, given the sensitive political, economic and social context of the oil industry in Russia, there was recognition in the company that there had to be a high degree of adaptability to survive. However, Khodorkovskys tight control of the company meant that the organization as a whole lacked flexibility and the ability to react to changes in the environment. The flexibility of the organization as a whole was still relatively limited due to the slower than desirable transition from a command-and-control style of management to the empowerment of employees. Khodorkovsky was fully focused on the Western business model. In contrast to its competitors (Lukoil, Surgutneftegaz and TNK-BP) this model was distanced from the political reality of the transition context. Robustness in a market economy context was not the only criterion for success in the Russian oil industry. The reversion to state control in Russia had reinforced the importance of close alignment with the state. When triangulated with other case data it appears that Yukos competitors were much more sensitive to the political exigencies of the transition context than the company itself. Yukos collapse Although the exact causes of Yukos downfall are not known, many associate its demise with Khodorkovsky beginning to present a political threat to Vladimir Putin, the Russian President. The external environment had changed and Yukos had not adapted to the new political reality.In 2004, despite the organizational transformation that had taken place, creating the ability to secure competitive advantage in the context of a market economy, Yukos was no longer in a position to control its own future. A reversion to state control was further evidenced in the re-nationalization of other segments of the oil industry. In 2004 the Russian oil major Sibneft, whose merger with Yukos had collapsed, was also acquired by Gazprom, the state gas company. The move towards increased state power threatened the fragile market economy in Russia. The heightened political risk, which could have presented itself to Yukos through a number of cues in the external context, appears to have been ignored. The official reason for the break-up of Yukos was the non-payment of taxes and Khodorkovsky was arrested for fraud and tax crimes. However, it was generally acknowledged that Yukos had acted no differently from its competitors in managing its tax issues in a complex and unclear regulatory environment. Ironically Yukos high standards of corporate governance and transparency had contributed to its downfall, with much of the information used against it being available on its own website. Yukos switched from being an exemplar case of organizational change, to a case study of failure to adapt to a changing institutional environment. The implications of this case study for managers are linked to what has recently been called the Icarus paradox, with reference to organizations whose strong performance has blinded their managers to environmental changes. A focus purely on what currently represents success may be an unwise strategy. Source: Extracted from Dixon, S. and Day, M. (2010), The Rise and Fall of Yukos: A Case Study of Success and Failure in an Unstable Institutional Environment, Journal of Change Management, 10(3), pp. 275292. In Coline Carnall & Rune Todnem, Managing Change in Organizations, 6th edition.