Sampoerna Guiding Coalition and Anchoring Culture Through Acquisition

INTRODUCTION

This paper consists of three parts; organization background, analysis of key success factor, and recommendation. We capture briefly the situation when acquisition happened. Judging from fact that acquisition was succeeded – reaching it goals – we identified that was two key success factors.

Guiding by Kotter’s Model we focused on building guiding coalition and anchoring new culture. As our objectives, we recommend some action to Sampoerna’s new CEO which can improve change management in the organization after acquisition.

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ORGANIZATION BACKGROUND PT

Hanjaya Mandala Sampoerna (Sampoerna) is the biggest cigarette manufacture in Indonesia. In 2008, it can sell almost 73. 3 billion unit cigarette, valued up to 33. 9 trillion rupiahs. These stats are the highest among other competitors in the cigarette industry.

With terrific product brand like Dji Sam Soe, A Mild, Sampoerna Hijau Kretek, etc, this company became an icon of cigarette industry in Indonesia. Sampoerna’s story of success is inseparable from the history of its founding family. Sampoerna traces its origin to Liem Seeng Tee, a Chinese immigrant who founded the Company in 1913. At his home in Surabaya, Indonesia, he began producing and selling hand-rolled kretek cigarettes, named after the crackling sound they make as they burn. His small company was among the first to manufacture and market kretek as well as non-clove cigarettes on a commercial basis.

Kretek cigarettes quickly grew in popularity. By the early 1930’s, Liem Seeng Tee had changed his family name and the name of his company to Sampoerna (Indonesian term for ‘perfect’). However, by 1959, three years after the passing of Seeng Tee, and in the aftermath of Indonesia’s struggle for independence, Sampoerna was once more on the verge of closure. In that year, Aga Sampoerna was appointed to lead the company, and succeeded in reestablishing and rebuilding the company. Aga’s second son, Putera took over the helm of PT. HM Sampoerna in 1978.

During Putera Sampoerna’s tenure, the company established itself as a public company with a modern corporate structure, and embarked on a period of investment and expansions. During the process, Sampoerna consolidated its position as one of Indonesia’s top-tier companies[1]. Sampoerna’s vision is embodied in the “Three Hands philosophy”. The philosophy embodies the business environment and Sampoerna’s role in this context. The Hands, which represent adult smokers, employees and business partners, and society at large, are the three key stakeholders the Company must embrace to reach its goal of becoming the most respected company in Indonesia.

They address each group through:

• delivering high quality cigarettes with fair value to adult smokers,
• providing good compensation and working conditions to employees and building a good relationship with business partners,
• giving back to the society at large.

There are 225 large (28%) and 585 medium (72%) tobacco related industries in 2004 (Central Board of Statistic, 2004). From those companies, only three players leading the market with 68% market share. In 2004, Sampoerna took second position with 19. 91% market share compared to Gudang Garam 30. 25% and Djarum in third position with 18,26% (GAPPRI in Agnes, 009). These three players are competing directly to become a market leader in industry. Sampoerna is well known as an innovative company with creative marketing strategy. We can see it from it phenomenal product called A Mild, the first low nicotine cigarette in Indonesia. May 18, 2005, Philip Morris International (PMI) acquired Sampoerna by buying 98% stake of the company at a price of Rp. 10. 600 per share or in total value of 18. 58 trillion rupiah. This was not only surprising for the company's internal community but throughout Indonesia. This acquisition is one of the largest foreign investments in Indonesian history (Taco, 2007).

Even until today, the company's internal do not know accurately the underlying reason Putera Sampoerna sold this company. Probably, Putera Sampoerna had seen an opportunity to sell his company in high price. Refer to Richter (2001: 341), so we can call in this case, pressure comes from vision of its owner. But, possibly there were several things considered by Putera Sampoerna in making this bold decision. We analyze them comprehensively to identify the pressures faced by the company. Putera Sampoerna realized that heavy pressures were not only occurred in his company but also in Indonesia’s cigarette industry in general.

Those pressures were:

• Government Mandate Pressure - The industry has been experiencing great pressure as public awareness of cigarettes negative impacts and demand to regulate them are increasing. One of the laws which regulate tobacco control is legislation Prov. DKI No 2 / 2005 on the control of air (Tempo, June 22, 2009).
• Geopolitical Pressure - Cigarette industry also faced pressures from many non-government organizations such as “Warga Indonesia Tanpa Tembakau” (WITT) and “Yayasan Lembaga Konsumen Indonesia” (YLKI). This issue has become global.

It is proven by the UN Conventions - 2 Framework Conventions on Tobacco Control/FCTC. Indonesia has not ratified it yet.

Hyper-competition Pressure (ibid, 57) The high competition market was also a strong factor that convinced Sampoerna to let go off the businesses. Although famous for its innovation, the company was not able to overtake the domination of Gudang Garam in the industry of clove cigarettes. Putera Sampoerna concluded that cigarette industry will not stay profitable in the future. One striking fact convinced him was the slow growth of the industry.

According to Adrian Rusmana, BNI Securities’ Head of Research, in the last three years, the revenue growth of tobacco companies in Jakarta Stock Exchange (JSE) was under the level of 10%; - 0. 3% in 2006 rate and 1. 9% in 2007 (Kurniawan, 2009). In the company's official statement, this acquisition provides an opportunity for it to take advantage from PMI's knowledge and experience from various countries over decades. In addition, the acquisition also brings resources, as well as new methods and procedures in the company's management (HM Sampoerna's Annual Report, 2005).

For PMI, their acquisition could increase market power, avoiding the cost of new product development, increase the speed of penetrating the market, and avoid the barriers to entry (Agnes, 2009). After acquisition, company achieved its success. Within 1. 5 years, they reached first place in the national tobacco industry with 28. 3% market share in the year 2007. In the same year in November 2007, The Indonesian credit rating agency PT. Pefindo upgraded the Company's credit ratings from id AA+ to id AAA with a stable outlook.

This is the first time the Company achieve an id AAA rating. Revenue also showed a growing trend, accompanied by increased net sales and income of the company (PT. HM Sampoerna Annual Report, 2007). The acquisition also speed the company's business acceleration. In 2008, Sampoerna added more than eight Cigarette Production Partners, 15. 000 new employees, build a new factory in Jakarta, then “pelintingan” through partners increased by 8. 000 (PT. HM Sampoerna Annual Report, 2008). From those facts we know that the management did the right action to achieve success.

Their action proved to be effective based on result they achieved. In early stages of acquisition, Martin Gray King takes the helm of Sampoerna. With his charismatic leadership style, like Putera Sampoerna did the organization growth rapidly in stable situation. Since May 27, 2009, John Gledhill took leadership role in Sampoerna (www. vivanews. com). Now we can recommend him what else he can do to maintain and improve Sampoerna performance. Before that, we have to analyze what make this acquisition works well.

KEY SUCCESS FACTORS IN ACQUISITION OF SAMPOERNA

The acquisition decision brings fears to Sampoerna’s employee. For most employees, the figure of Putera Sampoerna is not only perceived as a corporate leader, but also as a parent that is worthy enough to be considered as role. The acquisition feared would damage the harmonious atmosphere that had been created. Most of Sampoerna’s management was concerned in the decreasing of employee’s motivation. They were worried that there will be a reduction of employees (Yos Adiguna in SWA, 2007). Worker can produce 350 cigarettes/hour, while the machine is able to produce 8000 cigarettes/min. Thus, one machine is approximately equal to 1,500 people.

Fears of uncertainty and cultural shock are major challenge to management that needs a planned change management action. Based on eight step model by Kotter, there are two main key success factors in this acquisition. First, they succeed in creating guiding coalition. Second, they make cultural change come last not first. On this part, we discuss about what management did align with some concepts developed by Kotter.

• Creating Guiding Coalitions - The change idea in organization usually comes from groups of people who realize the importance of a change to be done by the organization in order to work better in the future.

But the idea is not always accepted immediately by some elements of the organization, such as the employee, the owner, or the CEO. This happens although they already sense the urgency to change. Even the CEO would not be able to make some change if he just fends for themselves without any support from the employees. In Kotter's Eight Step Process of Creating Major Change, Building Guiding Coalition is one of the early stages of important thing to make a change, because in essence a change who wants to do will not run properly if the plan change will not get support from elements of organization.

If the plan to change is supported by an influential group of the company, the next process will be carried out more easily, especially in expanding the vision, mission, strategy and communication of the change process (Kotter, 1996:51). All top executives considered this thing when decision gets final. Putera Sampoerna summoned all the leaders and gathered them in one big room to announce the acquisition decision. Putera Sampoerna directly builds coalitions to notify changes. All the people obey the Sampoerna family ansd no one questioned the reasons behind the decision.

Putera Sampoerna directly coordinate all these leaders, calling them as ‘change agents’ to transmit the spirit as change agents to all Sampoerna’s internal parties, and ordered them to spread the information to the lowest level within the organization (SWA, 2007). Realized this step should be arranged quickly, he make it quickly executed. Monday, 13 March 2005, the draft notification is made for the acquisition news sent to all employees of Sampoerna promptly at 9 am. Velocity in the notification is critical to prevent the rumors come from outside.

After the information communicated to all employees, then they understand. At the operational level there was nothing really changed, except for expansion. What will they feel may be more adherences to the rules and improved overlooked. That does not mean that once Sampoerna not obey the rules, but the assertion that the rule is an area that could follow it becomes thick, because it is the value of Philip Morris. What makes Sampoerna’s change agent succeed in guiding coalition? Kotter said a strong guiding coalition needed – one with the right composition, level of trust, and shared objectives.

In term of making right composition, first important thing is Putera Sampoerna and PMI’s leader at that time (Martin King) involved, engaged, and committed to the change. If Putera Sampoerna just let go without making a good coalition, maybe realities come contrary. Martin King continued his predecessor becoming the change leader in the organization so Sampoerna will ensure they have leader’s support for change. Putera Sampoerna also selected peoples who have strong position power, broad expertise and diversity, and high credibility within their circle of influence.

When the information has spread, there was resistance from some parties, although a small number, including several directors. Some of them even chose to resign. Most workers accept the decision because management promised no changes in operations; all will still be working as usual. The resistance does not occur because of all the elements felt the certainty of their fate. Kotter (2009: 163) stated that resistance can occur because of fears of status uncertainty. Besides, the lack of resistance is also due to the factors of good communication and high level of trust in employee.

After they had sufficient powerful persons and mutual trust, now it’s time to deal with what new shared visions. In Kotter, we need to create shared vision in coalition when all the members of the group want to achieve the same objective and real teamwork become feasible. Vision in this term is related with Martin King’s vision about Sampoerna in the future. Martin King demanded Sampoerna to improve acceleration, starting from the quantity and quality of products, as well as human resources, considering the very dynamic business changes. This is a key strategy of the future development of Sampoerna.

Continuous improvement being implemented by the Sampoerna with employee development systems, management and control report, reward & punishment, as well as information technology systems / IT (PT. HM Sampoerna Annual Report, 2005). Vision and mission are translated into the main target. One of the targets that best describes the spirit of change in Sampoerna is to become a market leader in the national tobacco industry in the next five years. After building a vision and make measurable targets, then for all elements have to work harder than before achieving it goals.

• Culture Came Last Not First - One of change challenge faced from acquisition is cultural adjustment (Palmer, 2009: 105). In Sampoerna acquisition, the challenge is the cultural adjustment because both of two companies came from different countries, different area, different operating systems and procedures that can often lead to conflicts. The way in which this is managed can be a major determinant of the success or failure of merger. There will be a culture shock if it wasn’t treating properly. The cultural is refers to norms of behavior and shared values among a group of people (Kotter, 1996).

Norms of behavior are common or pervasive ways of acting that are found in the group and that persist because group members tend to behave in ways that teach these practice to new members, rewarding those who fit in and sanctioning those who do not. Shared value are important concern and goals shared by most of people in a group that tend to shape group and that persist over time even when group membership changes. In the big company such as PMI and Sampoerna, one typically finds that some of these corporate cultures affect everyone and that others are specific to subunits.

The culture that exists in the organization is the most powerful forced in change management, because:

• Individuals are selected and indoctrinated so well
• The culture exerts itself through the actions of hundreds or thousands of people,
• It happens without much conscious intent and thus is difficult to challenge.

Because culture so powerful, when the new practices made in a transformation effort are not compatible with the relevant cultures, they will always be subject to regression. Management realized that the culture problem is one of the critical factors in the acquisition of the company.

This will hamper the achievement of goals if the accumulation of it not at the right proportion. Therefore, he will not intervene in the existing culture and prefers to focus on the company's strategic plan forward. Sampoerna’s cultural remains will be preserved as such because prior to the acquisition, Martin considered that the culture in Sampoerna is already very good and strong – a local company with international workings (SWA, 2007). This is also the reason why he only brought 14 of his staff and entrust some of the top management to the the previous leaders of Sampoerna. PMI, basically from USA, has its American Culture.

The style of American in being outspoken at giving opinion is very different to Javanese culture that tends do the contradictory. In American style, criticism is usually thrown straightforward and sometimes spicy but still in the context of work, not personal. On the other hand, Sampoerna’s staff is very polite, lack of courage in conveying thoughts in mind, and not straightforward. They are not talking about right or wrong, but rather to complement each other. Other Javanese culture will be maintained by PMI. One is in terms of product launch time, raising the selling price, and a meeting with the Javanese calendar system.

Other culture, such as it’s a tradition that Sampoerna always budget cost for the “pawang hujan” at the launch of its products. PMI which is a foreign company, although did not understand, still follows these tradition. This made the PMI headquarters confused when auditing the financial statements because of the 'unique' cost. Martin, as PMI representative in Indonesia must explain that this is common in Indonesia. PMI‘s culture was also signed to strengthen the existing Sampoerna culture. The use of English is increasingly common not only in top management but also in the middle management; both oral and written.

In lingual matters, Martin did not have problem because he can speak Indonesian and Sampoerna himself always recommend English to be used by every employee (Hidayat, 2007). Culture acculturation can be seen in [Exhibit 2]. From those, referring Kotter, we can conclude that change in culture come to last not first. But, in this case we see in different point of view that culture problem prevent early. They know it will caused problem, so they prevent it with choosing company (Sampoerna) which has similarity in culture. The fundamental similarity is that both companies have a passion to become the market leader.

Also, both have a behavior and a willingness to improve them to perfection. When judging Sampoerna, PMI found that culture in Sampoerna is good and strong, so they don’t need dramatic change, just little adjustment. Referring to Lewin’s theory of cultural formation (Kurt Lewin in Schein, 2004: 319-329), acquisition of Sampoerna has four phases. Four phases are the explorations phase, unfreezing phase, merge phase, and freezing phase. The first phase, exploration, should already be identified where the cultural similarities and differences between the parties, and goodwill to achieve the best should remain preserved.

The second phase is to dilute the old culture to the parties in the merger. The third phase is merging cultures, or the forming of cultural synergy, usually by defining a new culture, through education or training, coaching, mentoring, and so on. The fourth phase or freezing is realized by various artifacts such as logos, colors, physical appearances of the building, and so forth, as well as organization’s system such as regulation, the definition of a new culture, reward & punishment, and furthermore, the stabilization is continue done by gathering activities, and so on.

The first and second phase faced wisely by PMI so Sampoerna is now in the third stage, and was relatively easy to be done, because the critical point is in the second phase. PMI as the new owners did not implement their culture to be dominant. Similarly Sampoerna with the Javanese culture, that has a desire to become more globally.

RECOMMENDATIONS

The next year, the story of Sampoerna has dramatically taken a new direction; the firm has suddenly moved from an Indonesian family-owned company to an American global company. As results, Sampoerna had to adapt itself and challenged major issues.

The change process has been really successful and Putera Sampoerna passed the relay to Martin Kings and now to John Gledhill, avoiding too much troubles. Nevertheless, we can wonder what can be the reactions of the labor force if the company faced other issues in the future. For sure, even if John Gledhill is very skillful, he doesn’t have the aura of two former CEO. Then, the markets move more and more fast and conduct the company to adapt quickly. So, can the change process be implemented in the same conditions in the future? In other words, how the new CEO of Sampoerna can keep implementing successful change process in the future? Here are our recommendations.

Building the Guiding Coalition The Sampoerna family has a really special place in Indonesian mind; the successful story of the company and the charisma of its leaders had led to create individual governance under the control of monarch-like CEO. Indeed, despite of the increasing size of the company and fast-moving industry, what Putera Sampoerna said, people did. Now, the situation is definitely different in many aspects. First, John Gledhill can’t have the same influence on the employees company as his predecessor.

He is a foreigner, coming from a major global company and could be suspected not to focus on Indonesian interests, unlike Putera Sampoerna. Second, the tobacco industry is obviously an unstable sector. Law pressures, growing health considerations, strong competitions make the market more and more complex. Today’s business environment clearly demands an efficient decision making. Considering these two factors, it appears that leading the new company with the same leadership style could at least be very difficult and most probably impossible.

So, to tackle that issue and build a relevant change governance structure, we can suggest John Gledhill to create a strong guiding coalition that can make change happen. As Kotter said, there are three steps in building strong guiding coalition. We recommend what CEO should do based on these. The first step of this process is to find the right people; that means people with strong position power, broad expertise, high credibility, and overall leadership and management skills. Being sure of leadership skills of the change team members is a key to achieve the goals and special efforts to assure of it must be done.

Considering the structure of Sampoerna [Exhibit 3], we think that John Gledhill must involve each part of the organization to build the next guiding coalition. The first reason is that to be enough efficient, the guiding coalition has to be aware of all the aspects of the company. Indeed, in such a complex and fast-moving market, developing a vision and taking strategic decisions quickly and efficiently become more and more difficult. To succeed in the future, the CEO must lean on the specific knowledge of each department’s top managers.

In fact, with such a coalition, the information would circulate faster and in better conditions. The other reason that supports this choice is the fact that if each division of the different departments are represented in the guiding coalition, then the trust inside the company would be reinforce. We consider that this kind of coalition is able to increase the feeling of sharing the same goals and doing things in the same direction. If people think that the quality of their job is decreased because other departments don’t go in the same way, they would low their efforts as results.

So, concretely, we recommend John Gledhill to build the guiding coalition not only the director of each department but also the head of each subdivision. Considering the organization structure of Sampoerna, the coalition will consist of 25 persons. One obstacle is to assure that the directors and managers have sufficient leadership skills to join the guiding coalition. We suggest John Gledhill measuring their ability to do the job properly and take the decisions required if not. That means don’t hesitate in firing the weakest people and hiring good leaders to increase the efficiency of the coalition.

The next step of building a guiding coalition leans on creating trust among the team. Team building today usually has to move faster and Sampoerna’s CEO must conduct the process efficiently by using carefully planned off-site events with lots of talk and activities. The last step deals with the necessity to develop common goal inside the team work. Typical goal that can be chosen for Sampoerna is a commitment to excellence, a real desire to make their organization performs to the very highest level possible. Indeed, the common goal must be both sensible to the head and appealing to the heart.

The combination of these elements leads to a powerful coalition with the capacity to make future change happen despite all the forces of inertia.

Developing and Communicating A New Vision The success of the change process in Sampoerna must not hide the fact that some employees can feel uncomfortable with the growing uncertainty in the company. An acquisition is a major change in the mind of people, even if processes in operational level don’t change in the first time. Martin Kings had to be aware of this issue and deal with decreasing the potential fears or skepticism inside the company.

Now Sampoerna lead by John Gledhill and he has to aware those concern too. Developing and communicating a new vision is the solution to give to people the answer to their question. In fact, in order to implement future change in the company, vision is definitely essential. If new vision is not built, the feeling of risk and, so on, resistance to change could be an unsolvable problem when implementing a new change. Moreover, it allows simplifying many detailed decisions, it motivates people to take action in the right direction, and helps coordinate the actions of different people.

We can recommend Sampoerna’s CEO assuring that the vision is imaginable, desirable, feasible, focused, flexible, and communicable to be understood and shared by the whole company. For instance, next vision could be becoming a strong global brand able to develop itself on international markets. Then, to communicate the vision, John Gledhill and his guiding coalition have to respect key elements in the effective communication. Metaphor, analogy and example must be preferred to incomprehensible jargon and must be communicated many times under multiple forums (big and small meetings, memos, newspapers, etc).

Furthermore, behavior from important people must be appropriate to reinforce the message: they have to act as examples, try to explain seeming inconsistencies, and listen to people interrogations. To sum up, the new vision or strategy of the company is an essential step to anticipate future change process. People must understand and share the company vision to involve fully in the necessary change.

Anchoring New Approaches in the Culture When Martin Kings took the head of Sampoerna, he underlined the fact that PMI believed in the former corporate culture.

He said that the Javanese company was really adapted to the Indonesian market and that the new orientation of Sampoerna would still lean on the values built by the founders. Philip Morris, as a global company, is experienced in such an acquisition and executives are obviously aware of how anchoring new approach in the culture of a company is difficult. So they decided to take time before dealing with that sensible issue. Therefore, even if Sampoerna’s corporate culture seems to be efficient, PMI has to integrate little by little its own values.

Indeed, being part of a global company means share a common main culture (particularities can obviously survive). We can recommend John Gledhill first to be patient: the acquisition has just happened and people must be really sensitive regarding that kind of change. In fact, culture can be considered as the last step in change management process. Moreover dealing with culture issue is very difficult because of its own nature. Some aspects are almost not visible and some others not at all. Saying that doesn’t mean doing nothing; we suggest John Gledhill to implement few changes in the approach of each step of the change process.

That means he has to give to Sampoerna a “Philip Morris Touch”, especially considering efficiency and results. We think that managers and mid-level managers are able to disseminate the values if they are involved enough. To conclude, anchoring new approaches in the culture would be very difficult, John Gledhill must do it very patiently with a great humility if he wants to success.

CONCLUSION

Overall, the steps taken by management in conducting a post acquisition changes are very good, especially in a guiding coalition and cultural adjustment.

In building a guiding coalition, management can create a coalition based on the right composition based on the strong position power, broad expertise and diversity, and high credibility within their circle of influence. In addition, management has succeeded in creating a level of trust between the members, and has a good ability in shared objectives. Management also can overcome the cultural problems faced after the acquisition, the many cultural similarities that owned by PM and Sampoerna cause the process of cultural assimilation is not working too complicated.

Although in essence PM have a different culture with Sampoerna, Management still retain the the old culture to avoid cultural shock within the organization.

REFERENCES

1. Books Kotter, J. P. 1996. Leading Change. Boston: Harvard Business School Press
2. Palmer, Ian., Richard Dunford, and Gib Akin. 2009. Managing Organizational Change. New York: McGraw-Hill
3. Schein, Edgar R. 2004. Organizational Culture and Leadership. USA: John Wiley & Sons. Newspaper and Magazine SWA Magazine. HM Sampoerna: Padukan Budaya Lokal dan Multinasional. Kamis, 01 Februari 2007.
4. Tempo Magazine. Indonesia Pasar yang Menggiurkan Bagi Industri Rokok Asing. Senin, 22 Juni 2009.
5. Sampoerna’s website. http://www. sampoerna. com. Accessed at October 27, 2009.
6. http://berita. liputan6. com/ekbis/200503/97974/class='vidico'. Accessed at October 27, 2009.
7. http://bisnis. vivanews. com/news/read/61146-john_gledhill__dirut_baru_hm_sampoerna. Accessed at November 5, 2009.
8. Kurniawan, Agnes. 2009. Why Putera sold his Sampoerna. Accessed at October 27, 2009

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