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THE UNIVERSITY OF MELBOURNE

MELBOURNE BUSINESS SCHOOL

Managing People for High Performance

Peter Cebon

Final Exam: 13 August 2007

Reading & Noting Time: 15 minutes

Exam Duration: 2 hours

THIS IS AN OPEN BOOK EXAMINATION

Special instructions to be added as appropriate - this l is t is an example only

1, During the reading time, candidates may make notes on the exam paper but may not write in

their script books"

2. Calculators may be used during the examination

3" Answer ALL QUESTIONS" The marks for each question are indicated.

4.. The total number of marks in this examination is 120. You are likely to optimize your result by

allocating one minute of writing time to each mark.

5" This paper comprises 50% of the total marks in this subject..

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The following questions refer to the case. "Iggy's Bread of the World" HBS Case # 5-801·-283

1. Describe the culture of the organisation which the Ivanovics created. 25 marks

2. McCrae btought a different set of assumptions about the organisation's

culture to the bakery .. What do you see as the key contrasts in values and

cultural assumptions? 10 marks

3. Suppose you have been brought in to replace McRae .. Your charge is to

expand the organisation in a way that is consistent with the Ivanovic's original

vision. How would you go about it? (Be sure to make clear the theories and

frameworks that you draw upon). 40 Marks

Answer the following questions ..

4. Pfeffer and Veiga suggest that comparatively high compensation contingent

on performance is an important High Performance Management Principle;

however Kohn argues that incentive plans cannot work. You are a

management consultant and one of your clients is interested in improving

employee motivation, satisfaction and productivity.. They plan to do this by

making the transition from a pay system based on seniority to one based on

performance. What advice would you give to this client? In your answer

critically discuss the role of intrinsic and extrinsic motivators in the effective

management of employee performance.. 25 Marks

5.. You must put together an ad-hoc team for a task ..

8.. What factors will you consider when deciding the membership? 10 marks

a. What factors beyond the membership will impact on the group's

performance? 10 marks

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Harvard Business School 9-801-282Rev,March29,2001

Iggyls Bread of the World

T he m iss io n o f I gg y's B rea d o f th e W or ld is to m ake b re ad s o f th e h ig he st q ua lity a nd

th en d eliv er th em d aily to o ur c us tom er s w it h th e h ig he st s ta nd ar ds o f s er vic e a nd in te gr ity ,

[ . . . . , J We a re c omm itte d to p ro vid in g a n ur tu rin g a nd r es pe ctfu l e nv ir onm en t a t o ur wo rk pla ce

t ha t f os te rs c oop erat io n , c ommun ic at io n and a sen se o f a cc omp li shmen t f or a ll empl oy ee s .. We

p ro vi de t oo ls f o r g row th t hrough e du ca ti on , h ea lt h b en ef it s a nd a cc es s t o a lt erna ti ve medi ca l

treatm ents" W e provid e leadership th rou gh depa rtm en t m ana gers w ho are m otivated,

r esp on sib le, w illin g to lis ten a nd w illin g to fo llo w th ro ug h, W e a ll w ork to geth er a s a te am

t owa rd th e g oa ls s et fo rt h in o ur m is sio n.

From Iggy's Bread of the World's Mission Statement

Igor and Ludmilla Ivanovic, owners of Iggy's Bread of the World, glanced wearily at each

other across the boardroom table. The Ivanovics had just spent a long, tense afternoon with their

board of advisors, trying to decide what to do to ensure effective leadership in the company. Just six

months earlier, they had hired a Chief Operating Officer in the hopes that he would help them run

their business and, in doing so, alleviate some of the stress that they both felt. Instead, the decision to

bring in Matthew McRae' as COO seemed to have only complicated matters. McRae had recently

handed Igor and Ludmilla a letter of resignation, which he then withdrew one day later. Shortly

after, Igor and Ludmilla called this meeting of their advisors to help them make some critical

decisions regarding their future,

*****

Iggy's Bread of the World was the culmination of Igor and Ludmilla Ivanovic's dreams

When Iggy's first opened in Watertown, Massachusetts in 1994, the couple both ran and staffed the

company.. Igor baked the bread, while Ludmilla made the deliveries, visited potential accounts, and

wrote out the invoices and production reports by hand. Igor loved the baking and the hands-on

aspect of creating a product that made people happy. As he explained, "I simply have a passion for

the product" I feel a connection with the dough when it's mixing, or baking-I feel like its part of

me."1 Ludmilla's goal, elaborated in the company's mission statement, was to create a "nurturing

'Please note that the names of the COO and the management that he hired have been changed ..

1All direct quotes from Igor or Ludmilla, unless otherwise noted, are taken from an interview with the couple onOctober 8, 1999..

R es ea rc h A ss oc ia te A le xis G e nd ro n p re pa re d t hi s c as e u nd er t he s up er vis io n o f P ro fe ss or K at hl ee n McG in n a s t he b as is f or

c la ss d is cu ss io n rat he r t han to i ll us tr at e e it he r e ff ec ti ve o r i ne ff ec ti ve handl in g o f a n admini st ra ti ve s it ua ti on . .

Copyright © 2000 by the President and Fellows of Harvard College .. To order copies or request permission to

reproduce materials, call 1-800-545-7685,write Harvard Business School Publishing, Boston, MA 02163, or go to

http://www ..hbsp ..harvard ..edu .. No part of this publication may be reproduced, stored in a retrieval system,

used in a spreadsheet, or transmitted in any form or by any means--electronic, mechanical, photocopying,

recording, or otherwise-without the permission of Harvard Business School.

1

Licencee - MeSS (03) 93498155

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Iggy's Bread of the World 801-282

make ends meet. While at E.A.T",she decided to forgo her dream of becoming an actress and focus

on another of her passions, the restaurant business" "I decided that the business part of acting was

not for me and so I decided to put all of my eggs in one basket," Ludmilla recalled, "and try to open a

little restaurant ofmy own."

Ludmilla and Igor decided that they would merge dreams-hers of opening a restaurant and

his of baking for a living-and open a bakery. The couple felt the New York City market was already

saturated, and began looking at potential sites in other cities.

The Groundwork for Iggy's: Pain d'Avignon InJuly of 1992,Igor and Ludmilla borrowed money

from family and friends and opened their first bakery, Pain d'Avignon, in Hyannis, Massachusetts.

Ludmilla's mother had a cottage there, so the couple was already familiar with the area" Friends of

Igor's from Belgrade, who had been living in New York, joined them as silent partners" Igor recalled,

"When we started the bakery I didn't even know how to make bread! I knew what I wanted it to

look like and I needed it to taste like, but that's it." Ludmilla added,

When we had decided to open the bakery, two bakers from E"A.T"wereplanning on starting it with us. At the last minute, one of them dropped out and

then the other one decided he didn't want to work at Pain d'Avignon either, so here

we were with no bakers. We had come so far, though, that we just decided to go

ahead and open the bakery. We finally found another baker to come from KA.T. to

teach us how to make the bread. He was a tyrant, the baker, and he was so hard on

Igor but he was such a great teacher" He didn't have any recipes-Igor learned to

mix by touch, by smell, by the feeling of the dough, by understanding the taste.

Igor, Ludmilla, and Igor's brother Nikola threw themselves wholeheartedly into the fledgling

business. While Igor and Nikola baked, Ludmilla worked behind the counter, at the same time

caring for their newborn baby, Tamara. Ludmilla remembered, "Sometimes we didn't sleep for two

days, we got so slammed. We just got busier and busier. We were sleeping at the bakery, we were

sleeping standing up." Igor added, "We did it for sixmonths straight, seven days a week, an averageof 18 hours a day. You have to do it to learn."

The business quickly became successful, but the Ivanovics and their partners began to have

differences over how to produce the bread-Ludmilla and Igor insisted on using only all-natural

organic ingredients, even though the organic products were often twice as expensive as their non-

organic counterparts" Ludmilla recalled, "We were just going in different directions. Very early on,

Igor had a dream and it felt like, to pursue it, we had to either significantly change the operation at

the bakery or get out." And so, at the end of the first year, Igor and Ludmilla sold their portion of the

business to their partners and began, once again, to look for a place to open a new bakery.

Iggy's Bread of the World

The idea of Iggy's is threefold: one part is the bread and the quality of the

product: two is our work ....the employees ... it's a good bakery, but it also has to be a

healthy business; and three is the community, how we deal with outside customers,

how we can make a difference by not treating them like a number.

- Ludmilla Ivanovic

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The tiny store was always crowded with Iggy's enthusiasts ..The owner of a local catering

company called the bread "museum-quality, suitable for framing ..s Soon Iggy's had many of the

most prestigious accounts in Boston, including the Four Seasons Hotel and the Harvard University

Faculty Club, and the bread flew off the shelves. Within six months, with no marketing, their

revenue had grown to $1..57million (annualized), Ina glowing 1994 article on Iggy's in The Boston

Globe, Sheryl Julian WI'Ote:

What is really going on at the six-month old business, what is giving Iggy's

rave reviews by bread enthusiasts all over town, can be described in a single word:

passion. Ivanovic, 26, and his wife, Ludmilla, 30, are so passionate about their bread

that it comes through in everything they do. Itshows on their faces and suffuses

everyone in their [...] bakery-the people who work there and the customers who

stop by. And it is most evident when you break offa piece of baguette and taste it.6

The owner of a local natural food store attributed Iggy's popularity to "the quality of the

bread and the ingredients, the freshness, daily delivery and the fact that word has gotten out about

Igor and Ludmilla in terms of them being passionate about bread."7

The Work and the Workers

And passionate they were. Igor and Ludmilla devoted their lives to making Iggy's

successful. Ludmilla described the experience of starting and growing the company as

"incredible .....and nuts ....and amazing. I totally loved it. I got so involved in the company. I don't

know how I did it, with two kids-one a newborn baby! -but it was just a dream come true." While

Igor focused his energies on the baking side of the company, Ludmilla used the bakery as a means to

pursue her own passions. She explained:

The bakery became a stage for me, a channel through which I could do what

I believe in.. It's not just a business where we need to make money .. I want our

employees to get pleasure out of what they do.. I want them to be involved in the

company. I want them to like what they do, to be excited to come in and have

initiative and be proud of what they do.

Ludmilla instituted a "clean and happy hands" rule.. It started as just a reminder for

employees to wash their hands frequently, but she expanded it to encourage employees to practice a

more holistic approach to their jobs.. Ludmilla explained:

The clean and happy hands idea was started just to deal with the sanitary

issues when you're dealing with food-how important it is to wash your hands

often, not touch your hair, make sure the food is covered properly-but it quickly

evolved into a philosophy.. I believe that the energy that people have, it goes through

their hands into the bread.. So clean and happy hands was the rule-if you came to

work unhappy, if you were having problems with a co-worker-all you had to dowas come to see me or a manager and explain the problem .. We would try to work

things out, talk things over, go for a walk. I did not want personal problems to spill

over into the bread, into the product ..

To further involve the employees in the business, Ludmilla started offering English classes

once a week to foreign employees who wanted to learn the language. Ludmilla and Igor threw huge,

5 As quoted inSheryl Julian, "Iggy's on the rise," The Bo st on Glob e, July 6, 1994..

6 Sheryl Julian, "Iggy's on the rise," T he Bos to n G lo be , July 6, 1994..

7 As quoted inSheryl Julian, "Iggy's on the rise," The Bo st on Glob e, July 6, 1994..

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them in" H there's no connection, then they do something else, like packing ordistribution.

When Iggy's first opened, Igor used no recipes for the bread and had no time charts for the

oven workers. He knew how to bake by touch and by the feel of the dough, and thus recipes were

unnecessary" "Itwas not until we had around 20 employees that we started to write down the

recipes and make cooking charts," Igor remembered. "We have recipes now that the bakers follow,

but there are still times that the bread is too wet or too dry, and they have to improvise" They have to

have a feel for the bread, to know to add more water, or lower the temperature of the oven.v.things

like that that you can't get from a recipe."

Because they had to learn to bake the bread by touch, it took six months to fully train a baker.

Menezes explained:

It takes about six months for the bakers to really get a feel for how

everything works around here" And we can quickly see which workers have a feel

for the product. Because of this, we don't have a structured pay scale. It's more a

range for each job, but the individual worker really determines how much he makes

in that range" Raises come rather quickly for people that work hard and are

interested in what they do.

There were no set schedules for the baking times. Bakers worked 24 hours a day, but each

shift had a two-hour overlap with the previous shift so that they could be brought up to speed.

Menezes explained:

Working in a bakery is different from working in a regular kitchen, because

we're baking around the clock.. And because Iggy's is unusual and we don't really

have a fixed schedule, we make sure that the day and night shifts overlap by two

hours, so that the workers can let the new shift know what's going on and where

they are in the process.

The Business

Nikola, Igor's younger brother, began helping Igor and Ludmilla when they were still at Pain

d'Avignon and gradually assumed more responsibilities until he was running the day to day

operations and finances at Iggy's Bread. Nikola had left Belgrade, where he had been part of the

junior Olympic water polo team, in 1990to attend the University of California at Santa Barbara on a

full water polo scholarship. While he was in college, he often came to stay with Igor and Ludmilla

during his school breaks rather than returning home to Yugoslavia"

During the spring of his sophomore year, he decided to take a term off, and ended up

helping Igor with the baking for the first few chaotic months at Pain d'Avignon.

I remember that my record was 36hours straight. Itwas to the point where I

was making the bread and I was so tired I couldn't stand on my legs anymore" So I

had to sit on the table and make bread while sitting down. I was really good at

shaping the bread, I picked it up quicker than the others, so they used to wake me up

in the middle of the night. I would shape the bread, and then go back to sleep.. After

I went back to school, I would still come back to help out during holidays and

summer vacations and sometimes over long weekends. After they opened Iggy's in

Watertown, I would fly in to Boston, go to the bakery straight from the airport, and

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change their financial philosophy and take on debt or get capital funding in order to expand. Igor

remembered being approached by a venture capitalist:

AVC came to us and said that he would love to invest money, he would give

us this sum in exchange for a portion of the business. He said that we would make a

lot of money if they invested and Iggy's expanded. He told me, "Ifyou grow it to a

point you can go public, sell it, then you'll make a lot." I told him that I thought it

seemed like a very high price topay to get there.

Ludmilla was more pointed in her feelings about the idea:

I would never accept selling out because it's everything I don't believe in and

I wouldn't want any part of it. I would never sell Iggy's just for money .. I don't want

Iggy's to be franchised allover the States. I want everyone to open their own version

of Iggy's and make their own dream come true ..

Igor and Ludmilla realized that they couldn't remain at the edge any longer. Igor stated:

I think it's almost easier to maintain the value system of an organization

when you're larger .. Ifyou're in-between, it's a struggle just to make ends meet. You

have to concentrate on getting the product out, making deliveries, hiring and

training people-it's very hard. That's why I think there aren't too many in-between

bakeries. They come to the in-between size and they either scale back or try to grow

the company.. When you get large enough to be able to afford managers and HR

people, leal business people, they can run the organization and you can focus on the

mission you are trying to achieve .. You can use your energies towards that, rather

than towards the day to day operations ..

Igor knew that he couldn't continue running the business and also stay involved in thebaking, especially now that Ludmilla was spending less time at Iggy's. After much agonizing, and

with some trepidation, Igor and Ludmilla decided to expand, but without any outside investors.

With the decision to expand came more tough decisions. How were they going to finance this

expansion? As they grew, how would they deal with the increased administrative burden? If they

brought in outsiders to help them run the organization, would Iggy's lose its uniqueness? They both

felt that these changes put the very heart of Iggy's on the line. Up until this point, it had been a

constant struggle to keep up with customers' demands; the challenge now was to stay true to the

vision of Iggy's while growing the company into a full-fledged business.

Growing the Business

Igor decided that the first step to expanding the company was to grow physically. InApril of

1998, Igor and Ludmilla supplemented their tiny Watertown store with a large warehouse in

Cambridge. They renovated the warehouse, with Igor and Menezes designing the product flow for

the new, larger kitchen space. They bought seven new vans for deliveries, and increased the size of

their kitchen staff by 15.. To do all of this, they had to take out loans for the first time in their foul'

years of business ..

With the physical capacity expanded and a new financial structure in place, Igor and

Ludmilla began looking for someone to help them with the financial and administrative sides of the

business. Itwas deal' that they desperately needed help running Iggy's. According to Nikola, "It

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know all of their employees, many of the bakery workers felt that the new managers did not have any

interest in getting to know them. The tension between the new managers and the employees who

had been with Iggy's for years was palpable. Nikola, who often served as a liaison between the

bakery workers and the office staff, did not view the hiring of McRae and his management team in a

negative light. But he worried that the changes in the company's structure were being made too

quickly and without a full understanding of what the company was about. Nikola stated:

The workers who have been here for a long time know the company and

know what needs to be done. It's an unusual company, and we do things differently

than others do, I'm sure.. But the people who have been here since the beginning

have afeel for Iggy's in a way that new people cannot .. I know the name of every

worker we have, I know their families, I know what they do, who they are.. I breathe

this company, I live it, I feel it, So what people have a problem with, I think, is that

the new people came in and made a lot of changes very quickly, without really

knowing the employees or fully understanding what Iggy's is all about. They just

don't seem to want to feel it first.

The changes were felt throughout the bakery. Menezes recalled:

All of a sudden everyone had flashy titles. Before, no one really felt the need

for them.. The changes can be confusing, so I just try to focus on the bread, because

that's what I'm good at. With all the new people it's also a little bit hard because

only a few people know what goes on in every single department. Nikola, Igor,

myself, and maybe just one or two other people, know what goes on in the bakery as

a whole. Everyone else is restricted to their department, they just pack, or they just

bake, or they just deliver .. They don't have a sense for the organization as a whole .. If

you don't understand the dynamics of everything, it's really easy to get confused

when problems come up. It takes a long time to learn .....o a lot of the new people

that came in, they all have great ideas and want to fix the problems we're having and

try different things.. And all of this is great. But at the same time, you need to behere for a while to really get a feel for how everything works.

Discontent grew not just among the employees .. Igor, Nikola and Ludmilla were beginning

to feel out of touch with the organization. Igor thought that bringing Ludmilla's energy and

enthusiasm back to the company and the employees might help to boost morale.. So after almost

three years away, Ludmilla returned to work part-time at Iggy's .. Her main goal was to re-instill the

culture of the old Iggy's into the new, more corporate organization .. Ludmilla found inspiration in

corporate trainer Ken Blanchard's advice that a leader should be gentle, caring and supportive. She

planned to develop new cross training programs, and to talk with the employees to find out what

other programs might help bring back the culture of community that had once been so strong. But

the organization seemed to have grown in a way that thwarted her every effort. During Ludmilla's

first full day in the office, Coleman, the VP of Sales and Marketing, presented her with an

organizational chart detailing the company's new hierarchy, telling her she should make sure to

follow the lines of responsibility as indicated in the chart. Ludmilla remembered:

I was so taken aback. I didn't want to have an ego about all of this, but I

started this company with Igor. I'm listed as the president.. I know I've been away

for a couple of years, but still.: ..,. I come back and someone I don't even know is

telling me who I should talk to if I have problems?

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them" He came back with what was, to us, a staggering proposal, He told us that

with the "new economy" and with people making millions in start-ups, he felt like he

was missing a golden opportunity. His proposal included a significant raise, as well

as bonuses based on profit, beginning at profit levels below those which we had been

reaching before he was hired.

The Ivanovics debated how they should respond to McRae's proposal and, not sure what to

do, decided to call a board meeting. At the meeting, their board of advisors read McRae's proposal

and listened to the presentation he had prepared. As he walked out of the room, there was an uneasy

silence as the board members tried to decide how to respond to McRae's demands" Igor and

Ludmilla knew that whatever they decided, the future held no certainty for Iggy's,

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