Failure Analysis/Change Strategy
Rosalind Poole, Vuyani Mahluza, Emma Yearby, Robyn Williams
LDR /531
July 22, 2013
Dr. Gwendolyn Spann

Business Failure Analysis
The Hostess brand has had over 13 years of changes prior to the final change of bankruptcy this year. The founder Newman Drake started the business in New York in 1888. In 1960 Drake Bakeries was owned by a larger company, Borden. Borden was the maker of other popular snacks, Cracker Jack and Wise Potato Chips. In 1987 Borden sold the company to Ralston Purina, which was owned by ITT Continental Baking Company the makers of the rival Hostess Cake and Wonder Bread (Drake, 2008).
After Drake celebrated a 100th anniversary in 1988, the company was acquired by a Canadian company, Culinar. Despite Culinars ability to become profitable in 1997 from restructuring and optimization of already established company routes, they too sold Drake to Interstate Bakeries Corporation (IBC) a year later (Drake, 2008).
In 2007 Grupo Bimbo, another major bakery company wanted to purchase Hostess from IBC for a reported $580 million. IBC declined stating the reason was the low offering price from Grupo Bimbo. Hostess is valued today for $135 million. April 9, 2013 McKee Foods purchased IBC for $27.5 million (Flowers, 2013). McKee Foods decided November 16, 2012 to liquidate Hostess Brand assets and concentrate efforts on the once rival brands to Hostess, Tastykakes.
Drake Organization
The organization’s mission statement was committed to implementing sustainable business practices that will benefit our company, our consumers, our customers, our employees, and our environment (Drake, 2008).The company mission statement was vague and did not have a clearly defined set of goals. A mission statement should tell a customer about a company. It should illustrate goals, purpose, and practice. The organization was resistance to changing market demographics, debt management, and political influences.
Drake’s Debt Management Drake by 1997 had changed ownership three times and the following year would make Interstate Bakeries Company (IBC) the fourth new owner since 1960. IBC as a new owner was fine for years, but the changing consumer taste and nutritional desires determined the longevity and relevance of its products. The demand changes did not allow them effectively to price goods, and inflation took profits. The market history in early 1980 created a precedent of future events and pricing. The prices stayed the same, and profit margins declined because of higher cost for materials and fuel.
IBC remained optimistic in its ability to control cost, and remained unwilling to change their products or cost. The company added debt and in 2004 to stay operational. The amount was over $450 million (Hill, 2012).For five years the company had consultants and investment banks looking for other options other than bankruptcy. The company’s answer was to add more debt and in 2009 had $670 million of debt; that is 2/3 of asset value. Leadership remained unchanged despite what was showing on the ledgers, and continued sell the same products, using the same business model on a no longer profitable product. Demand was never an issue; people bought snack cakes but not at a price that would covers cost and return a profit. Demand statements are irrelevant if the company is giving the product away (Jed, 2012).
Drake’s Political Influences
The profit margins began to thin out and the company created another concern that would push the company to the bankruptcy door, rising labor cost. The majority of the 19,000 employees were unionized, and they threatened to strike if the company were going to start cutting wages and benefits. Because of the financial troubles IBC could not afford to pay the market rate for its labor, and there was a strike by the employees of ICB. This action by union members stopped the company’s ability to continue business operations. Management refused to take responsibility for their actions and placed blame on the union.
The investors who took over prior bankruptcies attempted to resolve the conflict by attacking the company’s most valuable asset, its workers, their wages, and benefits. IBC states that production at 12 of its 33 plants were seriously injured by the strike and had no choice but declare bankruptcy. When IBC failed as a business there were no single acts that contributed to this failure.
The other side of failure is success with the acquisitions of Flowers Food Inc. On July 8, 2013 Flowers paid $360 million for assets of IBC/Hostess brands which included Wonder, Nature’s Pride, Merita, Home Pride, Butternut bread brands, 20 bakeries, and 36 depots.
Flowers Organization
The organization is one of the largest producers of packaged bakery foods for retail and food service customers in the United States with 2012 sales of $3.05 billion. Flowers operated 44 bakeries that produce a wide range of bakery products. Among the company’s top brands are Nature’s Own and Tastykake (Flowers, 2013).
Mission Statement: As a team, their goal is to increase the value of the company to their shareholders by: * Growing sales organically and through acquisitions, * Creating foods that meet the needs of customers and consumers, * Developing strong brands, * Providing extraordinary service, * Operating efficient bakeries, * Innovating to improve our performance, * Managing our resources wisely, and by * Fostering team spirit * Appreciating diversity * Encouraging professional growth.
Commitment to these actions creates competitive advantages that make Flowers Foods' success possible (Flowers, 2013).
Changing Market Demographics
The company climate welcomes innovation and values diversity. This company culture is known as the Flowers Way. The main points that foster thee company culture is to innovate to improve business, appreciate team members, and appreciate diversity (Flowers, 2013)
Flowers have been always nutritionally conscience and continue to be aware of the health trends. They use nourishing grains and their snack cakes and pastries contain zero grams trans-fat per serving. According to the 2010 Dietary Guidelines the baked goods can be enjoyed as part of a healthy diet.
Flowers Debt Management
The company has already seen success with the new acquisitions of other entities during the first quarter, which resulted in increased profits for the company. The new acquisition that will be considered is in next quarter’s financial report. It is expected to be favorable because their acquisition increased the company’s market share.
Although the company had to borrow $300 million for the $360 million buy-out, the property is worth that price with the earning potential stated as limitless. The company has a stable outlook, and there is a strong corporate governance of managing its credit. These protective measures allow the company to continue to execute its growth strategies and have enough liquidity to manage moderate acquisitions and any short-term pressures off free cash flow. IBC did not adjust for volatile commodity and continued the financial ruin of developing too much debt. This is perhaps one of the major survival differences between IBC and Flowers Food.
The CEO of TasyKakes Charles P. Pizzi says, "People need to believe in your vision," "That is why people come to work for you, because you provide them with a vision. ... Consumers will follow that vision, investors will follow that vision and ultimately employees will follow that vision." The organizations vision was to take the current brand which had been around about 90 years and develop it by expanding into new territories both financially and geographically. Through relocation, dedication, task orientation, and reinvention new product categories were developed to reach a wider market. Through change management and the use of systems theory as well as contingency theory, the organization was reengineered for the inside out. Management also utilized a collaborative style of managing which empowered employees and gave them the opportunity to be a part of the rebuilding process. Changes were made to improve, line operations, increase accuracy, and simplify reporting, through the investing in advanced technological platforms which streamlined the processes and reduced inefficiencies therefore reducing operating costs, ultimately leading to optimal efficiency and overall productivity.

Flowers Political Influences
The union that was once the death of the IBC is breathing new life into Flowers Food. There is speculation that if the union had not gotten involved there may not have been a need for bankruptcy. Flowers has an investment bank Gordian Group that will be handling the IBC employees’ pension funds and a formal counsel called FLO-PAC (Flowers political action committee), which will advise on political involvement. Gordian is committed to preserving jobs, and this is causing unions to re-evaluate old business relations.
Flowers Food is willing to put the money and energy into the newly acquired company and turn it into a more profitable company with increasing revenues and market share. The union recognizes that this was something that past company owners were not willing to do.
The bakery confection union believes that Flowers along with Gordian will try to maximize benefits for union members.
Effective Steps Towards Change
Once management of Hostess Company has successfully identified the key indicators of business failure, it is imperative to initiate, develop, implement, and then monitor the change plan required to establish organizational change in order to put the organization on the path to success, and increased profitability (Kotter, 2012). Developing and clarifying how the future will be different from the past is a very important factor in developing a change vision. With clarification comes simplification of the decision making process, motivation for employees to take action (Kotter, 2012). With developing a change vision management of Hostess needs to take into account the current reality of the organization and also ensure that they are setting realistic and achievable goals. Management needs to provide guidance through the vision, and have the ability to communicate it. In essence the vision has to be imaginable, desirable, feasible, focused, flexible and communicable. Change is only effective if management ensures that as many employees as possible understand, accept and buy into the vision to bring about change (Kotter, 2012).
With the organization being in the middle of change the leaders need to establish a system that recognizes short term wins or achievements as a necessity. Focusing on such wins helps ensure the overall change initiatives success, and complete transformation of the organization (Kotter, 2012). Attainability and visibility of short term wins ensures success by relating them to the change effort. With successfully attaining and recognizing these small wins the employees at Hostess company feel rewarded as they receive feedback which boosts morale and motivation (Kotter, 2012). The careful planning by management for short term wins also increases employee’s sense of urgency and actual goals are accomplished. With the change vision underway it’s important not to lose focus, but rather consolidate their achievements and gains in order to spur more effective change (Kotter, 2012).
With the success of major change employees and management will see employees being empowered at all levels to lead projects, senior management focused on giving direction and clarity in aligning vision and a shared purpose, as well as an initiative to keep urgency high etc. Monitoring the change enables management to anchor these new approaches into the overall culture of the organization for sustainability towards the change effort (Kotter, 2012). The key is to firmly ground the new practices, with existing and new employees to ingrain the shared values and behaviors. This step enables the organizational to realize that success has to be visible and communicated well, culture needs to be enforced, and the importance of reinforcing new norms and values with incentives of a rewards system.

References
Adams, S. (2013, July 18). Leadership. Retrieved from Forbes.com: www.forbes.com/sites/susanadams/2012/11/21/why-hostess-had-to-die
Drakes Bakery History (2008) Retrieved from www.drakescakes.com
Flowers Food (2013) Retrieved from www.flowersfoods.com
Hepp, C. K. (2013, July 19). Collections: Technology. Retrieved from Philly.com: http://articles.philly.com/2009-05-25/business/25274306_1_peach-pie-technology-platform-greater-philadelphia-chamber
Jed, E. (2012) Hostess Brands Name Turnaround Expert Gregory Rayburn CEO, Vending Times Vol. 52 No.4 Retrieved from www.vendingtimes.com
Kotter J.P. (1995). Leading Change: Why Transformation Efforts Fail, Harvard Business Review
Lumeng, J. (2009) Maternal prompts to eat, child compliance, and mother and child weight status. Center for Human Growth and Development of Pediatrics, Division of Child Behavioral Health, University of Michigan. Retrieved from http/dx.doi.org.ezproxy. Apollo library.com