Management Tools For Creating
Government Responsiveness:

The Liquor Control Board of Ontario as a
Context for Creating Change












By Rosemary McInerney
and David Barrows

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Introduction

New approaches to management in the public sector are imperative as governments
enter the new millennium. Market dynamics have created challenges for public
organizations, with the emergence of the global economy, advances in technology,
increased societal demands, and the need to provide more social services with fewer
resources.1 As well, a widespread desire for increased organizational scrutiny has
increased the pressure for change, given more accessible globalized information
systems and heightened media attention critical of government inefficiencies in service
delivery. Response mechanisms have emerged within the private market to meet these
recent challenges but government organizations have been slower to respond. This is
understandable, given fiscal constraints and the bureaucratic process axiomatic to
governments. However, a new approach, which incorporates modern strategic
management tools, is necessary for the public sector to achieve improved performance
and overall service quality.

While current public policy models have certainly started to reflect a shift away from
traditional thinking about organizational design and public management, a systematic
process for creating and sustaining improved performance that reflects changes in the
environment is clearly absent. Evidence does exist to suggest change is affecting the
public sector, and this change is manifest in the metamorphosing structures and
processes of many public organizations. It is within this context that this case study is
presented.

The guiding principles in any strategic management process, whether in the public or
private sector, are about understanding what changes are needed, how to implement
and manage these changes, and how to create a roadmap for sustaining improvements
that lead to better performance. The difficulty in strategic management is the challenge
of laying a foundation for success in the future while meeting today’s challenges.2 The
primary tools available to organizations - for understanding, implementing, delivering and
managing services and change – are outlined in Diagram 1. This diagram is a brief
overview of a common public sector strategic management model3 (with the addition of
change management tools) used in the strategic planning process. This provides a

1 K. Kernaghan & D. Siegel, Public Administration in Canada. ITP Nelson: Canada, 1999. P. 3
2 Liam Fahey & Robert Randall, The Portable MBA in Strategy. John Wiley & Sons: U.S., 1994.
P. vi.
3 Sections of the diagram taken from Bryson, John M. Strategic Planning for Public and Nonprofit
Organizations. San Francisco: Jossey-Bass Publishers, 1988.

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dynamic method - not just a planning model - for evaluating the success of public sector
organizations in meeting customer demands in the new public management.

Strategic Management Model for
•External Assessment
Diagram 1:
Public Sector Organizations
•Internal Assessment

•Market Assessment

Review Performance
Information
& Renew Process

Gathering

Identify Critical Issues




Vision

Must
Mission
incorporate

Operational Plan based
change
on Strategic Plan
management

Development of Strategic Goals
issues


Formulation of Strategies for each Goal

Must Develop Annual Objectives


The application of this model helps to identify the components for success and the
capabilities of an organization in its strategic management planning. As illustrated, the
first step is information gathering, which identifies key market, industry and internal
organizational trends and opportunities that will impact the organization. Where
“market”, in the public sector contexts, refers to all relevant stakeholders. The
organization’s ability to respond to these critical strategic issues and challenges is
manifest in their vision and the mission statement describing what they do, with/for
whom they do it, their distinctive competence and why they do it.4 The strategic goals
and specific strategies for achieving these goals should be formulated in an operational
plan that also addresses change management issues. From this point, a review of this
process and performance should be ongoing.

In the overall context of these new issues and challenges, this paper presents a case
study of the Liquor Control Board of Ontario (LCBO) as an example of a government
service organization that has been relatively successful in utilizing this managerial
approach to assist with the achievement of stated organizational vision, mission and
goals. The LCBO is a crown corporation established to control the sale of liquor and to
promote responsible drinking within the province of Ontario. The LCBO is an excellent
case study for several reasons. First, it has incorporated many of the policy objectives in
the new public sector model and new market dynamics into its strategic management

4 Centre for Public Skills Training Report, p. 4.

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processes leading to improved performance levels and customer service. Secondly, the
LCBO is recognized as the largest buyer of alcoholic beverages in the world, with 1999
sales totaling approximately $2.5 Billion. Thirdly, the LCBO’s operations have drawn
attention in both the public and private sector. The LCBO exemplifies the possibilities for
change in the public sector. The private sector Retail Council of Canada named the
LCBO Innovative Retailer of the Year in 1997 and 1998. The case study examines best
practice benchmarks, and four related areas - industry analysis, stakeholders, service
performance, and change management – to determine overall value creation in the
LCBO’s performance.

PUBLIC SECTOR STRATEGIC BENCHMARKING

To evaluate the LCBO’s processes, activities and performance, it is useful to benchmark
the practices of competitors (both within and outside of their sector of commerce) that
have become leaders in their businesses. Examining a range of other benchmarks
provides a basis for evaluation and also helps to create a method for tapping into
potentially transferable organizational learning strategies. Of course, there are additional
factors to consider (i.e. purpose, stakeholders, etc.) since the LCBO is a government
organization. The LCBO regulates the pricing and distribution of alcoholic beverages in
Ontario, together with the Ontario Alcohol and Gaming Commission. Most provinces
within Canada have this type of regulating organization, with the recent exception of
Alberta.

Diagram 2 is a continuum that illustrates a three-dimensional range of best practice
possibilities for benchmarking the LCBO.

Diagram 2:

Organizational Benchmarking Continuum



Scope of Industry Benchmarks

Geographical Emphasis

Other Industries

Global

LCBO

Other Retail Industry
Domestic

Competitors


Regional
Industry Competitors


Public sector
Private Sector

Sector Emphasis of Benchmarks

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The LCBO’s position in the diagram illustrates the derivation of their organizational
benchmarks:
The LCBO looks beyond the government public sector to incorporate private sector
benchmarks;
The scope of their benchmarks extend somewhat beyond their industry (alcohol
beverage industry) to include the larger retail industry; and,
The geographical focus of their benchmarks tends to be more domestic than global.

The significance of these findings is twofold: the LCBO is targeting best practices that
are not limited to the government sector and their immediate industry, and this increases
it’s potential to learn from other organizational strategies. This study does not suggest
that success lies in setting targets stemming from the private sector; instead, it suggests
that much can be gained by moving beyond traditional boundaries for learning. While
there are numerous barriers and impediments to any organizational change, a greater
scope of consideration when setting benchmarks could help the LCBO to become more
successful.

Key Success Factors
The LCBO is uniquely positioned because it acts as a regulator and a retailer in the
alcohol beverage industry. While competing for customers and market share against
other wineries, breweries and distillers, it also functions in two other capacities: working
with industry associations to help retailers forge access and growth in export markets,
and collecting taxes from alcohol sales. As a wholesaler, the LCBO participates in
secondary customer segments, collecting license fees and regulating the activities of
Brewers Retail (beer distribution), Agency Stores, Duty Free Operations (i.e. border
crossings), Private Stock and Classics Private Stock, and Classic Catalogue shoppers.

Chart 1 provides an evaluation of competitor positioning in terms of capitalization base
and product offerings. The horizontal axis uses the following ranges: low is under $1 M,
medium is $1-10 M, high is $10-100 M and very high exceeds $100 M. The vertical axis
uses increments as follows: low is less than 10 different labels or product types, medium
is greater than 10 but less than 50 and high is over 50. While the chart lists only a small
sampling of competitors in the marketplace, it is clear that the LCBO dominates the
Ontario market with respect to both range of product offerings and sales revenue. As an
industry leader and extended arm of the government (acting as an arms length service

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provider), the LCBO transferred an unprecedented dividend of $800 Million to the
provincial government in 1999. Its channel power as a controller in the supply chain, its
access to government capital and its position as a regulator provides valuable strengths
within the industry. It should be noted that some industry competitors claim that this is
dual function as regulator and retailer provides an unfair advantage over competitors.

Comparative Chart of Competitors
Chart 1:

LCBO
Magnotta

HIGH
Frank N Brew
Vincor
Hillebrand

Pelee Island
UDV Canada
Corby

Inniskillin
Bacardi International Distillers

Brew-A-Brew
Wine Kitz
Labatts
Pillitteri
Kittling Ridge

oduct Offerings
Stonechurch
Cave Springs
Molsons
MEDIUM
Stoneyridge

Konzelman
Lakeview Cillars

Great Lakes Brewing
Old Credit Brewing
D’Angelos
Range of Pr
Neudstat Brewing
Sleeman

LOW
Brew By You
Trafalgar Brewery

LOW
MEDIUM
HIGH
VERY HIGH


Competitor’s Total Sales Revenues
The intensity of competition faced by organizations can provide a valuable strategic
management tool for identifying forces that determine competitive positioning and/or
barriers to optimized performance levels. The application of Michael Porter’s “Five
Forces Model”5 provides a useful analysis of the alcohol beverage industry in Ontario.
Diagram 3 demonstrates the intense competitive pressures from all of the five forces.
For example, on an international level, takeovers among global industry players in the
distillery business (e.g. the U.K.’s Diageo) have provided liquor producers with a greater
capital base and increased bargaining clout. The LCBO must respond to this dynamic
and anticipate changes that may result (i.e. lobby legislative changes in LCBO’s
regulatory scope). Likewise, this highlights the forces of globalization and the increased
the appeal of wines from countries like Australia and New Zealand, which may adversely
affect the sales or revenues from domestic products. The fall of world trade barriers has
already eroded the ability of the Canadian government to protect its domestic alcohol
beverage industry.



5 David Aaker, Strategic Market Management. John Wiley & Sons: U.S., p. 85.

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Diagram 3:

Five Forces in Alcohol Beverage Industry


Threat of New Entrants

•Entrance of other international companies like Diageo which

controls United Distillers and Vintners (UDV has large capital and
export links to control supply).

Bargaining
•Growth of U-brews (500 outlets) and discount products that provide
quality taste at cheaper price than Ontario wines & beers
Power of

Bargaining Power of
Suppliers
Buyers


•High supplier power
of the LCBO given
Industry Rivalry
•Retail customer power

legislative protection
increasing as
and control in buying
substitute buyer

and distribution
•Few large competitors but intense
channels increase
decisions.
rivalry between medium and small size
•81% of LCBO

•Ontario suppliers
manufacturers who are highly
revenues from retail
have some power due
committed. Exit barriers high with high
• Wholesale buyers

to their strength in
fixed costs of capital and investments
(I.e. agents and
alliance networks like
(planting, harvesting, processing,
licensees) no longer

VQA and government
marketing and distribution). Rivalry is
dependent on LCBO
desire to protect and
also high with wide product lines and
with new legislation
grow the domestic

substitutability (increased by
that allows them to
industry
globalization). Dominance of LCBO
source their products
•The government has
and larger suppliers.

and order from the
large control over
producer
pricing and regulatory

• LCBO power as a
structure, but limited
largest buyer and
by NAFTA and WTO
control of shelf space,

Threat of Substitute Products
consumer product
offerings, etc.

•High substitutability of purchasing at other new age, more price competitive U-

brews that offer substitute or comparable product offerings
•Type of alcohol beverage purchased may swing with economic factors (I.e. when

disposable income shrinks, consumers may substitute wine for beer)
•Increased interest in non-alcoholic coolers may cut market size growth in

alcohol beverage industry and LCBO power

The complex effects of these dynamics have resulted in many new customer demands,
which the LCBO must address if it is to improve performance and continue to add value
as a government organization. For example, there has been a proliferation of new
products within LCBO stores, as consumers are increasingly interested in accessing new
flavours. Interest in the growing market of u-brews (stores that help consumers produce
and bottle their own beer) and u-vints (consumers produce and bottle their own wine)
has increased, as these outlets provide new flavours of discount wine and beer and
threaten the traditional supply channel control of the LCBO.

The LCBO has tried to incorporate an analysis of these dynamic forces into their
strategic planning process on both a short and long-term basis. The LCBO uses a long-
term planning process with a five-year time horizon and annual strategic reviews.
Weekly “roll out” meetings among senior management staff are used to check

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quantitative and qualitative performance measurements against organizational targets.6
In addition, private sector practices such as the outsourcing of market research have
been used to continually gather and reassess industry information about retail
consumers and competitors.

The LCBO has included in its strategic plan:
A customer-focussed approach – how to provide higher customer value;
A branding vision and whole branding strategy;
An explicit identification of the LCBO’s strategic competitive advantage through
knowledge acquisition; and,
Quantifiable performance measurements as a “retailer” (this is a very progressive
accountability measurement and perspective for servicing in the public sector).

Despite its progressiveness, however, the LCBO largely uses industry-specific and
internally-driven benchmarks from what it calls a “Strategic Scorecard”.7 The scorecard
measures four key information sources: financial, customer research, competitive
analysis and employee research. The performance measurements from information
gathering sources (i.e. Customer Service Survey and Employee Survey) have set
performance benchmarks at ratings from 8 to 10 (out of a total of 10). While the best
external benchmark is the competitive analysis that looks at other industry competitors,
other industries (with the exception of the retail industry) and global retailers are not
considered.

The benchmarks set by the LCBO are high but it would be beneficial to look at best
practice benchmarks by giants such as Walmart or Chapters (the Canadian chain of
retail bookstores), who strive for 100% satisfaction in the retailing industry. If a customer
is not satisfied with a product or service, refunds are issued and these companies try to
understand and learn what can be done to prevent this in the future. While this
benchmark appears at first to be too costly, the relationship building and customer
retention rate may translate into huge dividends in customer loyalty and future sales
growth.8

While the LCBO does not appear to have any organizational benchmarks for measuring
communication and information flows across organizational departments, communication

6 Unfortunately, these measurements were not made available.
7 Based on interviews with senior management at the LCBO head office.
8 Joiner, Fourth Generation Management. RR Donnelly & Sons: U.S., P. 80-81.

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systems have been computerized much more than most other government organizations
(with the exception of the Ontario Lottery Corporation).9 In 1990 and 1991, stores and
warehouses were linked by computer to head office and a computerized network of
inventory and sales was added; as of 1999, approximately $80 million has been spent
on IT systems. An Intranet linking head office departments and bigger stores is
operational and future plans to extend this to all stores and to wholesalers is underway.

Notwithstanding the benefits of these technological communication systems, overall
communications are somewhat weakened by the limited use of cross-functional teams.
Cross-functional teams help to improve communication flows by building in layers of
redundancy that are important to prevent a real or perceived lack of information sharing.
For example, there is a recognized need to include the Social Responsibility Department
in most activities and programs and the department’s prestige is growing (evidenced by
its increasing budget and reporting directly to the CEO). However, the department’s size
is surprisingly small relative both to other departments (i.e. fewer personnel, smaller
budget, etc.), and the large role it plays in fulfilling the LCBO’s mandate to promote the
responsible use of beverage alcohol. Systemic policies or processes have not been
established to ensure growth in this area.

Benchmarking practices to stimulate growth through cross-functional team efforts (i.e.
measure number of teams, percentage of employee participation, percentage of
employee driven initiatives, etc.) would certainly help to further organizational learning
practices, build innovation and foster a greater shared culture. By allowing for new
systems to grow outside the formal organizational architecture (i.e. committees or task
forces developed in response to a need or issue), communications will increase and
emerging strategies will germinate.

STAKEHOLDER ASSESSMENT

Understanding the interests of stakeholders is extremely critical in public sector
management. Government responsiveness to these interests and the interests of
society as a whole are fundamental to service delivery and performance. Information
gathering is crucial and must be ongoing. Diagram 4 illustrates the various LCBO
stakeholders, and their proximity to the centre depicts their relative importance to the
LCBO’s success. The key drivers for positioning stakeholders in this chart were their

9 Based on interviews with management and discussion with government sector employees.

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importance to the LCBO’s growth, their threat if interests were not met, and their
importance given the LCBO’s rationale/mandate for existence.

Diagram 4:

Stakeholder Chart




Other Gov’t Ministries
Local Gov’t

Distillers


Licensees
Union

Taxpayers
Retail
Consumers


Fed’l Gov’t
LCBO
Agents
Employees



Prov'l Gov’t
Domestic
Industry Assns
Media

Suppliers
and Councils

Import Suppliers
Brewers Retail
Social Responsibility

Interest Groups
Interest Groups



The five most important stakeholders identified are retail customers, taxpayers, industry
associations, the provincial government and unions. Summary findings for these
stakeholders are presented in Chart 2, and additional comments about areas of concern
for the LCBO follow.

Chart 2:
Summary Findings of Stakeholder Assessment






Stakeholder
Importance to
Threat to LCBO if
Importance to
Overall Success

LCBO Growth
Interest Not Met
LCBO’s Mandate




If customers are
The people of Ontario
Customer surveys indicate
Retail
Retail customers
dissatisfied, they will buy
are the LCBO’s mandate
overall satisfaction rates
represent 81% of the
from other competitors,
- to set fair prices, and
that are improving
Customer
LCBO’s revenue and are
and this will weaken the
regulate the sale of and
annually, and the LCBO’s

their primary marketing
ability of the LCBO to
distribution of alcohol.
new branding strategy
target.
control issues associated
(segmenting customers
with the sale of alcohol
into 5 categories) has
(i.e. sale to minors).
helped to identify more
specific needs.

Taxpayers fund the
If taxpayer interests are
Taxpayers must believe
Taxpayers concerns -
Taxpayer
capital investments
not met, increased media
that the LCBO adds
affordable quality
through taxation and
attention may be critical of
value, and that the sale
products, quality service,

their political voice.
the organization, which
of liquor should be
and regulated responsible
could lead to reduced
government regulated.
use of alcohol - are
funding or the threat of
satisfied since they still
privatization.
favour government control.


The LCBO’s product
Suppliers have a direct
Associations represent
Industry associations have
ff i
d
il bilit
i fl
d t
i d t i t
t t
t b
ti l l

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Document Outline

• By Rosemary McInerney
• and David Barrows
• VALUE CREATION
• LCBO Publications
• APPENDIX 1:OPERATING HIGHLIGHTS
  • APPENDIX 2:PERFORMANCE HIGHLIGHTS
  • LCBO MARKET SHARE
    • Domestic
      • Imported
        • • • Total Regular Listings
              • Vintages Wines & Spirits
    • Duty-Free Listings

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