How to Compete with a Fast-Growing Disruptor

HANNAH BATES: Welcome to HBR On Strategy, case studies and conversations with the world’s top business and management experts, hand-selected to help you unlock new ways of doing business. OXXO was the dominant convenience store chain in Mexico — until its chief rival doubled in size almost overnight. Should OXXO accelerate their growth, in response? Or should they keep it steady and focus on developing more centralized operating systems and strengthening OXXO’s culture? Today, we bring you a conversation about the tradeoff between growing big and remaining flexible and agile enough to respond to the markets you serve — with Harvard Business School professor Tatiana Sandino.  Sandino studies how large companies implement management systems across multiple locations. And she wrote a case about how OXXO CEO Eduardo Padilla responded to this strategic challenge. This episode breaks down how OXXO implemented management systems across its locations. You’ll learn how it used those systems to gain new economies of scale, hold its store managers more accountable for results, and uncover new market niches to serve. This episode originally aired on Cold Call in December 2019. Here it is.

BRIAN KENNY: In May of 1927, retail history was made on the corner of 12th and Edgefield Street in Dallas, Texas. For it was there that the Southland Ice Company’s, Johnny Jefferson Green, or Uncle Johnny, as he was commonly known, realized that people often needed more than just ice. They needed basic necessities like bread, eggs and milk, things that were only sold in grocery stores, which in 1927, were either hard to get to or not open when you needed them.

So Uncle Johnny began stocking the items at his ice shop where he could keep them cold and he stayed open late. It was all about convenience and it spawned a global industry that, according to the National Association of Convenience stores, generated $654 billion in revenue in the U.S. alone in 2019. Southland Ice Company changed its name to 7-Eleven in 1946. These days, the industry has taken convenience to a whole new level with stores carrying all manner of packaged and prepared foods and beverages, household items, cigarettes and lottery tickets. At many locations, you can fuel up the car while you shop.

The competition is fierce. And finding a way to attract and retain customers is the only way to win. Today we’ll hear from professor Tatiana Sandino about her case entitled, “OXXO’s Turf War Against Extra.” I’m your host, Brian Kenny, and you’re listening to Cold Call. Recorded live in Carmen Hall Studio at Harvard Business School. Tatiana Sandino’s research examines how organizations use management control systems to ensure the actions and decisions of employees are consistent with the organization’s objectives. That’s exactly what we’re going to talk about today. Thanks for joining me.

TATIANA SANDINO: Thank you.

BRIAN KENNY: So nice to have you here on the show.

BRIAN KENNY: Well, I think people will really relate to this case. OXXO is a Mexican convenience store chain. But we’ve all shopped in convenience stores, many of us who travel around the world find ourselves in a convenience store wherever we are. So I think this is going to be highly relatable for folks. But maybe you can start, as we always do, just by telling us how does the case begin? Who’s the protagonist and what’s on his mind?

TATIANA SANDINO: The case is situated in 2006. And at that time, the CEO of OXXO, Eduardo Padilla, had to make a decision about what to do about a competitor, Extra, that had double its size in the previous year and was now threatening to displace OXXO as the dominant convenience store chain in Mexico. Padilla was working, at the time, on developing a more centralized operating system and strengthening the culture of the company. But with Extra’s threat, they needed to decide whether they should focus on accelerating growth just to preserve the dominance in the market or whether they should maintain the growth so that they could still focus on consolidating the culture and the systems that they had been investing in.

BRIAN KENNY: Okay, so they’ve got some important decisions to make here and that’s sort of the crux of the case. Why did you decide to write this? How does it relate to the research that you do?

TATIANA SANDINO: For more than a decade, I have been doing work with multi-unit organizations and how they implement management systems as they are growing. This is a very big sector, it’s all these companies that replicate a business model across multiple locations. So we’re talking about retailers and hotels, banks, all these kinds of companies. So these companies are a very important group. They account for about 40% of the labor market worldwide and they always confront a very challenging problem. And that is, that as they grow and they serve multiple markets, they always have to figure out how they can put controls to achieve economies of scale and execute their strategies consistently. But at the same time, they have to figure out how to remain agile. Because oftentimes, those management systems that they put standards and process controls often disempower employees and when you have disempowered employees, it’s more likely that those employees might be less productive, less engaged, less proactive with customers and less likely to learn information about the market and pass it on to the headquarters. My research, I’m looking at companies that implement management systems and I want to know how they can put systems so that they can scale, but they can also remain agile as they scale. OXXO caught my attention and it also caught the attention of my co-author, Gerardo Pérez Cavazos. Because it’s an extraordinary case of a company that had been growing and performing very successfully in Mexico. At the time we visited the company a couple of years ago, OXXO had nearly 14,000 convenience stores, and it was open at 3:00 or 4:00 every day. And it was doing this profitably and it was also doing it with a very strong entrepreneurial spirit. So to me, this was a very interesting case to look at and try to understand how OXXO had implemented management system to overcome this tradeoff between growing big, and at the same time, being flexible and agile to respond to the markets that it was serving.

BRIAN KENNY: And I found it interesting, too, that the agility that you’re talking about really happens at the store level. I don’t think people, necessarily, when they walk into a convenience store think, “How is this one different from another one?” And the experience is fairly similar but this is really happening at a local level in the case. So we’ll talk more about that. I teased in the opening about a 7-Eleven and the dawn of convenience stores in the United States, of course they’re everywhere in the world. Can you tell us a little bit about how the landscape looks in Mexico?

TATIANA SANDINO: Yes. Well at the time of the case (that was like 2006) there were about 7,500 convenience stores in Mexico. And at that time, there was growing demand for convenience in Mexico, as is the case in many other countries in the world. There is a growing demand for convenience because families, the husband and the wife are working, their schedules are extremely busy, the jobs are becoming increasingly demanding and so they are time-starved. In addition to that, in Mexico, there was also an increasing traffic in the streets. So for them, convenience became really, really important. And having a place where they could go and buy their everyday items, that was not pulling them out of the way, was a big deal.

BRIAN KENNY: I was always also surprised, rather, at the fact that both Extra and OXXO exist for a reason that I hadn’t considered before, which is basically to sell a particular kind of product. Is that right?

TATIANA SANDINO: Yes. So both Extra and OXXO are companies that emerge from their parent companies, where both of them are beer companies. They distributed the beer for their companies, both of them were trying to distribute the products of the parent companies. And so that became a threatening competition. It was not just about competing for our convenience stores, but also competing to place the products of their parent companies.

BRIAN KENNY: Right. And that also sets up a little bit of differentiation between these two competitors. How is the market, today, is it saturated at this point or is there still room for growth?

TATIANA SANDINO: So one thing that was very interesting, at the time when we located the case, it’s 2006, at that time, there were like 7,500 stores in Mexico. About 60% of them were OXXO stores. And at that time, the executives thought that the market would be saturated with 15,000 stores. That was their projection and their expectation. But as it turns out, OXXO now has more than 17,000 stores today.

BRIAN KENNY: Just OXXO?

TATIANA SANDINO: Just OXXO. And they keep opening three or four stores a day. And the reason why they originally thought was the market saturation is, that as we will see, but with the systems that they implemented, they were able to uncover new markets and new niches that they didn’t think of before. And so they keep growing and they keep growing strong because, at the regional level, they have very good understanding of what the customer needs are. And they keep uncovering new opportunities like in hospitals, like in universities, that they can open small stores in different places that they didn’t think of before.

BRIAN KENNY: Which gets that agility and the ability to sort of innovate on the model itself. Did you look at whether or not there was sort of brand loyalty between these two competitors?

TATIANA SANDINO: I don’t have good numbers for you on the brand loyalty, particularly for Extra and OXXO. But there is certainly a very, very strong brand recognition. Absolutely everybody that lives in Mexico or that has visited Mexico has seen OXXO and there’s brand loyalty. And the thing that is interesting is that usually you wouldn’t think of being able to differentiate with a convenience store. But OXXO was competing on service and on being present wherever the customer needed it. And so it became like a part of the lives of the OXXO customers. That’s not unusual, in the U.S., this happens as well. There are some convenience stores that compete on service and they managed to build very strong brand loyalties like Wawa, QuikTrip, there are a number of convenience store chains that do this. And what they do is that they go into a market, they put a lot of their stores in that market and they build these brand recognition. And so OXXO was doing these region by region, kind of saturating the market in a way so that people now recognize OXXO as the place to go and when they need something for the day.

BRIAN KENNY: What’s it like to work at OXXO? What’s the culture like there?

TATIANA SANDINO: Originally, the company was very decentralized. And so when Eduardo Padilla arrived to the company, this was around 2000, there were a lot of different stores that had grown across different regions. And the reason why the company had been successful, at the time they had like 1,000 stores, is because people were very empowered. The store managers were receiving big commissions, and from those commissions, they had to hire their staff. And they also were responsible for any inventory that got lost. So it was almost like a franchise model, but they didn’t have to invest in the long term assets. So it was a very entrepreneurial company and they had grown in these way, region by region. But it was very disconnected. Whatever happened in one store or one region, nobody knew about like what drove the success or the failure of a store in those places. Headquarters had very little information about how things were being done. When Eduardo Padilla joined OXXO, he saw a great opportunity on strengthening the organization by connecting the different regions, connecting the different stores and helping leverage the knowledge that was there but that was distributed throughout the organization and achieving economies of scale by coordinating the resources, et cetera. And so the first thing he did was to strengthen the culture. There was this futile kind of lords that were operating in different places and now he wanted to bring them together to collaborate and to try to share best practices, to try to share some resources to achieve economies of scale.

BRIAN KENNY: This was like a big culture shock, I’m sure.

TATIANA SANDINO: It’s a big culture shock for people that were operating independently. When he came in, he wanted to create a culture where people would trust each other, where they would feel like they wanted to collaborate to achieve results, not just locally for themselves, but for the company as a whole. That they would share their best ideas and create a team like culture.

BRIAN KENNY: That sounds easy to say and probably really hard to do. Like we’ve all been through cultural shifts in the places that we work. And I guess what I’m wondering is, do you do these two things simultaneously? You implement the systems and you change the culture at the same time? Do you have the employees create the systems? What’s the way to approach this? How did he approach it?

TATIANA SANDINO: The way he approached it was that he thought that the culture was the most important piece. Because without the culture, he couldn’t develop the systems. And so he created a culture where people would feel included. And for this, he created a huge number of rituals. So, the rituals, in fact, they ended up with about 60 rituals.

BRIAN KENNY: Wow, that’s a lot of rituals.

TATIANA SANDINO: A lot of rituals. But the rituals were really created because he wanted to create a sense of equality, that there was a sense that we’re all working on this together. For example, that people were expected to address each other with the word, “Tu,” instead of the word, “Usted.” In Spanish, the word, Tu, is the word that we use for You. And it’s used to talk with your friends about-

BRIAN KENNY: More familiar.

TATIANA SANDINO: Much more familiar. Whereas the word, Usted, is used to talk with your boss or, really, with your mom when you’re a little kid. So, the word, Usted, is also You, but it’s much more hierarchical. He also created a number of rituals that connected the people from the headquarters on from the regional offices with the stores. So everybody at regional offices or headquarters had to adopt the store and visit it regularly. And they also had to go every year and work at the warehouse or work at a store for one day so that they could really experience what the work was like. But a lot of the rituals were to create this sense of equality and community. He also promulgated company values and encouraged people to share ideas with each other a lot. Many of these rituals were meetings where people would meet monthly to discuss with their peers, and annual meetings to discuss across units. Multiple meetings that happened at headquarters or the plazas or regional offices that where about promulgating the corporate values with employees. But they were also about engaging in conversation, horizontally, vertically, across all the people in the company. They invited criticism very often, they had systems specifically to invite criticism. They wanted to hear from their employees, and they wanted to hear what was not working so that they could fix it.

BRIAN KENNY: I know in some cultures that might be easier to achieve than others. Certainly in some Asian cultures, criticism doesn’t flow easily from the bottom up. How is it in Mexico? Are they more comfortable speaking their mind about that kind of thing?

TATIANA SANDINO: There are a lot of things that are hierarchical in the Mexican culture, generally speaking, the Latin American culture. I think that it’s not like everybody goes around criticizing each other freely. So there’s a lot of work that needs to be done for this and that’s why they implement the systems for these. They had a chain of complaint that they put in place, where everybody was asked to do their jobs and they knew that they needed to be supported by other people. And so one thing that companies or people that are entrepreneurial often do is, “If I don’t get the support, I fix the problem myself.” But in this company, they strongly encouraged them not to do that, but to complain about the support that they didn’t get. And so, they created this encouragement for people to speak up when something was not going well.

BRIAN KENNY: Let’s talk about systems for a minute. Are you talking about a technological system or a business process or both? Maybe put a little definition on that.

TATIANA SANDINO: I would like to focus mainly on the systems that they created so that they could have some control over the processes and over the outcomes that were coming out of the stores. So how are people operating? What is it that they are achieving with their operations? They had no information about this. They had just financial information and they knew some stores did well and others didn’t, but they didn’t know what was happening in that black box. So, the question was, how do you put a system in place when people have been so empowered all of their life and they’re not going to welcome somebody telling them what to do. The new approach that they tried was to balance this ability to control what’s happening in the stores and setting some standards and gaining economies of scale and coordination, but at the same time, they needed to be flexible because people wanted to make decisions to decide how to operate their stores on the conditions that they faced. They created a system, and this is the system that I think contributes a lot to the success of this company, I would describe it as like a structured empowerment system. Because instead of holding people accountable for following a process, what they decided is that they would hold them accountable for results. But at the end of the day, the store managers had to decide how to mix and match those tasks so that they could come up with a routine that would work for their store.

BRIAN KENNY: At the store level.

TATIANA SANDINO: At the store level.

BRIAN KENNY: Okay.

TATIANA SANDINO: So this is a form of empowerment, but it’s structured because we have communicated what the tasks are. And they can now mix and match them in the way that makes sense for them. For their results, they created a checklist. And this checklist consisted of a number of results that the customer would want to see, the customer value preposition. They were very qualitative. Is the service fast? Are the store employees professional and presentable? And you may think this is not so qualitative, but it is because when people start to engage on what does that mean? If you don’t want to micromanage them, then you leave them at a level that is so much qualitative. So when they were setting up their standards, they had to set up the standards like as a principal, not as a rule.

BRIAN KENNY: So you have to look presentable.

TATIANA SANDINO: Look presentable, you have to provide quick service, but we’re not telling you exactly how to achieve that. The store has to look clean, but we’re not going to tell you how to clean the floors. That’s what they were going for.

BRIAN KENNY: So how did they cascade this through? It’s a huge company, right? And how did they kind of roll this out to all the way down to the store level?

TATIANA SANDINO: They started testing this and they started to put the system in place. One of the things that is very important about this whole process is that they start by asking people to put these systems in place, but there has to be a lot of feedback. I mentioned this checklist that the store managers had of what they had to deliver, each store manager checked this checklist every day. But once a week, the store advisor came and they discussed those results, especially because some of them are qualitative.

BRIAN KENNY: So the store advisor is sort of a regional manager, is that the idea?

TATIANA SANDINO: The store advisors, for every ten stores, they have one store advisor. And then the store advisor is under the plus or regional management group. And as they discuss the results, they are also strategizing on how they could have made better choices. And so they started to go in through that loop. So how to roll this over is at a store by store level. And the question is, are people going to be willing to do this? They created these dialogues internally with the advisors, but there are a lot of dialogues that went up to the process department. So each year, initially, every few months they asked for advice on the checklist and the standards that they were presented with. Where they brought in opinions from everybody, and as I mentioned, they had built this culture that invited a lot of criticism and they wanted to hear about this. They revise the standards; they reply to single input that they got from the employees.

BRIAN KENNY: And they had some ownership in it because they had helped to devise the standards. Does this become like a recruiting tool for OXXO? Do they use this when they’re interviewing, you know, potential employees to say, “Look, if you work here, we’re empowering you to help create the experience.”

TATIANA SANDINO: Well, this is interesting because hiring people at OXXO is a challenging job. And it’s challenging because they are growing so fast. If you think about opening three or four stores a day, that’s a lot of growth. I don’t know if they use, particularly, the system or explain the system, but it’s when the people experience the system that then they are more willing to stay. And so especially for people that are store managers and above, they have very high retention rates because people feel engaged and connected. The store managers hire their own people, they pay them from their commission. So they are the recruiters. A lot of the work comes to them, many of them recruit their own families and things of that sort. And so that creates more opportunities for retention.

BRIAN KENNY: So, they’ve been implementing this systems approach for a while. How’s it going?

TATIANA SANDINO: It’s going very well. At least the last time that I talked with them, they were beyond version 20 of the system. They had taken a lot of feedback, improved the system. There were times when people were asked for their collaboration and their feedback and their input, the open seasons that I was talking about, and they were taken very seriously and given feedback on what they did. And then there were times, when they are not in collaboration season, there’s a very strong culture that they have to follow the system. And people are very strongly committed to the system.

BRIAN KENNY: And they’re sharing that information, I would assume, more broadly across the organization. Right?

TATIANA SANDINO: Absolutely.

BRIAN KENNY: The case goes into, I thought, a really interesting example of where they’re giving the store managers sort of the freedom to be agile with the system. And it’s called the Lego system. Can you talk a little bit about that?

TATIANA SANDINO: Yes. It’s done more at the regional level. So the plazas or regions are held accountable for developing the stores. For the different plazas, when they decide where to open a new store, they have to decide what the store layout is going to look like. Rather than having the headquarters impose one or two layouts for all the stores, they learned that imposing didn’t work very well. They create some store shelf building blocks and they call that internally, Legos.

BRIAN KENNY: If anybody from Lego’s is listening, they probably haven’t trademarked the name, so that’s just their shorthand for it.

TATIANA SANDINO: Yeah, that’s just their shorthand. Imagine that the store shelves, each of them have a planogram, which means that it’s like a photograph of how a shelf should look. So they have this store shelf building blocks for each category of products. But for each category of product, they don’t have just one, they have multiple, let’s say six or eight different ways in which you could arrange and stock your shelves for carbonated drinks, say. Perhaps your store is very small and so you’re going to pick one of the store shelf building blocks of carbonated drinks that is small, that fits in maybe just one refrigerated door. The plaza managers can pick and choose which assortment of products, and in what kind of configuration best works for their store. You can imagine that the number of stores you can come up with is very large when you mix and match the different choices that they make for each of the different categories of products.

BRIAN KENNY: The brand manager in me has to ask, I assume they’ve got sort of a brand standards that make the experience consistent from store to store. So, you know you’re in an OXXO versus an Extra?

TATIANA SANDINO: Yes, that’s correct. The OXXO’s are very highly customized. Of course there’s a lot of brand marketing, the way the stores are decorated and everything is very distinctive with yellow and red colors and very distinctive branding. But many of the stores look different from each other. Extra, on the other hand, had like three standard models of stores and that was it. And so if you were going to compare how standardized the Extras looked relative to the OXXOs, you would think, “Oh, the Extras look a lot more standardized.” But the problem is that they were not really learning anything about the customers or customizing to serve them. So, when OXXO was keeping track of Extra, because it was a real threat, they just realized that the customers were not buying so much from them. And so they decided at the end that they were not going to try to match their growth, but instead, try to consolidate these systems with which they would be able to understand the customers a lot better, create more collaboration within the organization and gain both economies of scale and greater knowledge.

BRIAN KENNY: So are there other organizations or industries where you think a systems approach is really working well?

TATIANA SANDINO: There are many different models in which companies could work. And so these way of structuring empowerment is one. But it’s one that I have seen that many companies use. Because for multiunit organizations, this problem of trying to achieve economies of scale and some consistency in strategy execution, that is always hard to achieve at the same time that you remain agile. Some companies come to mind that I have written about, like Dutch Bros. This a drive through coffee company in Oregon that competes by providing very high quality service and customized products to their customers in a very fast way. People go through the drive through for a few seconds, but they really connect with their customers in a great way. And one of the things that they do is that they allow the employees to customize the drinks. And this could get out of hand very quickly, right?

BRIAN KENNY: I was going to say, something could go wrong here.

TATIANA SANDINO: But what they do is that they decided to create a few base drinks and choose the number of flavors that they could include in each of those base drinks. The choices are somewhat guided by providing these based drinks on the flavors that could go well with that drink. They are allowed to experiment a little bit even if they have failures. The only catch there in Dutch Bros is that, at some point, they were creating so many drinks and they were giving so many names to the drinks that it became very hard for customers to go and ask for the same drink in another store. So there are some rules that need to be put in place. There are a lot of examples like that. QuikTrip, which is another convenience store chain, also standardizes tasks, but lets the store teams decide when they’re going to do each of the tasks. So they have that flexibility of mixing them and matching them. Or you could go as far as, let’s say, consulting companies, where what they standardize our frameworks with which they share best practices and they share a way of doing things that is more likely to succeed.

BRIAN KENNY: And what’s interesting is all the examples you’ve given, including OXXO, these are all service examples. These are people delivering a service and trying to create an experience. And that interaction that you have to have with your customer or your client has to be yours, it’s got to be authentic.

TATIANA SANDINO: Yes, yes.

BRIAN KENNY: You’ve discussed this in class before.

TATIANA SANDINO: Yes, I have discussed the case several times.

BRIAN KENNY: I wouldn’t ask you to give away any secrets, but I’m curious, have you ever had any OXXO employees in your class, people that have worked at the store?

TATIANA SANDINO: I haven’t had OXXO employees, but almost always, I have OXXO customers.

BRIAN KENNY: I’ve been one. I’ve been to an OXXO.

TATIANA SANDINO: Oh, you have been one? In Mexico?

BRIAN KENNY: In Mexico, yes.

TATIANA SANDINO: Yes, oh, fantastic. What was your experience?

BRIAN KENNY: I felt like I was in a 7-ELeven, I’m sorry to say it, but to me, it felt very familiar. So I’m an American and I’m in Mexico, and that experience for me was nice because it was a very familiar sort of surroundings and a lot of the same products that I could get at a convenience store near my home. So it did what I needed it to do. And I think for a lot of people that go to a convenience store, they want the convenience, that’s why they’re there. They need something quickly and as long as you can satisfy that, then-

TATIANA SANDINO: Well, mission accomplished then.

BRIAN KENNY: Right, exactly.

TATIANA SANDINO: Yes. I think that’s the idea, that they want this to be perceived as easy for people. And when they need something, that they will be able to find it at the convenience store chain. One interesting thing is that people in the stores come up with all sorts of ideas. Those ideas come, really, from the customers when the customers asked for something that they don’t have. Since they are so encouraged to speak up, they communicate that. So, a lot of the product offering and the service offering at the stores has really come from those conversations that they constantly have and the feedback that they get from the store managers and the store staff.

BRIAN KENNY: Yeah, makes perfect sense. Thank you so much for joining us today.

TATIANA SANDINO: Thank you so much, Brian.

HANNAH BATES: That was Harvard Business School professor Tatiana Sandino – in conversation with Brian Kenny on Cold Call. We’ll be back next Wednesday with another hand-picked conversation about business strategy from the Harvard Business Review. If you found this episode helpful, share it with your friends and colleagues, and follow our show on Apple Podcasts, Spotify, or wherever you get your podcasts. While you’re there, be sure to leave us a review. We’re a production of the Harvard Business Review – if you want more articles, case studies, books, and videos like this, find it all at HBR dot org. This episode was produced by Anne Saini, and me, Hannah Bates. Ian Fox is our editor. Special thanks to Rene Barger for his notes and his support. And thanks, as always, to Maureen Hoch, Adi Ignatius, Karen Player, Ramsey Khabbaz, Nicole Smith, Anne Bartholomew, and you – our listener. See you next week.