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1. Based on the course content, define motivation.

2. Name four external contingent rewards that an employer might use to have a positive effect on a worker’s performance.

3. Define intrinsic and extrinsic motivation.

4. Describe a company personnel policy from your personal experience that you believe has had a negative affect your performance at work or on the performance of someone you know.

5. What are the four chemicals, according to Simon Sinek, that affect motivation and what do these chemicals do?

Management 515

Motivation and Performance

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Classic Definitions
Motivation. The psychological forces that determine the direction of a person’s behavior in an organization, a person’s level of effort, and a person’s level of persistence
Explains why people behave the way they do in organizations
Can be manipulated by external forces
Nature of Motivation.
Direction. Possible behaviors the individual could engage in
Effort. How hard the individual will work
Persistence. Whether the individual will keep trying or give up when faced with obstacles

Here are the classic descriptions of motivation. You will find definitions similar to these in most books on management.
I believe this description to be inaccurate.
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My Definition
Motivation: An internal desire to elicit a pleasurable physiological response, i.e., the production of neurotransmitting hormones. This desire can be a consequence of a learned response to stimuli, the outcome of a logical assessment (an internal cost-benefit analysis), or the demand to satisfy some physical human need. It is the mildest form of addiction.

View this video: https://
www.youtube.com/watch?v=ReRcHdeUG9Y
This is a 45 minute video. Yes, that is a long video, but Mr. Sinek has done a very good job of capturing his book, “Why Leaders Eat Last,” in this video.
By watching this video, you do not need to buy and read his book.
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More Definitions
Intrinsic Motivation.
Desire to take an action for it’s own sake
Usually results in a physiological response, e.g., production of endorphins or dopamine
Extrinsic Motivation. Desire to take an action in order to receive an external reward or avoid a punishment
Pro-social Motivation. Desire to benefit or help others
Philanthropy. Taking action to better mankind
Misanthropy. Hatred or distain of humankind or human nature
Charity. Taking action to alleviate suffering in others

Two types of motivation exist: intrinsic (internal) and extrinsic (external).
In my view of the world, even extrinsic motivation is a precursor to a physiological response, i.e., you make a logical assessment that doing something will result in a dopamine response.
Pro-social motivation is a term used in many books on the topic of motivation. I do not consider this a separate category of motivation. In my view, philanthropic action (to better mankind) or charitable action (to alleviate suffering in one) is a logical assessment that the action is in the best interest of the individual—maximizing pleasure or minimizing harm.
Mentally healthy people act in their rational self interest. Mentally healthy people will not do things that cause them harm. I argue that even the exceptions are not exceptions.
The priest who accepts poverty, chastity, and humility to help others, in my mind is doing so because he is convinced that he will receive his reward in the afterlife.
The parent who risks life to save a child does so because of the logical assessment that the risk in action is less costly (harmful) than the harm of the death of the child.
Acts of generosity encourage the production of serotonin.
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Relevant to Business
Inputs. Anything a person contributes to his or her job or organization, e.g., time, effort, skills, knowledge, work behaviors
Outputs. Anything a person gets from a job or an organization, e.g., pay, job security, benefits, praise or recognition, positive feedback
Benefits. Compensation other than salary
Total Pay Package. Total value of all monetary compensation and benefits

These definitions of input and output are from the perspective of the employee.
From the firm’s perspective, the employee is a black box, into which you feed inputs (pay and benefits, instructions, policies) and from which the firm accepts outputs (work, ideas, or other actions).
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Business Theories of Motivation
Expectancy Theory. Motivation will be high when workers believe that high levels of effort lead to high performance and high performance leads to achieving desired outputs or outcomes (Victor Vroom)
Three Needs Theory. Posits that the needs for achievement, power, and affiliation affect the actions of people from a managerial context (David McClelland)
Maslow’s Hierarch of Needs. A model of how human’s seek to satisfy needs at progressively higher levels. Needs at a lower level must be satisfied before seeking needs at a higher level (Abraham Maslow)

You have seen the other two, so view this video on Three Needs Theory: https://
www.youtube.com/watch?v=an5MW6F03wk

Here is a popular model of Maslow’s Hierarchy of Needs.
If you need a refresher, view this 3 minute video: https://
www.youtube.com/watch?v=EH04OsNuvcw

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Maslow’s — Another View

Maslow’s original model actually had 8 levels. I read his book, “Maslow: On Motivation” and the distinction between the 8 and 5-level model is insignificant.
One point of trivia that I need to make on this topic. Almost all of the commenters of Maslow describe his Hierarchy of Needs as a theory. It is not.
A theory provides an explanatory framework for some observation, and from the assumptions of the explanation follows a number of possible hypotheses that can be tested in order to provide support for, or challenge, the theory.
The hierarchy cannot be decomposed into hypotheses that can be tested.
Is this distinction important? Probably not, but I prefer to be exact in presenting theses briefings.
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More Business Theories of Motivation
ERG Theory. There exist three universal needs—existence, relatedness, and growth—which constitute a hierarchy of needs and motivate behavior (Clayton Alderfer)
Motivation-Hygiene Theory. Posits that some outcomes that lead to higher motivation and job satisfaction and can prevent dissatisfaction. Unsatisfied hygiene needs create dissatisfaction; satisfaction of hygiene needs does not lead to motivation or job satisfaction (Frederick Hertzberg)
Equity Theory. Workers constantly evaluate the fairness of their work outputs or outcomes with respect to their work inputs (Stacy Adams)

Again, your have seen the other two, so look at this video on ERG Theory: https://
www.youtube.com/watch?v=W_DH2YYO0qE

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An Example of Equity Theory

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More Business Theories of Motivation
Goal Setting Theory. Focuses on identifying the types of goals that are most effective in producing high levels of motivation and performance and explaining why goals have these effects (Edwin Locke)
Operant Conditioning Theory. People learn to perform behaviors that lead to desired consequences and learn not to perform behaviors that lead to undesired consequences
Positive Reinforcement. Offer people outcomes they desire when they exhibit desired behaviors (get a cookie)
Negative Reinforcement. Eliminate or remove undesired outcomes when people exhibit desired outcomes (stop the beatings) (B.F. Skinner)

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More Business Theories of Motivation
Motivation Crowding Theory. Extrinsic motivators such as monetary incentives or punishments can undermine intrinsic motivation (Bruno Fey & Reto Jegen)
Self-determination Theory. A self-determined man chooses to behave in a manner that reflects his autonomy and his behavior and not to achieve an external reward or escape aversive environmental stimuli (Edward Deci & Richard Ryan)
Tournament Theory. Large differences between pay of a superior and subordinate motivates subordinates to compete for the reward (Edward Lazear & Sherwin Rosen)

View this video on Self-determination Theory: https
://
www.youtube.com/watch?v=pskp2rZ94RQ
The effects of Tournament Theory is most common in professional athletics, where you see the best in a specific area (who might only be slightly better than the next person) can demand huge salaries differences.
Look at CEO salaries. Men and women are given huge salaries because they are perceived to be the best and therefore demand tournament-like salaries. Even worse, the benefit packages usually include “golden parachutes” where the executive is paid a huge bonus, when the executive leaves the firm. So even if the executive does a poor job, destroys the company, and is fired, a huge bonus is received.
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If you must punish…
Downplay the personal element of punishment. Make it clear that you are dissatisfied with the performance or dysfunctional behavior, not the person
Try to punish dysfunctional behaviors as soon after they occur. Be certain that individuals know exactly why they are being punished
Try to avoid punishing someone in front of others. This can damage a person’s self-esteem. However, making organizational members aware that an individual who has committed a serious infraction has been punished is effective in preventing future infractions

The “carrot and stick” approach is an idiom that refers to a policy of offering a combination of rewards and punishment to induce behavior. It is named in reference to a cart driver dangling a carrot in front of a mule and holding a stick behind it.
If you are in a position to apply the stick, such must be done carefully.
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Pay and Motivation
Expectancy Theory. Instrumentality, the association between performance and outcomes, must be high for motivation to be high
Needs Theory. Pay is used to satisfy many needs
Equity Theory. Pay is given in relation to inputs
Goal Setting Theory. Pay is linked to attainment of goals
Maslow. Once basic needs are satisfied, pay becomes less influential in motivating performance

View this video: http://
www.ted.com/talks/dan_ariely_what_makes_us_feel_good_about_our_work
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Merit Pay
Bonuses. Compensation plan that bases pay on individual, group, or organization performance
Piece-rate Pay. Employee’s pay is based on the number of units that the employee produces
Commission Pay. Employee’s pay is based on a percentage of sales that the employee makes
Organizationally-based Merit Plans
Scanlon plan. Focuses on cost avoidance (reducing expenses or costs) and sharing based on savings
Profit sharing. Employees receive a share of an organization’s profits

Bonuses are a common form of contingent, extrinsic rewards: do this and get this.
Piece rate pay is the ultimate form on incentive. Amazingly, advocates for workers rights have denounce piece rate pay as exploitative.
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One PhD’s View
Equity and Expectancy. As long as pay is considered equitable and meets expectations, pay is not a motivator. It can, however, be a dissatisfier (Motivation-Hygiene Theory) when perceived as unfair or unexpected
Merit Pay. All pay-for-performance plans, except pure piece work, will be considered unfair and inequitable by some and have a net negative result on the firm. Pure piece work is considered exploitative
Pay is never #1. Pay has never ranked higher than 8th on any list of factors that motivate performance

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Alternate View Continued
Extrinsic rewards, if used, must be trivial, timely, and directly linked to the desired behavior

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Motivational tricks, e.g., new titles without increases in pay or responsibility, don’t fool anyone
Alternate View Continued

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The World is Changing
Knowledge workers. Value to firm is based on knowledge held by individual not on skills
Industrial to service-oriented. The United States is becoming a pure service-oriented workforce
Developing nations. Lesser developed nations can provide labor at lower costs
Communication costs. Communication transaction costs continue to decrease

View this video: http://
www.ted.com/talks/dan_pink_on_motivation
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Management 515

Human Resource Management

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Definitions
Human Resource Management (HRM). Activities that managers engage in to attract and retain employees and to ensure that they perform at a high level and contribute to the accomplishment of organizational goals.
Recruitment and selection
Training and development
Performance appraisal and feedback
Pay and benefits
Labor relations
Strategic Human Resource Management (SHRM). The process by which managers design the components of a HRM system to be consistent with each other, with other elements of organizational architecture, and with the firm’s strategy and goals. The objective of SHRM is the development of an HRM system that enhances the firm’s efficiency, quality, innovation, and responsiveness to customers

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HRM System
Adapted from Contemporary Management, 8th. Jones and Garth

Recruitment and Selection. Used to attract and hire new employees who have the knowledge, abilities, skills, and experiences that will help an organization achieve its goals.
Training and Development. Ensures that organizational members develop the skills and abilities that will enable them to perform their jobs effectively in the present and the future. Changes in technology and the environment require that organizational members learn new techniques and ways of working. Generally, firms hire people with the skills they need and only pay train them in special circumstances. However, sometimes, it is cheaper to teach a current employee new skills instead of paying the market rate for the skill with a new employee.
Performance Appraisal and Feedback. Provides managers with the information they need to make good human resources decisions about how to train, motivate, and reward organizational members. I side with Drucker and Deming and believe that formal performance systems have negative effects on firms. Nonetheless, if a firm insists on have a performance system, it must be equitable, unbiased, and designed to reward the behaviors the firm values.
Pay and Benefits. Rewarding high performing members with raises, bonuses and recognition. Some believe that increased pay encourages better performance. I disagree, but we will address that in the lecture on motivation. Benefits are a way to sweeten the pot. Some benefits, such as health insurance under the Affordable Care Act, are now mandatory. The total cost to the employer (pay and benefits) must be considered in making hiring decisions.
Labor relations. Steps that managers take to develop and maintain good working relationships with the labor unions that may represent their employees’ interests. Labor unions are becoming less and less relevant; however, firms must ensure that human resource departments meet the needs of the firm and properly address all matter of employer-employee relations.

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Contemporary Challenges
Eliminating exposure to sexual harassment or hostile work environment litigation
Accommodating employees with disabilities under the Americans with Disabilities Act of 1990
Dealing with employees who have substance abuse problems
Managing the effects of HIV-positive employees and employees with AIDs, Ebola, the flu, etc.

Claims of sexual harassment can be expensive for firms to defend in court. To protect the firm, management must ensure that:
Policies prohibiting sexual harassment and hostile work environments exists.
Employees are aware of the policies.
Policies are enforced.
No allegation is ignored. The decision might be to do nothing, but the investigation of the accusation must be performed.
The Americans with Disabilities Act (ADA) requires employers with 15 or more employees to provide qualified individuals with disabilities an equal opportunity to benefit from the full range of employment-related opportunities available to others. For example, it prohibits discrimination in recruitment, hiring, promotions, training, pay, social activities, and other privileges of employment. It restricts questions that can be asked about an applicant’s disability before a job offer is made, and it requires that employers make reasonable accommodation to the known physical or mental limitations of otherwise qualified individuals with disabilities, unless it results in undue hardship. What is reasonable and what is undue is a question still being addressed in the courts.
Sometimes, if might be cost effective to treat employees with substance abuse issues, however, a firm should always have a policy to establish expectations.
Dealing with employees with communicable diseases is a very complex issue. Read the document Moodle, “Infectious Disease in the Workplace.”

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Legal Environment
Equal Employment Opportunity (EEO). The right of all citizens to the opportunity to obtain employment regardless of their sex, age, race, country of origin, religion, or disabilities
Equal Employment Opportunity Commission (EEOC) enforces employment laws
Americans with Disabilities Act of 1990. Prohibits discrimination based on disability. Requires reasonable accommodation for firm’s with more than 50 employees

In the United States, laws protecting employment exist. The Equal Employment Opportunity Commission (EEOC) is the federal agency that administers and enforces these laws. The EEOC investigates discrimination complaints of race, color, national origin, religion, sex, age, disability, genetic information, and retaliation for reporting, discriminatory practices. The Commission also mediates and settles discrimination complaints and is empowered to file civil discrimination suits against employers.
The EEOC has been criticized for some of its rulings, such as advice that requiring a high school diploma from job applicants could violate the Americans with Disabilities Act. The advice letter stated that the longtime lowest common denominator of employee screening must be “job-related for the position in question and consistent with business necessity.” The EEOC has been criticized for its heavy-handed tactics. Based on a statistical analysis of personnel and promotions, EEOC argued that one firm was systematically excluding women from high-earning positions in commission sales, and was paying female management lower wages than male management. The firm counter-argued that the company had in fact encouraged female applicants for sales and management, but that women preferred lower-paying positions with more stable daytime working hours, as compared to commission sales which demanded evening and weekend shifts and featured drastically varying pay. The courts ruled in favor of the firm, noting that the EEOC had not produced a single witness who alleged discrimination, nor had the EEOC identified any Sears policy that discriminated against women.
The EEOC was a long-standing approach to arguing discrimination: post hoc, ergo propter hoc. The EEOC assumes that if the demographics of your workforce are not identical to the demographics of the local community, then discriminatory practices exist and you must prove they do not—in essence, guilty until proven innocent.

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Legal Environment

Here are the major laws passed in the last 50 years that address employer obligations in the hiring process.
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Definitions
Recruitment. Activities that managers engage in to develop a pool of candidates for open positions
Selection. The process that managers use to determine the relative qualifications of job applicants and their potential for performing well in a particular job
Outsourcing
Using outside suppliers and manufacturers to produce goods and services
Using contract workers rather than hiring them

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Human Resource Planning (HRP)
Activities that managers engage in to forecast their current and future needs for human resources
Demand forecasts. Estimates the qualifications and numbers of employees the firm will need given its goals strategies
Supply forecasts. Estimates the availability and qualifications of current employees now and in the future, as well as the supply of qualified workers in the external labor market
Gap analysis. The analysis of knowledge, skills, and abilities (KSAs) of the current workforce and those KSAs that are or will be needed

The planning processes of firms should not only define what will be accomplished within a given time, but also the skills that will be needed to achieve the defined business goals (e.g., knowledge, skills, abilities, and training of employees and number of employees).
Firms should evaluate the skill mix of the workforce on a regular basis to ensure that the workforce is moving the firm in the desired direction. The overall objective of human resource planning is to ensure the best fit between employees and jobs, while avoiding workforce shortages or excesses. The three key elements of the HR planning process are forecasting labor demand, analyzing present labor supply, and then taking action to balance projected labor demand and supply.
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Job Roles
Job Analysis. Identifying the tasks, duties and responsibilities that make up a job and the knowledge, skills, and abilities needed to perform the job
Job analysis methods
Observing what current workers do
Having workers and manages fill out questionnaires
Job compensation should be proportional to complexity

Job analysis is a process of collecting information about a job. The process results in two sets of data: job description and job specification.
Job Description provides both organizational information (e.g., location in hierarchy and authority) and functional information (what the work is). This information gives the worker, analyst, and supervisor a clear idea of what the employee must do to meet the demand of the job. The job description must:
–indicate the scope and nature of the work including all-important relationships.
–be clear regarding the work of the position, duties etc.
–be specific about the kind of work, complexity of the work, the degree of skill required, the extent to which problems are addressed, and the extent of employee’s responsibility for each phase of the work
Job Specification is the information about:
–Physical specifications: include the physical qualifications or physical capacities that vary from job to job to include physical features like height, weight, size, vision, hearing, ability to lift weight, ability to carry weight, health, age, capacity to use or operate machines, tools, equipment etc.
–Mental specifications: include ability to perform arithmetic calculations, to interpret data, to read, to plan, judgment, ability to concentrate, ability to handle variable factors, general intelligence, memory, etc.
–Emotional and social specifications: emotional stability, flexibility, social adaptability in human relationships, personal appearance including dress, posture, etc.
–Behavioral Specifications: include judgments, research, creativity, teaching ability, maturity, self-reliance, dominance, etc.
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External Recruiting
Looking outside the organization for people who have not worked at the firm previously.
Access to a potentially large applicant pool
Ability to attract people who have the skills, knowledge, and abilities an organization needs
Brings in newcomers who may have a fresh approach to problems and current with the latest technology
Targeted recruiting includes advertising needs in newspapers and at open houses, career fairs at colleges, and recruiting meetings with groups in the community

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Internal Recruiting
Managers turn to existing employees to fill open positions
Internal applicants are already familiar with the organization
Managers already know candidates (better the devil you know than the devil you don’t know)
Can help boost employee morale
An internal recruiting only policy can limit innovation in a firm

Whether a firm looks to the outside or the inside to fill positions is a function of judgment. Both approaches have their advantages.
Hiring from within means you hire someone who as familiar with the firm and the form’s culture, has a proven track record, and has a proven record as a fit for the firm.
Hiring from without is the opportunity to bring in new skills and new ideas.
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How to Differentiate Candidates?
Adapted from Contemporary Management, 8th. Jones and Garth

Testing of all kinds is acceptable as long as it meets a legitimate business need.
Laws vary from state to state about what you can do to evaluate a candidate. For example, in some states you cannot ask a candidate whether the candidate has been convicted of a felony. The belief is that even felons need a fair chance to find a job. Others, disagree.
However, if you can show a legitimate business need, the courts tend to side with the employer.
Here are two examples. At one time, the airline industry required flight attendants (who were called stewardesses back then) to be females under 103 pounds. The argument was that smaller women were a business necessity to save fuel. Smaller people caused the air craft to burn less fuel. The fact that they were all attractive was only a coincidence. The courts did not buy the argument since the airlines did not apply the same standard to pilots or passengers.
On the other hand, the restaurant Hooters only hires women of a specific body type. Hooters argues that the restaurant has an image to uphold. In this case, the court has sided with the restaurant.
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Training and Development
Training. Teaching organizational members how to perform current jobs and helping them to acquire the knowledge and skills they need to be effective performers.
Development. Building the knowledge and skills of organizational members to enable them to take on new responsibilities and challenges.
Needs Assessment. An assessment of which employees need training or development and what type of skills or knowledge they need to acquire

How much a firm spends to train and develop its workforce is a matter of judgment. In general, firms hire the skills it needs and does not pay for additional training.
However, it is sometimes better for the firm to pay for the training for a specific skill. For example, if a firm is unable to find a qualified candidate with a specific skill, it might train an existing employee in that specific skill.
Some firms encourage formal education. For example, Northrup Grumman will pay the full cost of higher education. If you already had a PhD, Northrup will pay for a second one. The company believes that this reflects well on its reputation and is worth the cost.
Firms must constantly make the cost-benefit analyses for its training and development policies.
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Performance Appraisals
The evaluation of employees’ job performance and contributions to the firm’s performance
Evaluates traits, behaviors, results
Traits. Loyalty, dedication, dependability, dedication
Behaviors. Timeliness, friendliness, attitude, communication skills
Results. Outcomes (or outputs) vs. goals
Usually on some Likert-like scale

A performance appraisal is a systematic and periodic process that assesses an individual employee’s job performance in achieving organizational goals. Other aspects of individual employees can be considered as well, such behavior, potential for future improvement, strengths and weaknesses, etc. Historically, appraisals have been conducted annually; however, many companies are moving towards shorter cycles, even weekly. Appraisals can be used to provide feedback, counseling, and developing employees, and as a way to justify compensation, job status, or disciplinary actions.
A central argument for the use of appraisals is performance improvement, establishing as a basis for employment decisions (e.g. promotions, terminations, transfers), to aid with communication (e.g., letting employees know how they are meeting organizational expectations), to establish personal objectives for training, and as a means to document actions in in wage and salary administration.
Appraisals can aid in the formulation of job criteria and selection of individuals who are best suited to perform specific jobs, as a guide for employee career development, and an aid to work motivation.
At this point, I must voice my opposition to performance appraisals. Both Peter Drucker and W. Edwards Deming argue that appraisals have a net negative effect on firms. I concur. The biases that we all hold make the creation of a totally objective performance evaluation system (and its implementation) a near impossibility. No matter how fair you think you are, someone, somewhere will disagree with you. These perceptions of unfairness (remember Equity Theory and Expectancy Theory) have negative outcomes that overshadow the potential positive aspects of a performance system. I admit this puts firms is a tough position. Without the documentation of performance appraisals, how do you justify management decisions such as promotions, raises, and punishments?
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Sources of Evaluation Information
Reports
Supervisors
Self
Subordinates
Customers
Peers
360

Many types of appraisals exist.
Self–Self appraisals can supplement manager view.
Peer appraisal–Coworkers provide appraisal; common in team settings.
360 Degree–performance appraisal by peers, subordinates, superiors, and clients who are in a position to evaluate a manager’s performance. 360 evaluations are argued as the most objective (fairest) of any system. However, the cost of these evaluations have been empirically shown to exceed the benefit.
The most meaningful appraisals can be those rendered by outside parties, e.g., customers, who are not as affected by biases. Automated reports, e.g., sales reports, are the most objective, but forms must ensure they are evaluating the right thing—are the firm’s goals sales or profits?
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Types of Appraisals
Formal appraisals. An appraisal conducted at a set time during the year and based on performance dimensions that were specified in advance
Informal appraisals. An unscheduled appraisal of ongoing progress and areas for improvement

We have discussed formal appraisals.
I consider informal appraisals, where a supervisor sits down with the employees and chats about performance, to be the most useful. These sessions should be frequent—not so often as to interrupt the work, but often enough to ensure the employee gets feedback in a timely manner.

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Pay and Benefits
Pay
Includes employees’ base salaries, pay raises, and bonuses
Determined by characteristics of the organization, the labor market, the job complexity, and levels of performance
Benefits
Required. Social security, workers’ compensation, unemployment insurance
Optional. Health insurance, retirement, paid leave, day care, flex-time, telework
Cafeteria-style benefits plans allow employees to choose the best mix of benefits for them, but can be hard to manage

The take away from this slide is, firms must always consider the total cost of compensation—pay and benefits—when making hiring decisions.
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Policies
Pay policy
Leading. Firm pays workers more than prevailing rate
Matching. Firm matches prevailing rate
Lagging. Firm pays less that prevailing rate
Hiring
Preference to internal hiring
Preference to external hiring
Personnel
Dress
Relationships

A firm’s pay policy can have far-reaching affects on the firm’s performance.
To attract the best and brightest candidates, firms will often pay more than the market rate for a skill.
At times, a firm might want to pay below the market rate, e.g., when cash is tight and the labor market is soft.
In the long run, firm’s tend to regress to the market average.
Please read the article in Moodle on pay policy.
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Workforce Relations
Labor Relations. The activities managers engage in to ensure they have effective working relationships with the labor unions that represent their employees interests
Unions. Supposedly represent worker’s interests to management in organizations
Collective bargaining. Negotiation between labor and management to resolve conflicts and disputes about issues such as working hours, wages, benefits, working conditions, and job security

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Consider This
Both Drucker and Deming argue the performance evaluation systems have a negative effect on business
Complexity drives compensation, not amount of work. If you are doing the work of two people, hire another person
Labor union participation is at lowest level since 1950s
Policies must be codified
To ensure employees understand them
To overcome the presumption of responsibility
To protect the firm from litigation

Management 515

Leadership

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Definitions
Leadership. The process by which a person exerts influence over others and inspires and directs their activities to achieve group or organizational goals
Leader.
An individual who is able to exert influence over other people to help achieve group or organizational goals
Someone who has followers
Manager. A quasi-leadership role established by formal position within an organization

Here are some classic definitions.
I wish to emphasize the difference between a leader and a manger. In my view, leader and manager are roles. These roles are inherently in conflict. The leader wants change and the manager wants stability.
Leaders can emerge at any level. Managers only exist in formal organizational structures.
Leadership demands one thing—followers. Without followers, leaders are useless voices in the wind.
Followers can be willing or coerced. Willing followers believe in the leader, or the mission or the idea. Coerced followers will only follow as long as the coercion exists.
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Leader Role versus Manager Role
Manages work
Manages subordinates
Achieves results
Risk averse
Involved
Relies on position and authority
Leader
Manager
Effects change
Leads followers
Risk-taking
Facilitative
Relies on charisma and influence
Transformational
Consultative
Participative
Dictatorial
Authoritative
Transactional
Autocratic
Consultative
Democratic

You have seen this chart before.
I argue that pure managers and pure leaders do not exist in the real world.
All managers must lead from time to time and all leaders must manage once in a while. As leaders and mangers move left and right on this continuum, the mix of these tasks varies.
One person can assume both roles at the same time, however, an internal conflict then naturally exists.
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Leadership Style
The specific ways in which a manager chooses to influence others
Shapes the way the leader approaches the other principal tasks of leadership
Leadership style has a cultural component
European managers tend to be more people-oriented than American or Japanese managers
Japanese managers are group-oriented, while U.S managers focuses more on organizational goals
Affects the leader’s view of time horizons

Much has been written about leadership styles. Some will argue that you must do this or that, exhibit this or that characteristic, and follow certain rules at which point you will be a leader.
I suggest that you ignore these people.
Leadership styles are a function of the individual leader’s personality. What leadership style a specific leader uses is more a matter of how you define the leadership styles. No universal definitions exists.
In general, individuals are comfortable with one and only one specific set of characteristics. For the purpose of this discussion, let us call this a leadership style. Just like personality indices, leaders tend to fall into a limited member of styles which we will see in the following slides.
The better leader can adopt more than one leadership style. The best leaders can adopt many styles and apply the style that is best suited for the situation.
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Leadership Styles
No consensus exists on the definition of leadership styles
Transactional vs. Transformational
A transactional leader is concerned with the day-to-day. A better definition is manager.
The transformational leader is concerned with change
Common view of leadership styles
Authoritative
Democratic
Charismatic
Laissez Faire
Bureaucratic

Some will argue that leaders are wither transactional or transitional. I disagree with this bifurcation. In my mind, a transactional leader is really a manager. Feel free to disagree, but remember that in my view of the world, leaders seek change and managers seek stability. If no change is needed, then you do not have need of a leader.
The five styles listed in bullet three are the most commonly accepted. However, depending on the author of the book you are reading, hundreds of styles exist.
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Leadership and Styles
Many styles exist, no one style is best
Most people have a preferred style
Based on personality
Most comfortable
Few people can operate in more than one style
Over time, tend to regress to preferred style
Strive to understand all leadership styles and their impact
The more flexible you are in your leadership styles, the better leader you will be

This emphasizes what I said two slides previously. As an aspiring leaders, I would admonish you to:
–Understand how to define various leadership styles. This is not so important for the act of leading, but for your ability to communicate with others.
–Understand what leadership style with which you are most comfortable.
–Try to adopt and apply different leadership styles to different situations.
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SUPPORTING
Praise, listen, and facilitate
For people who have
High Competence
Variable Commitment
EMPOWERING
Turn over responsibility for day-to-day decision making
For people who have
High Competence
High Commitment
COACHING
Direct and support
For people who have
Some Competence
Some Commitment
DIRECTING
Structure, control, and supervise
For people who have
Low Competence
High Commitment
Low DIRECTIVE BEHAVIOR High
Low SUPPORTIVE BEHAVIOR High

Here is one model of leadership.
There is nothing wrong with this model, except I believe it is incomplete.
7

DOMINATOR
High on task, low on people
Big boss. Runs the show
Sets high expectations
Concerned with results
Suppresses disagreements
Gets things done
Competitive and confident
Doesn’t listen to others
AVOIDER
Low on task and people
Keeps a low profile
Hesitant and cautions
Doesn’t want to make mistakes
Follows tried and true
Avoids conflict/disagreements
Doesn’t provide direction
Carries out what others want
COLLABORATOR
High on task and people
Sets high expectations
Concerned with results
Involves people in decisions
Deals openly with concerns
Seeks win-win solutions
Encourages responsibility
Interdependent
ACCOMMODATOR
Low on task, high on people
Warm and friendly
Keeps people happy
Smoothes over conflicts
Easy going, overlooks mistakes
Lets others decide
Loose structure
Low EMPATHY High
Low ASSERTIVENESS High

Here is another model. Same issue.
8

Strengths Weaknesses
Commanding
Goal oriented
Emphasis on bottom line
Makes quick decisions
Willing to take risks Pursues big, risky challenges
Makes abrupt decisions
Lack of esprit de corps
Lack of communication
Innovating
Idea oriented
Emphasis on people
Entertaining, fun
Willing to take risks Lots of ideas, goals
Lack of clear priorities
Difficulty with follow through
Hard to gain commitment
Deliberating
Fact and process oriented
Emphasis on precision
Stresses academic credentials
Lots of quality control Linear thinking
Unwilling to take risks
Tends to miss deadlines
Blind to the big picture
Caring
Relationship oriented
Emphasis on team
Fun, warm, friendly
Loyal to the cause Avoids conflict, change
Makes decision slowly, if ever
Not clear about purpose or goals
Tendency towards bureaucracy

This model is closer to the classic five, but also incomplete.
9

Innovator Developer Activator Maximizer Stabilizer
Design Design and Build Build Build and Maintain Maintain
Bringing new ideas and original solutions to the marketplace. Thinking outside the box to solve problems Taking action on original solutions and learning along the way. Motto: Ready, aim, fire Moving forward to achieve challenging goals. Overcoming obstacles and getting things done Embracing the good of the past while making new changes. Working together with all kinds of people Keeping things running smoothly and efficiently. Creating systems that meet the highest standards of accountability
Creativity Flexibility Tenacity Diplomacy Consistency

Principal Characteristic

Same issues here. OK, but incomplete.
10

Style Description When to Use Weaknesses
Commanding
Coercive Dictatorship
“Do what I say” When time is scarce or in a crisis Members can feel stifled as they are treated as workers and not asked for an opinion
Visionary
Authoritative Mobilizes people towards vision
“Come with me” When a new direction is needed Lacks an ability to help team members understand how they get to a goal
Affiliative Focuses on emotional needs over work needs
“People come first” Best used for healing rifts and getting through stressful situations Confrontation and emotionally distressing positions can be avoided
Democratic Uses participation, listening to both the bad and the good
“What do you think?” To gain valuable input from employees and to gain buy-in when there is time to do so Can be lots of listening, but very little effective action
Pacesetting
Builds challenging and exciting goals for people
“Do as I do, now” When the team is already highly motivated and competent Can lack emotional intelligence
Coaching Connecting corporate goals while helping people find strengths and weaknesses
“Try this” When individuals need to build longer term strengths Can appear to be micromanaging

And again.
11

Style Definition Style Definition
Autocratic Leader is in total control of the group and task. Importance is focused at the top Laissez Faire Leader withdraws authority and influence in favor of permissiveness
Consultative Leader consults those affected by a decision. Those affected have a voice Nomothetic Leader emphasizes the requirements of the institution rather than the needs of an individual in the group
Participative Leader and group discuss and decide together. Those affected have a voice and a vote Idiographic Leader emphasized the needs of an individual rather than those of the institution
Democratic The majority opinion of the group determines the course of action Situational Appropriate approach is determined by the situation: traits of the leader and group and the task at hand

The classic five plus three. Better, not perfect.
So far you have seen dozens of terms for leadership style. Some are similar, some contradictory.
Understand that no consensus exists. Nonetheless, you need to decide in which category (style) your personality falls. This will be the style that you naturally adopt.
If that style is not the best for a particular situation, not all is lost. At least you are aware and can try to adjust to a more appropriate style.
12

13
Servant Leader
Term coined by Robert Greenleaf in the 1970s. Emphasizes:
Social responsibility over selfishness
Service, honesty, fairness
Some claim it is the way ahead in the world
Places the needs of the employees over those of the stockholders, other stakeholders, or the firm
Antithetical to human nature
Why would a firm want a servant leader?
Seems to be an effort by leftists to taint business schools (one PhD’s opinion)

A more recently coined style is that of servant leader.
Servant leadership is both a leadership philosophy and set of leadership practices. The servant-leader shares power, puts the needs of others first and helps people develop and perform as highly as possible.
The most common division of leadership styles is the distinction between autocratic, participative and laissez-faire leadership styles. Servant leadership can be associated most closely with the participative leadership style. The highest priority of a servant leader is to encourage, support and enable subordinates to unfold their full potential and abilities. This leads to an obligation to delegate responsibility and engage in participative decision-making.
The servant leadership approach goes beyond employee-related behavior and calls for a rethinking of the hierarchical relationship between leader and subordinates. This does not mean that the ideal of a participative style in any situation is to be enforced, but that the focus of leadership responsibilities is the promotion of performance and satisfaction of employees.
I have no objection to servant leadership, in fact, I believe it is the best style for government and philanthropic organizations. I am not convinced that it is best for business. I fall back to the adage that, “if everyone is in charge, then no one is in charge.”
13

14
Power
A leader only uses power through coercion
A leader with willing followers does not need power
A leader with unwilling followers must use coercion:
Physical force
Bribery
Blackmail
Threats
Deceit
In business, power is an element of the role of manager
Legitimate. The authority that a manager has by virtue of his or her position in the firm
Reward or Punishment. The ability of a manager to give or withhold tangible benefits or impose penalty

I have addressed these concepts previously.
The leader with willing followers does not need power, or you might say that the power the leader wields is the ability to positively influence others.
If you need to wield power in the form of rewards or punishment, then you are acting like a manager.
14

15
Sources of Managerial Power
Relevant
Coercive
Expert

One model holds that power comes in three flavors.
I would argue that expert and relevant power can be exercised by a leader, but coercive power falls within the toolkit of the manager.
How you view power is up to you, just be aware that not all power is the same.
15

16
Coercive Power
The ability to punish others
Limited in effectiveness and application. Can have serious negative effects on morale and performance
Ways for managers to exercise coercive power in business
Reprimands
Adverse personnel actions
Pay adjustments
Adjustments to benefits
Reassignment
Dismissal

If you msut use coercive poer, you are a manager or a very bad leader.
Yes, power does flow from the end of a gun, but it does not develop willing followers.
16

17
Expert Power
Power that is based on special knowledge, skills, and expertise
Special knowledge
Skills
Abilities
Expertise
Tends to be used in a guiding or coaching

Expert power flows form the leaders ability to convince followers that the leader knows best.
17

18
Relevant Power
Power that is derived from subordinates’ and peers’
Respect
Admiration
Loyalty
Trust
Possessed by managers who are respected, liked, and whom subordinates hold as a role model
Relevant power is most often associated with leaders. We follow because of a belief in the leader or the cause

This is more akin to charisma or the power of personality.
18

19
Leadership Traits
Intelligence
Expertise
Dominance
Self-confidence
High energy
Tolerance for stress
Integrity
Honesty
Maturity

Most authors will tell you that good leaders must exhibit these characteristics. In the U.S. military, the leadership manuals tell us that these characteristics are essential for the officer corps.
Having grown up in that environment, I can agree that in the specific realm of military operations, an officer who does not exhibit these characteristics will fail. I am not convinced that these characteristics are all vital in business.
No consensus exists on what is the right set of leadership characteristics. I do not believe that such a definition is necessary. Many successful leaders have lacked many of these characteristics.
As an example, I (as an individual) will not follow someone who is not honest. On the other hand, 62% of supporters of Hilary Clinton admit that she is not honest, yet they will vote for her.
What is important depends on the individual.
19

20
Nurture vs. Nature
Anyone can be a leader
All you need to lead is followers
Leaders exist at all levels
Leaders are formal or informal
Formal leaders often have a management role
Informal leaders are those people who inspire others to get things done
I can teach you the academic skills, but…
For some critical leadership traits, you either have them or you don’t
These traits differentiate bad from good from great

Some final thoughts…
20

21
Good Leaders…
Lead by example. Always do the right thing, even when it is hard, and insist that others do likewise
Are passionate about the mission. A leader without passion will lose followers. Honest passion can inspire others.
Possesses strong organizational skills. A disorganized leader is chasing his own tail. Disorganization breeds disorganization, and therefore, inefficiency.
Delegate. First, you can’t do everything. Second, a great leader creates other leaders through delegation. This is an argument for servant leadership

22
Good Leaders…
Never deny responsibility. Even though you delegated work to a subordinate, the ultimate responsibility still rests with you.
Communicate effectively. The leaders primary task is effecting change. This demands the ability to clearly convey a vision in many media and in ways to reach everyone.
Are honest. Bad news never gets better with age. Good leaders do not obfuscate.

23
Good Leaders…
Are good listeners. Part of being a good communicator is being a good listener. If all you want to do is talk, you are not leading. When you listen more, you get to the heart of things much faster.
Know their people. Keeping track of names, birthdays, marriages, and children pays huge dividends with some subordinates. Those with the natural ability are truly blessed. The rest of us need to write things down.
Are often followers. If you are leading without following, you’re a dictator. A leader-follower finds value in the team, and inspires the team to higher performance.

Here is another model of leadership. I do necessarily agree with this model, but I want you to watch them to form your own opinion.
Dr. Maxwell, in my opinion, confuses the line between leadership and management, but he has a good message.
John Maxwell: https://www.youtube.com/watch?v=aPwXeg8ThWI
23

24
Another View
General Kurt Gebhard Adolf Philipp Freiherr von Hammerstein-Equord.
“I divide my officers into four classes as follows: The clever, the industrious, the lazy, and the stupid. Each officer possesses two of these qualities. The man who is clever and industrious, I appoint to the general staff. The man who is clever and lazy is destined for high command because he has the nerve to deal with all situations. Use can, under certain circumstances, be made of the stupid and lazy. But, whoever is stupid and industrious must be got rid of at once”

This German General was the German Army Chief of the General Staff during WWI. In his view, the best leader is clever and lazy.
I cannot argue against his position. I suspect most authors of books on management would argue against lazy, but I see the general’s point.
Now, the general was talking about picking the right jobs for different officers, but I find it interesting that the general wants the industrious to serve on the staff (to be managers) and the lazy to be leaders.
If you only need a leader which you need change, then the lazy leader will pick the path of least resistance to change.
Please feel free to disagree with me.
24

25
Sex and Leadership
The number of women managers is rising but is still relatively low in the top levels of management
Historical experience suggests that men and women are different. Politically incorrect, but true
Women are nurturing, supportive, and concerned with interpersonal relations
Men are task-focused
For task-oriented endeavors, e.g., manufacturing, men may be a better fit
For people-oriented endeavors, e.g., knowledge work, women may be a better fit

Politicians seeking votes will argue that women suffer discrimination in the business world and only the politician can fix it. This is garbage.
I argue that women are less prevalent in senior management roles for many reasons that have nothing to do with discrimination:
–Self-selection. Women tend to select job roles that do not lead to senior management, e.g., child care, health care.
–Child bearing. When women temporarily leave the job market to bear children, they fall behind their male peers in competing for advancement
–The last hundred years of U.S. industry has demanded task-focused skills. Men tend to have a greater aptitude for task-focused leadership styles
I also argue that times are changing and the need for participative management is increasing. Women are better suited for this leadership style. All things being equal, I predict that in the next 50 years, more women will be in senior executive roles then men in the United States.
Does the “good ole boy network” still exist (where men executives favor their men friends over women for promotion)? Yes, I admit it, it does, but it is not as prevalent as many politicians claim.

26
Different choices

Neil Ritson

Strategic Management

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Strategic Management

Contents

1 Introduction 7

2 Why Strategy? 8

3 The Formulation of Strategy 9

4 Schools of strategy 11

5 Levels of strategy 13

6 Process of strategy 16

7 Types of Strategy 2

8 Stakeholder theory 29

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Contents

9 External Analysis 33

10 Internal Analysis 39

11 Integration 44

12 Human resources management HRM 47

13 Culture 51

14 SWOT Analysis 63

15 Generic Strategy 66

16 Managing change 72

17 Growth and Decline 81

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Contents

18 Globalization and International Strategy 90

19 The Basis of Strategy: Structure 98

20 References 113

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Introduction

1 Introduction
This compendium provides a comprehensive overview of the most important topics covered in a
strategict course at the Bachelor, Masters or MBA level. The intention is to supplement renowned strategy
textbooks.

This compendium is designed such that it follows the structure of a typical strategy course.

Throughout this compendium theory is supplemented with examples and illustrations.

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Why Strategy?

2 Why Strategy?
In ancient Greek, ‘stratos’ was the term for the army and so in military terms, ‘strategy’ referred to ‘the
act of the general’.

So, the origins of ‘strategy’ – the ‘art of the general’ – comes from the military arena – from China came
“The Art of War” by Sun Tzu, from Prussia came “On War’ by Carl von Clausewitz.

In recent times the defeat of the Nazi regime in Germany was arguably due to a dire strategy by the
leader of fighting a war on two fronts – West (USA, UK) and East (Russia) – so while the armed forces
were highly skilled and had technological superiority the strategy was a huge mistake.

Strategy nowadays is ‘big stuff ’ – the top levels of the organisation are generally involved in preparing
plans for the future – for finance, and growth by acquisitions, innovation in products, developing new
markets and increasing internal efficiency. The recent rise of Apple is due to a combination of these factors.

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The Formulation of Strategy

3 The Formulation of Strategy
Introduction

There is a need in modern times for strategies to achieve agreed goals and objectives, giving a sense
of purpose and direction to the organisation, because of recent technological and social changes and
competition from rival organisations.

So a strategy is some sort of future plan of action, usually understood as being undertaken by senior
management at a high level of abstraction. Note this is not always the best definition of strategy, as we
will see later when we discuss levels of strategy.

Different Definitions

A strategy is

“The art of war*, especially the planning of movements of troops and ships etc.,
into favourable positions; plan of action or policy in business or politics etc.”

(Oxford Pocket Dictionary)

We don’t usually use dictionaries in academic work – but this is the history of the word.
*You can refer to The Art of War by Sun Tzu

Here are some alternative definitions:

Hofer and Schendel define it as
“the mediating force or ‘match’ between the organisation and the environment.”

(Hofer and Schendel 1979)

Alfred Chandler Jr. suggests:

“the determination of the basic-long term goals and objectives of an enterprise, and the adoption of
courses of action and the allocation of resources necessary for carrying out these goals”. Chandler (1962)
(Alfred Chandler Jr. is one of the most famous researchers in strategy)

Porter relates strategy to the success or failure of a company “obtaining a competitive position or series of
competitive positions that lead to superior and sustainable financial performance”. Michael E Porter (1991)

(Porter is even more famous than Chandler now – see “Positioning School” later)

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The Formulation of Strategy

Quinn stresses integration:

“the pattern or plan that integrates an organization’s major goals, policies and
action sequences into a cohesive whole…strategy helps marshal and allocate

an organization’s resources into a unique and viable posture.”
James Brian Quinn, Strategies for Change: Logical Incrementalism (1980).

Andrews stresses the “raison d’être”, the reason for being:

“the pattern of objectives, purposes, or goals and the major policies and plans
for achieving these goals, stated in such a way as to define what business the

company is in or is to be in and the kind of company it is or is to be.”
Kenneth Andrews, The Concept of Corporate Strategy (1971)

Walt Disney’s Peter Pan

• Lost Boy: “Injuns! Let’s go get ’em!”
• John Darling: “Hold on a minute. First we must have a strategy.”
• Lost Boy: “Uhh? What’s a strategy?”
• John Darling: “It’s, er…It’s a plan of attack.” –

(from Grant 2004)

(Robert Grant is famous for the “Resource-based school” and for his work on the oil industry. He quotes
Peter Pan in a lighter vein!)

Mintzberg and Waters (1985) suggested there are several major ways to look at strategy, and identified
nine types of strategy. Mintzberg and others increased these by one to 10 in later books. We don’t need
to bother about them now.

However, a major distinction Mintzberg and Waters made is that strategies can ‘emerge’ over time by a
series of actions which are related by some internal managerial culture or paradigm. This is not about
strategy being flexible, but invisible! This is discussed later.

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Schools of strategy

4 Schools of strategy
Introduction – Definition – there are three ‘schools’ of strategy

Through the debate three ‘schools’ of strategy were born:

•

The ‘planning’ school

• The ‘positioning’ school
•

The ‘resource based’ school

The ‘planning’ school

Andrews, 1971, Ansoff, 1965

• Achieves a ‘fit’ between the organisational strategy and the environment in which it operates.
• Requires detailed and inflexible planning not suitable in turbulent markets.
• Uses ‘Product Life Cycle’ and other marketing theories
• Based on past trends, forecasts and stable structures and environments eg mature industries,

public sector
• Uses a very bureaucratic and rational process

Present

New

Existing product New product

Expansion ie,
increase in
market

Market
development

(sometimes called
‘exploration’)

Product
development
or innovation

Diversification

market

penetration

Fig 4.1 The Ansoff Matrix

Example: used in mature, stable markets and industries, public sector.

The ‘positional’ school

• Focuses on a rational, analytical approach of making strategy
• Attempts to place the organisation and its products in a favourable market or environment.
• Based on performance measurement and decision making tools.
• Emphasises competitive advantage

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Schools of strategy

Examples include:

– Porter’s (1980) work:
‘Five forces’ model of industries
Internal ‘value chain’
‘Generic’ strategies

– Boston Consulting Group Matrix – BCG – of four cells – cash cows, stars dogs and problem
children, based on income from market share and on potential market growth

High

High Low
Low

Market growth

Problem
child

Star Cash
cow

Dog

Market
share

Fig 4.2 The BCG Matrix

The ‘resource based’ school

Robert Grant 1998, Jay Barney 1991

• Looks to the internal environment instead of the market
• Incorporates the ‘core competence’ approach of Prahalad and Hamel, 1994
• Based on an ‘inside-out’ approach suggesting that the competitive advantage of an

organisation is based on its own distinctive resources, capabilities and competences.

However

• Danger of ignoring the external environment.
• Grant and others do not consider culture and HRM.

Key points

These schools are not important in individual analysis but in theoretical essays and assignments

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Levels of strategy

5 Levels of strategy
Most academics classify strategies into three levels:

• Corporate
• Business –
• Functional/Operational –

Corporate
strategy

Business strategy

Corporate level

Business level

Functional
level

Planning stage

Actions
stage

Manufacturing
Plants

Retailing
Companies

International
Affiliates

Finance sources
and accounting

controls

Fig 5.1 Levels of Strategy

Corporate level – finance

• Few books go into the way in which financial strategies are adopted, yet this is important, if
not vital.

• Businesses fail ultimately for lack of cash, caused by poor decisions of course, but also by the
lack of a solid relationship with banks and/or shareholders, particularly institutional ones,
who may put pressure on the Board and even revolt at the Annual General Meeting.

Corporate strategy – what business are we in, or hope to be in? what business or businesses the firm
should be in?

It relates to the future formula and structure of the company, and affects the rationale of the company
and the business in which it intends to compete.

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Levels of strategy

Example Racal Electronics’ decision to float off Vodafone as a separate company.

• Competitive or business strategy – Strategic Business Units (SBUs) are a part of an
organisation for which there is a distinct external market for goods or services how each
business attempts to achieve its mission within its chosen area of activity.

Here strategy is about which products or services should be developed and offered to which markets
and the extent to which the customer needs are met whilst achieving the objectives of the organisation.
A term that is often used in relation to business strategy is SBU, or strategic business unit. SBU means a
unit within the overall corporate entity for which there is an external market for its goods and services,
which is distinct from that of another SBU.

• Johnson and Scholes (2002) place Porter’s ‘generic strategies’ here, at the business level: this
is because the SBU concept has different markets to address and so different resources and
operational strategies will be needed.

• In brief, Porter says businesses – but not the Corporate level – must choose between ‘cost-
leadership’ and so compete on price, and ‘differentiation’ and so compete on quality.

• Remember Profit = Volume × Margin so cost leaders need high volume

We will discuss Generic strategies again later.

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Levels of strategy

Example: Ford’s Motor Co’s car division – an SBU – launched its Mondeo model, aimed at fleet car
buyers, who had not favoured the Sierra, its predecessor.

Operational or functional strategies – departmental level – accounting, HR, manufacturing, marketing –
how the different functions of the business support the corporate and business strategies. They are
concerned with how the various functions of the organisation contribute to the achievement of strategy

It examines how the different functions of the business (marketing, production, finance etc.) support
the corporate and business strategies. Such corporate planning at the operational level is means oriented
and most activities are concerned only with the ability to undertake directions.

Example: revising delivery schedules and drivers’ hours to improve customer service or recruiting a
German-speaking sales person to assist a UK company’s sales drive in Europe.

However, the boundaries between the three categories are very indistinct and much depends upon the
circumstances prevailing and the kind of organisation. Overall, corporate planning is concerned with
the scope of an organisation’s activities and the matching of these to the organisation’s environment, its
resource capabilities and the values and expectations of its various stakeholders.

• These are not really considered by most text books! Simplistically, a strategy here can be
considered to be any forward-looking plan.

• We can debate how far HR and Marketing to take two obvious examples, can be considered
‘functional’ as they are so important.

• At this level however we can see that detailed reward policies or marketing communication
plans are not Corporate-level activities.

Examples:

• Manufacturing – increase yield, decrease waste, accelerate throughput, monitor quality to
reduce warranty clams , organise and train employees in cross-functional teams to enable
flexible response.

• HR – use benchmarking such as salary surveys to check labour market, introduce audits
of training and recruitment, suggest plans to increase employee commitment – to reduce
turnover & absenteeism.

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Process of strategy

6 Process of strategy
Strategic management is the organised development of the resources of the functional areas: financial,
manufacturing, marketing, technological, manpower etc., in the pursuit of its objectives. It is the use of
all the entity’s resources,

The complex nature of many large organizations has led to the splitting of strategies into inter-related
(we hope) levels comprising the hierarchy of process:

Fig 6.1 The hierarchy of process

Mission

Objectives

Strategies

Tactics

Actions, programmes and rules

Another conception is of a linear chain:

Strategy Deployment ofresources
Desired

objectives

The process is a set of policies adopted by senior management, which guides the scope and direction of
the entity. It takes into account the environment in which the company operates.

A sequence of developing plans that move from general to specific and intent to action would create
several levels of planning, which could be illustrated in the triangle above.

• ‘Vision’ and ‘mission’ are often used interchangeably:

Vision is broader and future looking.

• Conveys the unique purpose of a company
• Delimits the scope of activities that the company is, or will be, undertaking

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Process of strategy

Every organisation will have a purpose for its continued existence. A mission statement expresses their
purpose and can therefore be a brief statement. It also links with the idea of Vision – how managers
interpret the Mission for their colleagues.

Mission statements can be long or short. A statement should include the basic function or tasks of an
organisation, particularly why it exists, the nature of the businesses it is in, and the customers or clients
it seeks to satisfy. A formal mission statement provides a driving force behind the organisation’s other
plans and more specific objectives. A mission statement is a formal commitment to the vision that
incorporates the company’s strategy.

So a good way to see if an organization has a deliberate strategy is to see if it has a Mission Statement and
what that says about its raison d’etre and direction for the future. Check out its website and/or Accounts

Mission statements contain two main elements:

– A declaration of the overall mission
– An articulation of key organisational goals

(see Fortune/Mission)
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Process of strategy

Examples

ConocoPhillips (oil)

“Use our pioneering spirit to responsibly deliver energy to the world” [my emphasis]

Harley-Davidson (motor-bikes)

“We fulfill dreams through the experience of motorcycling, by providing to motorcyclists and to the
general public an expanding line of motorcycles and branded products and services in selected market
segments.” [my emphasis]

Avis (car hire)

‘we try harder’

How about these visions?

BP ‘beyond petroleum’ – what is beyond petroleum??

Virgin – Pacific Blue, Virgin Credit Card, Virgin Trains, Virgin Records – what is Branson’s ‘vision’.

Coca-Cola: my vision for Coke – seeing Vladimir Putin, President of Russia, drinking it out of a can on TV.

Goals, Objectives and Strategies

Goals: General statement of aim or purpose

Objectives: Quantification if possible or more precise statements of the goal.” Objectives do not only
represent the end point of planning but are the ends towards which management activities and resource
usage is directed. They therefore provide a sense of direction and a measure of success achievement.
(Johnson and Scholes 2002)

In a way, objectives are easier as they are nearer ‘now’ and can be seen at the bottom levels – such as
“reduce absenteeism by 5% by end-year”. These are often ‘SMART’ – Specific, Measureable, Achievable,
Relevant/Realistic and Time-bound.

Strategies – relate to broad areas of an enterprise’s operations. Their purpose is to furnish a framework
for more detailed tactical planning and action.

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Tactics – are actions carried out to put into effect the details of a strategic decision – tactics can therefore
be seen as the detailed implementation of a strategy. In addition, some tactical decisions will be made
in response to changing circumstances.

Actions, programmes and rules – are the operational practices that will translate the intention of the
tactics into action by individuals and are therefore detailed, short term and subject to immediate control.

Goals

Formulating appropriate goals is a vital component of the process of strategic planning and decision-
making. The ‘goal model of effectiveness’ stresses external achievement. Organisational goals are
important because they provide a sense of direction and help to focus management decision-making;
they also provide a standard against which progress can be evaluated.

Usually goals are thought of as more long-term or higher level abstractions, than objectives. Such goals
may be derived for functional activities and departments – to create a more efficient factory, or implement
a better management information system for example. Also, there may be more general performance
goals such as ‘to increase the return on assets’, or ‘to raise productivity’. These are desired results linked
to particular timescales.

Problems of goal identification

If the concept of organisational goals is examined carefully a number of important theoretical and practical
problems begin to emerge. It is useful to list these in summary form and then go on to explain each one.

• Whether organisations have goals at all.
• Whose goals to take into account.
• Whether official and actual goals are the same.
• What relationship exists between goals at different levels within the organisation?
• How to establish priorities among goals.

Individuals

Within the organisation people too have goals, and, as a result, identifying overall organisational goals
cannot be achieved simply by adding together every individual’s personal goals. This leads us to the
second problem: whose goals to take into account.

What senior managers want the organisation to achieve and what other people in the organisation actually
do are not inevitably the same thing. Goals at different levels of the organisation have to be compared,
to establish whether overall goal congruence exists.

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Identifying the goals of a particular organisation certainly requires inputs from those in charge. In
owner-managed business organisations this group is clearly identified. However, in a large public limited
company, or a public sector organisation, the identification is much more difficult. The process will be
made easier where there is a formal written statement of the organisation’s goals.

Formal goals are an essential starting point, but they will not necessarily reflect in every respect the goals
that are actually pursued in the everyday management of the organisation. These actual goals may only
be discovered by talking to a much wider group of members of the organisation, or by participating in
the making of key decisions.

An environmental analysis of opportunities and threats should include a stakeholder analysis because
profitability and other external measures are evaluated by this powerful group and in terms of the
organisation’s goals or mission, a miscalculation of the expectations of stakeholders could prove disastrous
for the management.

The goal model of effectiveness

‘Originating in traditional measures of performance used in accounting, the goal model…is
unquestionably the most commonly used and widely discussed approach for assessing effectiveness’
(Bedeian, 1984, p. 144).

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External measures of these goals might include any or all of the following:

• profit;
• growth/turnover;
• market share;
• delivery time;
• time-to-market;
• reputation.

The popularity of the goal model stems from its apparent simplicity, but it is also important to be aware
that this simplicity is apparent rather than real. The key assumption underpinning the goal model is
that the goals of an organisation can be clearly established, and that the necessary human and material
resources can then be managed to achieve these objectives.

The discussion in the previous section indicates that the identification and prioritisation of organisational
goals may be more difficult than is recognised by a simple goal model. A further complication concerns the
period of time to be taken into account when assessing performance using this approach. Organisations
are dynamic entities, and a measurement of goal attainment at any one time may not give a complete
picture of organisational performance.

The system resource model

The interdependence between an organisation and its environment provides the starting point for
the system resource model of organisational effectiveness. When considering a systems approach to
organisations earlier in the chapter, the concept of an organisation as a processing sequence was
introduced: this highlights the fact that organisations depend on being able to acquire inputs from their
environment, to be processed and returned as outputs to others in the environment who will value them.

Such factors might include:

• bargaining expertise;
• bargaining power;
• effective environmental scanning (e.g. predicting the environment changes);
• adaptability to changes (e.g. contingency planning).

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The internal process approach

This is most often used in ‘not-for-profit’ organisations such as charities for whom financial measures
are not always appropriate, and as can be imagined, this model (like the system resource model) is more
akin to a concept of efficiency than effectiveness. However, certain measures can overcome this such as
those used by Peters and Waterman.

Others could include:

• high morale;
• strong culture;
• quick decision-making;
• effective reward systems.

In any case, it can just as easily be applied to a profit-orientated organisation as part of a simplified
value chain.

Thus the three approaches outlined above can be thought of as a continuous system, where, if a Total
Quality Management (TQM) technique were applied, different measures could be used as appropriate
for each part of the whole system.

Stop! What would you expect to be the main problems of applying the system resource model to an
organisation?

Although the basic idea behind the system resource model has merit, it is not difficult to see the problems
it entails:

a) It is difficult to make operational decisions; in particular there is no clear way of
determining what is an ‘optimum’ balance between an organisation and its environment.

b) There is a danger of confusing the concepts of efficiency and effectiveness, when indicators
such as productivity are used to assess the health of the organisational system.

c) It is not clear how any system can be evaluated without reference to the purposes it is
supposed to fulfil, i.e. its objectives.

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It can be argued that a method of assessing organisational effectiveness that is both valid and useful will
probably need the following features:

• Some way of identifying organisational goals and of assessing the importance of each.
• A method of assessing these goals from the point of view of key interest groups – such as

customers, shareholders and the local community – as well as senior managers.
• The means to assess the relative importance of the key interest groups, which may have

conflicting expectations of the organisation.
• Guidelines about where to look for the relevant information and who to discuss goals and

goal attainment with.
• A way of distinguishing between organisational goals and strategies.
• If possible, practical guidance about how an organisation should change to ensure continued

success.
• Practicability, in the sense that meaningful measures of performance can be found.

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Types of Strategy

7 Types of Strategy
Strategies may come about in different ways and Mintzberg and Waters recognised that there are different
modes of strategy formulation, which are described below.

The figure below shows the alternatives:

intended strategy
Deliberate strategy

Emergent strategy

Realised strategy

Unrealised strategy

Planned

Opportunistic
strategy

Imposed strategy

Fig 7.1 Planned intended and deliberate strategy – the Rational model

Planned or deliberate strategies come about where there are precise intentions, which are written down
and imposed by a central leadership. Key features include a large number of controls to ensure surprise-
free implementation in an environment, which is controllable, with managers who are able to ascertain,
review and evaluate every option available, and they are then able to choose what appears to be the best
option in the light of rational criteria. Often there is a specialist Strategy Department.

Organisations using this strategy should

• be large enough to afford the costs of formal analysis.
• have goals that are operational.
• operate in an environment that is reasonably predictable and stable.
• take a systematic and structured approach to its development.
• collect internal and external information and integrate decisions into a comprehensive

strategy.
• focus on systematic analysis, particularly in the assessment of the costs and benefits of

competing proposals.

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Strategic planning is seen as a way of preparing for changes and providing direction for the organisation.
It also allows the organisation to co-ordinate its activities internally.

Emergent Strategy

According to Mintzberg and Waters, strategies can be deliberate or emergent or a stage in-between. There
is a corporate intent followed by its interpretation. Sometimes this intent is not formally written down
but emerges over time as part of the culture.

Example Top-down

A culture of like minded people who have values which coincide on a focus – on quality or a desire to
be internationally known etc.

Opportunistic Strategy

Strategies may come about in or entrepreneurial ways. An organisation may take advantage of changes
in the environment or recognise new skills in an opportunistic manner. Alternatively, a firm may be set
up by an entrepreneur because of an opportunity in the market place.

In the entrepreneurial mode, strategy-making is dominated by the active search for new opportunities,
and is characterised by dramatic leaps forward in the face of uncertainty. Strategy is developed by
significant bold decisions being made. Growth is the dominant goal of the organisations, and in uncertain
conditions, this type of mode can result in the organisation making significant gains. Entrepreneurial
mode – requires the strategy-making authority to rest with one powerful individual. The environment
must be flexible, and the organisation oriented toward growth. These conditions are most typical of
organisations that are small and/or young.

The organisation operating in this mode suggests by its actions that the environment is not flexible, it is
a force to be confronted and controlled. Power is centralised in the chief executive, with an unwillingness
to ‘submit’ to authority.

Imposed strategy

Strategy may be imposed on the organisation. Government policies may have an impact on the strategy;
this has been the case for those public utilities recently privatised. Recession and threat of a takeover may
force a strategy of cost cutting and retrenchment. Technological developments may cause an organisation
to develop new products to replace the ones that have become obsolete.

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Realised And Unrealised

The strategy however my be realised and thus be successfully implemented or it may fail and remain
unrealised in practice.

Other Types of Strategic formulation

Muddling through

Lindblom (1959) has argued that the rational model in strategy simply does not reflect reality – and
reject the very idea of formulation – managers just make on the spot decisions as issues arise and so
just ‘muddle through’ without a plan.

Lindblom therefore argued that strategic choice takes place by comparing possible options against each
other and considering which would give the best outcome. Lindblom called this strategy ‘successive
limited comparisons’.

NB See also the adaptive mode below for a similar view.

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Types of Strategy

Logical incrementalism

Definition

Logical incrementalism incorporates both the behavioural realism of ‘muddling through’ and the
advantages of a planned, analytical approach. This view has been championed in particular by James
Brian Quinn.

The outcome of this approach is a deliberate policy of small strategic changes within the framework
provided by a general sense of strategic direction.

Managers have a view of where they want the organisation to be in the years to come, but they try to
move towards that objective in an evolutionary way. They do this by attempting to develop a strong,
secure but flexible core business whilst also continually experimenting with ‘side issues’. Quinn argues
that the decisions taken by management as part of this process should not be reviewed in isolation.

While managers are continually learning from each other, this results in continual testing and gradual
strategy implementation, which provide improved quality of information to help decision-making.
Because of this continual readjustment, the organisation should be in line with the environmental
demands being placed on it.

Quinn’s studies recognised that such experiments could not be the sole responsibility of the top managers
but they should be encouraged to come from the lower levels of the organisation.

Crafting

Mintzberg likens strategy development to a potter crafting clay.

‘The crafting image captures the process by which effective strategies come to be. The planning image,
long popular in the literature, distorts those processes and thereby misguides organisations that embrace
it unreservedly.’

It must be realised at the outset that there is no one best way of managing the strategy of an organisation.
A flexible, reactive style may suit a small firm in a rapidly changing environment, whereas a large company
may need to take a long-term view and plan accordingly.

Strategies may come about in different ways and Mintzberg has recognised that there are different modes
of strategy formulation, which are described below. His views on planned strategies dovetail with what
we have already described as the rational model, but his other two modes of strategy formulation lead
on to a wider discussion.

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Adaptive mode

It is called the adaptive mode because it fits the description that managers give of how strategies come
about in their organisations. They see their role as strategists as being involved in a continual proactive
pursuit of a strategic goal, countering competitive moves and adapting to their environment whilst not
rocking the boat too much.

This mode is commonly found in the public sector, non-profit making organisations and in organisations
that face relatively stable environments. Strategies are developed as a result of the interaction and
bargaining among various power/interest groups. As there is no one source of power or influence,
strategies are not always automatically clear.

Major characteristics distinguish the adaptive mode of strategy-making:

• There is no one central source of power, no one simple goal.
• strategy-making reflects a division of power among stakeholders – unions, managers,

owners, lobby groups, government agencies, and so on.
• The organisation cannot make decisions to ‘maximise’ any one goal such as profit or growth;

rather it must seek solutions to its problems that satisfy the political forces of stakeholders.
• Strategy is characterised by a ‘reactive’ solution to existing problems rather than the

‘proactive’ search for new opportunities
• It seeks to reduce uncertainties by, for example, negotiating long-term purchasing

arrangements to stabilise sources of supply.
• Decisions are in incremental, serial steps.
• Strategy focuses on what is familiar, considering the convenient alternatives
• Disjointed decisions are characteristic sometimes contradictory.

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Stakeholder theory

8 Stakeholder theory
Introduction – definition of Stakeholders

Groups or individuals that have an interest in the well-being of the company and/or are affected by the
goals, operations or activities of the organisation or the behaviour of its members. They have a ‘stake’
in what the organisation does.

Explanation

Stakeholders can be broadly categorised into:

a) internal stakeholders – employees, management
b) connected stakeholders – customers, suppliers, competitors
c) external stakeholders – government, pressure groups

Business strategy

Government – tax, trade
and employment depts.

Community – local,
environmental agencies
and the public at large

Customers – direct customers,
end users and consumer groups

Suppliers

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family members, individual managers
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Debt holders – banks, individuals
and investment institutions

Employees – current, pensioners
unions and staff associations

Managers – from the board of directors

Fig 8.1

Internal stakeholders

These include:

Managers – are likely to have a particular interest, and concern for, the size and growth of the organisation
and its profitability, job security, status, power and prestige (office size, type of company car, number of
staff working for them).

Non-managerial employees – normally concerned with improving pay and conditions and, particularly
in the current economic situation, job security. Safety, freedom from discrimination, and industrial
democracy are also of concern.

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Employees are more productive when they have a sense of participation in the decisions affecting them.
Human resource development has become a major organisational objective for many companies. German
companies have labour representation on management boards, and the Swedish company Volvo has
pioneered the concept of job enrichment for assembly-line workers.

Connected stakeholders

These include:

Customers and final consumers – are interested in value for money, ethical advertising and consumer
protection. A customer may be an institution, such as a hospital or government agency; it may be another
firm, such as a distributor or manufacturer; or it may be an individual consumer.

Suppliers – want a fair price, regular business and payment on time. Every organisation purchases raw
materials, services, equipment and labour from the environment and uses them to produce its output.
What the organisation brings in from the environment will determine both the quality and the price of
its final product.

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Advances in inventory control and information processing have changed organisational relationships
with suppliers. Some companies keep zero inventory, relying on several ‘just in time’ (JIT) deliveries
each day. If JIT methods are in operation, this obviously results in a much closer relationship between
organisations and suppliers, not only in terms of lead-time deliveries, but also in terms of quality control.

Competitors – competition in an industry is rooted in its underlying economics, and competitive forces
exist that go well beyond the established combatants in a particular industry.

Competitors will therefore be concerned with the degree of rivalry between themselves in their own
industry and the degree of potential rivalry or threat of entry from others.

Shareholders – are the owners of companies and are the suppliers of any additional risk capital, which
may be required. The type of shareholder or shareholders that a company has, will largely determine the
sort of information that can be gained from them. There are basically two main types of shareholder:

1) institutions, usually of a large size; and
2) private shareholders, either individuals or small groups of investors.

An institutional investor is the general name given to those institutions, or firms, which make investments
in stocks and other securities as principals but raise funds for investments from individuals and other
firms. There are four main types of institutional investors.

Pension funds – These invest on behalf of the pension fund members in order to provide members with
a retirement pension.

Insurance companies – These operate on behalf of holders of life and endowment policies.

Investment trust companies – These are limited liability companies, who invest in shares, property, etc.,
on behalf of their own shareholders.

Unit trusts – These are trusts, which invest on behalf of its unit holders.

External stakeholders

The external stakeholders include:

Governments

seeking finance through taxation and other means
legislated activities which catch votes and political support

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Safety
Industrial harmony
Deregulation/privatisation which aims to increase efficiency and competition.

Pressure groups – such as Friends of The Earth desire an improvement in the ‘quality of life’ through:

• the reduction of pollution and
• the maintenance of an ecological balance by ceasing to rely on non-renewable resources;
• the minimisation of poverty,
• assistance with local community projects
• help with the young and elderly.

Example, the development of the catalytic converter as part of a car’s exhaust system reduces engine
performance and adds to the overall purchase price of a car. Managers, however, have no choice but to
take into account today’s current climate of broad and genuine concern for the environment.

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External Analysis

9 External Analysis
There are generally considered to be two parts or levels – Environmental analysis of the ‘far’ or ‘macro’
environment affecting all firms, and the industry analysis of the ‘near’ or ‘micro’ environment which is
much more specific.

Benefits of external analysis include

• Increasing managerial awareness of environmental changes.
• Increasing understanding of the context in which industries and markets function.
• Increasing understanding of multinational settings.
• Improving resource allocation decisions.
• Facilitating risk management.
• Focusing attention on the primary influences on strategic change.
• Acting as an early warning system.

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External Analysis
Explanation

The far or macro environment

The macro-environment represents forces that affect all firms across all industries.

There are various suggestions as to how to define parts of an environment so as to understand them in
depth. There are common issues such as the Political, Economic Social and Technological influences,
the PEST factors. Sometimes these are extended:

• PESTEL separates out Legal from Political activity and adds Environmental.
• STEEPV adds Values or ethics.
• SPENT adds Natural environment.

The PEST classification is rather simple and we need to take account of the fact that when we refer to
political factors we are including legislation arising from political activity as a key influence.

In more detail the aspects of the macro-environment are as follows:

Political factors act at three levels

Supranational (e.g. the EU)
National, and
Sub-national or local level.

Government active areas include

• Policies on healthcare, unemployment, exchange rates, inflation, economic growth
• Government employment and the public sector generally
• Fiscal policies on taxation
• Government Agencies regulating competition pollution and industrial relations
• Laws of various kinds such as those relating to protection of the environment or the safety

of employees in the work place or those relating to Customer protection

Economic factors refer to all the key economic variables often related to Political action, such as

• GDP gross national product
• growth,
• inflation,
• Central Bank lending rates
• Currency exchange rates

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External Analysis

• Fiscal policy tax on corporations and individuals
• Regional issues like land process and labour rates
• Distribution of economic rewards in society
• Freedom to move monies
• Stock exchanges and money markets.

Social factors refer to

• attitudes, values and beliefs tastes of held by people including ethnic minorities.
• Culture: Attitude to work, savings and investment, ethics, etc.
• Demography: Size and structure of the workforce, population shifts, aging.
• Social structure: class and segmentation of the market.

These affect economic factors and increasingly it is necessary to take account of the above list of factors not
only at the domestic/national level but also at the global level as companies internationalise their activities.

Technological factors

These can be internal and external. Organizations use technology – not hardware but software too such
as Quality Control – and produce products and services of varying complexity.

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External Analysis

They include

• Goods and services.
• Production processes.
• Information and communications.
• Transport and distribution.
• information technology, computing and associated implications for production.
• biotechnology and new industries.

How to use the analysis tools:

• Scan the macro-environment for actual or potential changes in the PEST factors.
• Assess the importance of the changes for the market, industry and business.
• Analyse each of the relevant changes in detail and the relationships between them.
• Assess the potential impact of the changes on the market, industry and business.

The ‘near’ or ‘micro’ environment

This is the ‘Industry or competitive environment analysis’ of Porter (1979).

His ‘Five Forces’ model of the competitive environment is as follows:

Figure 9.1

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External Analysis

Barriers to entry: include such factors as capital requirements, economies of scale, product differentiation,
switching costs, brand identity, access to distribution channels, and threat of retaliation. The higher the
barriers to entry, the higher the potential profitability of the firms in the industry.

• Economies of scale.
• The capital requirement of entry.
• Access to distribution channels.
• Cost advantages independent of size.
• Expected retaliation.
• Legislation or government action.
• Differentiation.

Competitive rivalry: the intensity of competition depends on a number of factors whether or not a strong
industry leader exists, the number of competitors (degree of concentration), the presence of exit barriers,
the importance of fixed costs in determining capacity, degree of product differentiation and the growth
rate of the industry.

Usually, rivalry is more fierce and intense when there is

• no industry leader,
• a large number of competitors,
• high fixed costs,
• high exit barriers,
• little opportunity to practise product differentiation and
• slow rates of growth.
• Extra capacity.

Supplier power is determined by such factors as importance of product to buyer, switching costs, degree
of supplier concentration to an industry and the supplier’s ability to enter an industry.

Supplier power is likely to be high when:

• there are few suppliers.
• The cost of switching to another supplier is high.
• The brand of the supplier is powerful.
• There is a possibility of forward integration by the supplier.
• The supplier’s customers are highly fragmented so their bargaining power is low.

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External Analysis

Buyer power. The bargaining power of buyers depends on several factors, including buyer knowledge,
purchase size, product function, degree of buyer concentration in an industry, degree of product
differentiation and the buyers’ ability to enter the industry.

Buyer power is likely to be high when:

• There is concentration of buyers.
• There is a large number of small operators in the industry.
• There are alternative sources of supply.
• Material costs are high.
• The cost of switching to another supplier is low.
• There is a threat of backward integration by the buyer.

Threat of substitutes is important because they can de-stabilize the current industry structure by offering
customers better-valued or more useful products.

Forms of substitution:

• Product-for-product substitution e.g. email substitutes for fax – does the same job better
• Substitution of need – e.g. better toothpaste leads to fewer dentists
• Generic substitution – the currency in your pocket – petrol for haircut
• Product not a necessity – cigarettes, alcohol, luxuries

It is important to note that each industry will have its own unique interrelationship of the five forces and
that the relative bargaining power of each of the five forces together determines the overall attractiveness
or profitability in an industry.

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Strategic Management

Internal Analysis

10 Internal Analysis
Competences, Core competences and Resources

Competence:

• Is an attribute or collection of attributes possessed by all the companies in an industry.
• Develop from resources and include skills, technology or ‘know-how’.
• Are essential for survival in a particular industry.
• Have the potential to be developed into core competences.

Core competence or “distinctive capability”

Definition:

Superior acquisition and employment of resources
AND
Superior development of ‘general competences’
(Prahalad and Hamel, 1990)

They are an attribute or collection of attributes specific to a particular organization which enables it to
produce above industry average performance.

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Internal Analysis

They develop from the way in which the organization has employed its competences and resources more
effectively than its competitors.

• They are only possessed by those companies whose performance is superior to the industry
average;

• They are unique to the company;
• They are complex;
• They are difficult to copy;
• They relate to fulfilling customer needs;
• They add greater value than ‘general’ competences;
• They are often based on distinctive relationships with customers, distributors and suppliers;
• They are based upon superior organizational skills and knowledge.

Resource analysis

Definition:

Resources are “inputs employed in the activities of the organization”.

• Analysis by category:
• Human;
• Tangible
• Intangible.

• Analysis by specificity:
• Industry-specific;
• Non-industry-specific.

• Human
Skills, know-how, capacity for communication and collaboration, motivation

• Tangible
Financial (cash, securities, borrowing capacity)
Physical (plant, equipment, land, mineral reserves)

• Intangible
Technology (patents, copyrights, trade secrets)
Reputation (brands, relationships)

Culture

(Grant 2008 p 131)

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Internal Analysis

Analysis by performance:

• Contribution to internal and external measures of performance.
• Internal measures:

• Business objectives and targets;
• Historical comparisons;
• Business unit or divisional comparisons.

• External measures:
• Comparisons with competitors;
• Comparisons with companies in other industries.

Introduction and Definition of The Value Chain

Internal organisation can affect the cost and even the feasibility of some strategies. There must be a
‘fit’ between a strategy and the elements of an organisation. If the strategy does not fit well, it might
be expensive, or even impossible, to make it work. This related to the Resource-Based view of the firm
supported by Grant 1995.

The value chain can be defined as ‘a framework to differentiate the value-adding activities in an
organisation’. Ii comprises primary and support activities.

Below this section is a suggested audit of human resources and cultural aspects which are often hidden.

We need to:

• Understand the nature and sources of particular core competences;
• Identify the need for and methods of adaptation of existing core competences;
• Identify the need for new core competence building;
• Identify potential sources of core competences based on resources and competences;
• Ensure that core competences remain focused on customer needs.

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Internal Analysis
Explanation

Each of the activities can be considered as adding value to an organisation’s products. For example, the
activity of operations in a car assembly plant. While the separate components do have a value in that
they can be sold and bought as individual items, as engines, wheels, etc., but when they are assembled
into a complete vehicle then they have added value to customers far in excess of the individual parts.

The value chain can best be described by use of a diagram as follows:

Figure 10.1 The value chain

Firm infrastructure

Human resource management

Primary activities

Procurement

Technology development

Inbound
logistics

Operations Outbound
logistics

Marketing
and sales

Service

Support
activities

M
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Internal Analysis

The primary activities:

• inbound logistics:
– these deal with the delivery. movement and handling of raw materials from suppliers;

• operations:
– transformational activities which create end products from raw materials, inputs and

• outbound logistics:
– refers to the processes which transfer products to distribution channels;

• marketing/sales:
– includes such activities as advertising, promotion, product mix, pricing, working with

buyers and wholesalers, and sales force issues;
• service:

– customer service issues include warranty, repair, installation, customer support,
product adjustment and modification.

The support activities:

• procurement:
– the firm’s purchasing of material and supplies for its activities;

• technology development:
– focuses on improving the processes in primary value-adding activity;

• human resource management:
– hiring, training, compensating, developing and relations with the firm’s people;

• infrastructure:
– a broad term for such activities as finance, accounting, legal, government relations.

Definition: margin:

The difference between the cost of operations and the income from sales

Examples:

The flexible, entrepreneurial organisational structure of organisations such as 3M, where new project
teams and divisions are continually created, is a key to its growth.

An established centralised organisation with a background oriented to one country may have difficulty
implementing a diversification strategy requiring a decentralised organisation and an entrepreneurial
thrust – as the UK retailer Marks and Spencer failed in its expansion into France.

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Integration

11 Integration
Two major types exist – Horizontal and Vertical.

Horizontal integration

• seeks to sell a single type of product in several different markets.
• Horizontal integration occurs when a firm is being taken over by, or merged with, another

firm which is in the same industry and in the same stage of production as the merged firm,
e.g. a car manufacturer merging with another car manufacturer. It also enables pressure to
be put on suppliers’ prices etc. by a now-larger customer.

The goal of horizontal integration is:

• to consolidate like companies and reduce the number of competitors so as to try and
monopolize an industry or sector

• to control prices, quality, and other inputs (like delivery times and methods) and
standardize components so reducing costs

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Integration

Vertical integration

• Vertical integration relates to production and is much less common than Horizontal
integration in marketing.

• There are two main varieties: backward (upstream) integration, forward (downstream)
integration.

• It is a consolidation of many firms that handle the same part of the production process.
• It is typified by one firm engaged in different parts of production (e.g. raw materials

sourcing, manufacturing, transporting, marketing, and retailing).
• Vertical integration is not inherently good. For many firms, it is more efficient and cost

effective to rely on independent distributors and suppliers.

Backward (upstream) integration

This involves the development of or purchase of supplies/ers.

Companies will pursue backward integration when it will result in improved efficiency and cost
savings. Backward integration might cut out suppliers’ profit margin and transfer it to the buyer, reduce
transportation costs, improve profit margins.

Example: Apple makes both hardware and software, but Microsoft only software and misses the ‘lock-
in’ effect.

Forward (downstream) integration

This is the move to create or buy organisations further down the value chain, thus adding value and
profits from each subsequent stage of value-creation.

Raw materials suppliers might move from wholesale to retail chains, or to manufacturing.

Apple’s forward integration is relatively new, from Apple-approved Resellers to the online Apple Store
and its own retail stores which only sell Apple hardware, software and services. It also has retained some,
and extended the range of other resellers.

Advantages of Vertical Integration

• Lower “transaction costs” between stages
• Synchronization of supply and demand leading to just-in-time
• Lower uncertainty of supply failure
• Lower risk – not all eggs in one basket.
• Strategic independence from suppliers (especially if important inputs are rare or highly

volatile in price)
• Acquisition of rents from different stages

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Integration

Disadvantages

• High capital costs of maintaining different businesses e.g. Unilever sold off profitable
businesses as it could not afford the rising cost of R+D

• Loss of ‘core competences’: management now are in different industries with different cost
drivers. Danger of ‘bounded rationality’ and path-dependency

• Weaker motivation for good performance since sales are guaranteed and poor quality may
be blended into other inputs at later manufacturing stages

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Human resources management HRM

12 Human resources management
HRM

HRM and Strategy

HRM includes four key aspects – reward, relations, resourcing and training and development according
to the UK’s Chartered Institute of Personnel and Development (CIPD 2005). In recent times, Resourcing
has become a key issue due to economic and competitive forces. A significant model, which generated
a great deal of research, was the ‘flexible firm model’ of Atkinson (1984), in which a divide was made
as between ‘core’ and ‘peripheral;’ workers. This was not merely a restatement of what is in effect a dual
labour market theory, but was seen as a new, strategic, phenomenon.

Atkinson’s seminal work was entitled “Manpower strategies for flexible organisations” and this strategic
level of HR is identified by authors such as Wood (1988) as a key issue for society, mirroring as it did
the thesis of ‘flexible specialisation’ forwarded by Piore and Sabel (1984). Unfortunately there has been
little attempt to attach a theoretical approach to the decision to sub-contract.

However, the literature on ‘HRM as strategic’ fails entirely to identify this kind of strategy and instead
concentrates on the ‘core’ workers, on HRM’s commitment, best practice and strategic performance
without reference to the periphery or the process of implementing such a strategy.

In looking at this HRM literature, some clear problems emerge. Firstly, the literature in inconsistent and
its terminology is vague, leading to problems of identifying variables accurately and to issues of their
subsequent measurement.

The confusion of terms continues in the literature: ‘high-performance work practices’ ‘high performance
work systems’, ‘high-commitment HRM’, ‘high-involvement HRM’, ‘best practice or high-commitment
HRM’ are terms used by different authors to describe the same thing- a strategy of increasing productivity
through people.

Marchington and Wilkinson (2002: 202) conclude that ‘practices’ are ill-defined, while Guest et al 2000a
found no consistency in ‘bundles’ of HRM practices in the Workplace Employee Relations Survey
and resorted to counting the number of ‘practices’ individually to ‘find’ this ‘high commitment HRM’.
Additionally, most results are from self-reports and cross-sectional studies which must, as Guest admits,
be taken with caution (Guest et al 2000b:7-80).

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Secondly, Legge (1995) like the many papers she lists, conflates different definitions of HR and, confuses
the generic the HR function, which belongs to all managers, especially those in the line, with the HR
department and its various roles. Thus she erroneously concludes that ‘HR’ has no influence on strategy.

Thus what is required is a mid-range theory, applied to a single industry or sector, which has a clear
variable which can be subject to measurement. Atkinson’s suggests that the key criterion on deciding on
which tasks to outsource depends on the extent of ‘firm-specific skills’ could be measured by transaction
cost economics, and where the function of maintenance could be used as a measure of one aspect of
HRM, that of Human Resource Planning.

Storey (1992) developed a model to examine the differences between the old form of Personnel and
Industrial Relations and the new bundling of practices under the title of “HRM”.

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Human resources management HRM

Dimension Personnel and IR HRM

1. Beliefs and assumptions

Contract Carefully written contracts Aim to go ‘beyond contract’

Rules Clear rules/mutuality ‘Can do’; marginalises ‘rule’

Guide to management action Procedures/consistency control ‘Business need’ /flexibility/
commitment

Behaviour referent Norms/custom and practice Values/mission

Managerial task v labour Monitoring Nurturing

Nature of relations Pluralist Unitarist

Conflict Institutionalised De-emphasise

Standardisation High (e.g. ‘parity’ an issue) Low (e.g. ’parity’ not relevant)

2. Strategic aspects

Key relations Labour-management Business-customer

Initiatives Piecemeal Integrated

Corporate plan Marginal Central to

Speed of decision Slow Fast

3. Line management

Management role Transactional Transformational leadership

Key managers Personnel/IR specialists Line managers

Prized management skills Negotiation Facilitation

4. Key levers

Foci of attention for interventions Personnel procedures Wide cultural structural and
personnel strategies/models

Selection Separate, marginal task Integrated, key tas

Pay Job evaluation; multiple fixed grades Performance-related;
few if any grades

Conditions Separately negotiated Harmonisation

Labour-management Collective bargaining contracts Towards individual contracts

Thrust of relations with stewards Regularised through facilities and training Marginalised (with exception of
some bargaining for change

Communication Restricted flow/indirect Increased flow/direct

Job design Division of labour Teamwork

Conflict handling Reach temporary truces Manage climate and culture

Training and development Controlled access to courses Learning companies

Fig 12.1 The Storey model of HRM – Personnel and IR and HRM: the differences

=======================================================================

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HRM Strategy

There is a problem of measurement. We need to know where we start from. The points below are essentially
quantitative and give little or no direct indication of the way in which HR can be effective –such as in
employee/industrial relations. Here the benchmarking of processes in a detailed qualitative survey can
help.

Typical benchmarks are:-

• Number of employees.
• Employee costs.
• Level of skills and capabilities
• Staff training and development.
• Employee motivation and morale.
• Industrial action – strikes etc.
• Organisational structure.
• Recruitment and selection processes.
• How the effectiveness of HR policies and procedure is monitored.

From here we can work on a functional strategy at first and then relate it to the Business and Corporate
levels.

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Culture

13 Culture
Definition

‘that set of beliefs, customs, practices, and ways of thinking that they come to share with each other through
being and working together.’
(Stacey, 1996).

There are two types: organisational and corporate. The former is a deep-seated unconscious patterning;
the latter often seen as four types of power and control operated through the organisational structure
So the first is hard to change the second easier.

Explanation: The importance of culture

• Employee motivation.
• Recruitment.
• Employee morale.
• Productivity and efficiency.
• Quality of product/service.
• Industrial relations.
• Innovation and creativity.

Artefacts and evidence for organisational culture

The measures of culture can be seen typically in
• philosophy/ideas of the entrepreneur.
• activities of the organisation.
• competitive nature of the industry.
• management style.
• national/regional beliefs and attitudes.
• dependency of the organisation on technology.
• status and location of offices and other buildings.
• style/cost of buildings and furnishings.

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Culture

How these come about: The Cultural web

Fig 13.1 The Cultural web

• Stories: Events and people from the past and present.
• Rituals and routines: Procedures for doing things within the organisation.
• Control systems: The level of control by which activities are controlled.
• Organisational structures: Formal and informal power relationships.
• Power structures: Groups/functions/departments of the organisation that are associated with

the core assumptions of the organisation.
• Symbols: Logos, office layouts, titles, etc. that reflect hierarchy or difference.
• Paradigm: Encapsulates and reinforces the behaviours observed in the other elements of the web.

An organisation’s culture will influence its strategy, its ways of doing business and the way it responds
to change. A key factor in determining how effective the organisation is will be the appropriateness of
its culture for its stakeholders, and particularly its customers. A strong culture will be beneficial if it
focuses on these elements and highlights the need to change proactively. On the other hand, a strong
culture that does not have these attributes is likely to be a major barrier to effectiveness.

The main effects and characteristics of a strong culture will be as follows:

• It will strengthen behavioural regularities and norms among members of the organisation.
• It will minimise some of the perceptual differences among people within the organisation.
• It will reflect the philosophy and values of the organisation’s founder or dominant group.
• The particular culture will have a significant effect on the organisation’s strategy and ability

to respond to change.

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Culture

Some aspects of an organisation’s culture will be visible and obvious, while many others will be both less
tangible and more significant (Figure 1.9).

Determinants of culture

McKinsey, a large US management consultancy, produced 7-S framework for understanding organizations.
The 7-S name is clearly intended to stick in the memory rather than arising strictly from the data. The
seven factors referred to are:

• systems;
• structure;
• style;
• strategy;
• staff;
• skills;
• shared values.

This of course is the ‘soft’ side of enterprise and includes an early reference to the idea of shared values
which we now call ‘culture’.

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Culture

Organisational culture can be described as what the organisation ‘is’, a ground-up set of factors which
employees can readily identify. Writers often distinguish this from ‘corporate culture’, which is the
management’s view of what is needed to perform well in present competitive markets and something
that an organisation ‘has’.

This concept of culture is one that has been borrowed from the discipline of anthropology, where it
has long been used to describe the way of life of a particular group of people. Other uses of the word
involved ‘high-culture’ or ‘the arts’ and the first use of it to organisations was reportedly by American
Marxists who reflected that the interests of the ruling elites were transferred downwards in society. The
interweaving of laws, customs, press stories and published books reinforced the national culture.

Writers on culture

Edgar Schein (1985), in his analysis of different levels of organisational culture, described the more
obvious symbols of an organisation’s culture (its ‘artefacts and creations’). These are things such as factory
and/or office equipment, head office buildings, the way in which employees dress and the provision of
information for customers. However, a real understanding of culture requires a deeper probing to reveal
what the ‘values’ and ‘basic assumptions’ of organisational members are, which Schein explains as follows:

‘In stating that basic assumptions are unconscious, I am not arguing that this is a result of
repression. On the contrary, I am arguing that as certain motivational and cognitive processes are
repeated and continue to work, they become unconscious. They can be brought back to awareness
only through a kind of focused inquiry, similar to that used by anthropologists. What is needed
are the efforts of both an insider who makes the unconscious assumptions and an outsider who
helps to uncover the assumptions by asking the right kinds of questions.’

Gareth Morgan (1986, 1997) stresses the point that although managers can influence the evolution of
culture they cannot control it. He also argues that our understanding of organisational culture is quite
superficial, and there is a danger that some managers will see culture as a simple manipulative device
for achieving more control over employees.

More recently, Geert Hofstede studied the answers to survey questions by over 10,000 IBM employees
in different countries, showing consistent international differences in how they view the world. These
international cultures emerge above IBM’s own regional culture (its corporate and organisational cultures)
as a consistent set of different ways in which managers acted

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Culture

William Ouchi in 1981 popularised the idea of culture in his book Theory Z: How American Business can
meet the Japanese Challenge. He suggested that there are a number of characteristics that differentiate
the typical American firm (Theory A) from the typical Japanese one (Theory J). Of course, Ouchi is
generalising when he speaks of the typical American or Japanese organisation. Looked at more closely,
organisations in any one country will have important differences and unique features: these differences
represent the culture of the particular organisation. He went on to suggest that it was possible for American
firms to modify their culture (Theory Z) to help them compete more effectively with the Japanese.

Models for categorising culture

Corporate culture: culture-as-a-variable

The task for owners and managers is to achieve the right blend of cultures for the organisation’s task and
environment. However, managing culture is not a short-term or straightforward task, since it goes beyond
slogans and new mission statements: real change requires modifications to values, basic assumptions and
behaviour that are not easy to achieve, but which may be increasingly important for many organisations.
Handy expanded this as:

‘deep-set beliefs about the way work should be organised, the way authority should be exercised,
people rewarded, people controlled – these are all aspects of the culture of an organisation.’

The term ‘culture’ can thus be applied to the study of organisations in several different ways, but interest
in organisational culture can probably be traced back to Roger Harrison’s questionnaire for charting of
four types of culture in 1972 in which he determined ‘corporate culture’ as ‘organisational ideologies’.

This approach uses culture as something that the organisation ‘has’ as opposed to what it ‘is’. Corporate
culture can be changed, arguably, whereas organisational culture cannot; it only emerges by dint of the
shared experience of employees. People can usually articulate the organisation’s key values, and sometimes
these are formally set out.

For example, Hewlett Packard makes use of statements called the ‘HP Way’ to clarify corporate values
to all employees, and in the area of ‘belief in our people’ the following appear:

• Confidence in, and respect for, our people as opposed to depending on extensive rules,
procedures, etc.

• Depend on people to do their job right (individual freedom) without constant directives.
• Opportunity for meaningful participation (job dignity).

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Culture

So explicit an approach to the use of culture is still the exception rather than the rule, but organisations
promote and act on values whether or not they are formally documented. Underpinning any set of
values will be basic assumptions about things such as the relationship between the organisation and its
environment, appropriate human relationships (e.g. individualistic and competitive or collective groups)
and what motivates people. These will be very important, but largely unconscious.

While culturally each organisation is unique, it is useful for purposes of analysis to attempt to identify
the main types of organisation culture.

Deal and Kennedy 1982 strong culture theory

In their book ‘Corporate Cultures’, Deal and Kennedy state:

‘Companies with very strong cultures – the companies that intrigue us most of all – fit [into cultural
types] hardly at all. These companies have cultures that artfully blend elements of all four types and
blend them in ways that allow these companies to perform well when the environment around them
changes as it inevitably does.’

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Culture

Strong refers to the degree to which members subscribe to the norms and values, in effect a kind of
psychological ‘cloning’. These norms and values are importantly defined as those espoused by management,
and the idea is to use this commitment in the absence of bureaucratic methods, to provide performance
enhancement via improved self-motivation. In this way strong cultures link to work on job satisfaction and
may overcome job-design failure associated with the types of technology identified by Joan Woodward.

Organisations with strong cultures are supposed to perform better than those with weak ones but the
link has not been proven: successful companies obtain the right blend of appropriate cultures, which
has a good deal of support from the relevant research literature. The assertion, however, that companies
with strong cultures are more interesting, and by implication more successful, is much more debatable.

Cabals are especially strong cliques of self-supporting individuals who may de-rail the process by charisma
or Machiavellian methods, such as the Dutch Admiral Paradigm where two recruits mutually praised
each other in meetings and eventually became the two youngest Admirals in the Dutch Navy.

In this way a strong culture might begin to reflect the members’ values rather than the organisation’s.
Additionally of course it may produce strong resistance to change, later being a victim of ‘groupthink’.
Finally a strong ‘masculine’ culture may not travel well, especially to areas of the world characterised by
Hofstede’s ‘feminine’ dimension.

The authors also suggested a typology which was not based on any scientific methodology though the
types were categorised to an extent by two variables – risk-taking and feedback of results – and has
passed almost unnoticed into the dustbin of history, not being referred to by any of the major texts on
organisational behaviour. The four types were:

• tough-guy macho – high risk, quick feedback;
• work-hard-play-hard – few risks taken;
• bet-your-company – high risk but slow feedback;
• process – no feedback, bureaucratic.

Corporate culture

Definition: Roger Harrison called corporate cultures ‘organisational ideologies’ or ‘the way we do things
round here’.

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Culture
Explanation

Culture however is represented by the shared values that hold together the other organisational systems;
thus Harrison provided a definition as ‘organisational ideologies’.

Harrison used a questionnaire method to produce four distinct types:

• Power cultures, based on one or a few powerful central individuals who motivate by a
combination of patronage and fear, and make little use of written rules (this is likely to be
the dominant type of culture in small, family-managed businesses).

• Role cultures, which are impersonal and rely on formalised rules and procedures to guide
decision-making in a standardised, bureaucratic way (e.g. civil service and traditional,
mechanistic mass-production organisations).

• Task or achievement cultures, which are typified by teamwork, flexibility and commitment
to achieving objectives, rather than emphasis on a formal hierarchy of authority (perhaps
typical of some advertising agencies and software development organisations, and the
desired culture in large organisations seeking total quality management).

• People or support cultures, of two types. The first type is a constellation of stars, based on
technical expertise of individual employees – architects’ and solicitors’ practices, IT and
management consultants. The organisation is what these few people possess as skills. Other
types of organisation exist for the benefit of the members rather than external stakeholders,
and are based on friendship, belonging and consensus (e.g. some social clubs, informal
aspects of many organisations).

Clearly these need to match the external environment if at all possible.

Peters and Waterman (1982) The cultural excellence school

These former McKinsey consultants suggest that culture, as a form of control, is critical for corporate
success. Their research into high-performing American corporations revealed that corporations with a
clearly articulated tight culture were able to develop simple, decentralised, flexible and innovative forms
of organisation based on trust and participation. These simplified forms of organisation reduced the
number of managerial levels and central staff through the avoidance of bureaucracy and, by avoiding
complicated matrix structures, lived in line with man’s limitations.

The eight key characteristics of excellent organisations are as follows:

1. Bias for action
To facilitate decision-making and problem-solving they avoid self-perpetuating bureaucratic
committees. Instead they promote a ‘ready-fire-aim’ ethos through temporary ad hoc
mechanisms.

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Culture

2. Close to the customer
They listen and learn from customers so that they are market driven. Quality, reliability and
service are valued as long-term growth is sought through customer loyalty.

3. Autonomy and entrepreneurship
They regularly reorganise to produce small basic units, like product divisions.

4. Productivity through people
They believe people respond to trust, that those at the frontier know best, and that innovation
comes from ‘where the action is’.

5. Hands on value driven
They take ‘value-shaping’ seriously and inspire employees by ‘Management by walking about’
(MBWA) – regular visits to the workplace.

6. Stick to the knitting
They avoid diversification and concentrate on the things they do well.

7. Simple form, lean staff
Simple self-contained but competing structures, like product divisions, have few central ‘staffers’
and intermediate levels of management. Simple structures make reorganisation easier.

8. Simultaneous loose-tight properties
Since autonomy has been ‘pushed down the line’, while the corporate level retains control over
a few core values, these organisations are both centralised and decentralised.

Two main points can be made about the cultural excellence school.

• It reveals the limitations of the traditional ‘rationalist’ approach which only regards
measurable and visible aspects of organisations worthy of consideration, the consequence of
which has been a restrictive emphasis on rigorous organisational design, financial planning
and analysis and information technologies, etc. Hence insufficient attention has been given
to the less quantifiable ingredients of organisational life. Culture has either been neglected
or relegated to the ‘art of management’.

• The emphasis on simple forms of organisation using simultaneous loose-tight controls
refocuses the traditional debate about whether or not organisations should operate tight
centralised controls or looser decentralised ones which encourage self-regulation.

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Culture

Whatever the merits of this approach, we need to recognise that it constitutes a resurgence of universalism
and is therefore somewhat at odds with contingency theory. Several factors suggest, however, that it is
unlikely to replace contingency theory because:

• the sample of organisations studied (all high performers) and the character of their
employees (self-motivated and highly trained) is not representative;

• it is quite likely that organisations facing complex environments and undertaking changing
tasks will benefit more from such forms than those operating in stable environments;

• other research, while tending to confirm the relationship between performance and some of
the key characteristics, has nevertheless found variations in the degree of centralisation of
organisations according to the market operated within.

Peters and Waterman made an important contribution to the understanding of how large, successful
organisations are managed, unfortunately, some of the organisations defined as excellent have subsequently
experienced severe operating difficulties. Thus, for example, only two years after publication of the book,
the magazine Business Week re-examined the companies against the original criteria used by Peters and
Waterman and found that fourteen of the forty-three no longer matched up to the yardstick of ‘excellence’.
This merely illustrates the temporary nature of organisational success.

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Culture

Peters (1987) Thriving on chaos

Subtitled “A Handbook For A Managerial Revolution”, Peters produced an amazing 45 prescriptions (his
term) under five headings for ‘managing change innovation and survival’.

Most of these contain a lot of common sense and are self-evident and revisit previous attempts to define
‘best practice’ or ‘excellence’:

• Creating total customer responsiveness;
• Using fast-paced innovation;
• Achieving flexibility by empowering people;
• Learning to love change;

Building systems for a world turned upside down.

Of particular interest is the final set of prescriptions with the unusual heading ‘building systems for a
world turned upside down’.

This involves control systems, and the need to measure what is most important strategically. Too often
management accounting systems are set up to link into financial reporting requirements, a theme
pursued by Eli Goldratt in “The Goal” which he subtitled “A Management Accounting Textbook”. Peters
wants measures of product quality and customer satisfaction and wants these simple. Control should be
bottom-up with ‘conservative’ (i.e. achievable) goals. Trust and integrity come high on this list as without
control, trust is a de facto requirement without which systems cannot work.

Culture and control

How significant is culture for control? Academics and managers have recently suggested that culture is
significant because:

• it may be appropriate for organisations which have to contend with turbulent environments
while employing staff who have a high regard for self-regulation;

• strong corporate cultures which are closely linked to corporate strategy may be critical for
success.

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Culture

Culture comprises values, which stress what is important for the corporation, and beliefs about how
things should work. It is expressed through symbols, rituals, myths, stories and behaviour. It consists
of taken-for-granted assumptions and norms about how people should behave, usually on the basis of
learning from what has been successful in the past. It is this latter feature which makes corporate culture
a double-edged ‘weapon’, because it is difficult to change. Yet many organisations are facing turbulent
environments (technological developments, heightened international competition, unpredictable
markets, recession, deregulation, etc.) and are attempting to change corporate strategy by, for example,
moving into unfamiliar markets. This often proves difficult because the existing culture, which may have
been a tower of strength in the past, is not suited to the new strategy. Hence some corporations have
developed an interest in cultural change, though experience suggests it is a difficult and lengthy process
which should be undertaken as a last resort.

These aspects of organisational culture are ‘taken for granted’ by long-established members of the
organisation as representing the normal ways of doing things and behaving. However, new members of
the organisation have to learn these norms and be socialised to accept them. Life is generally much more
straightforward and easier once the basic ground rules are known; while some of these may be set out in
formal documentation, most organisations have important cultural values that are not spelled out in this
way. If an organisation has few shared values, and wide differences in ways of thinking and behaving in
different departments, it has a ‘weak’ culture. Some organisations, however, have very ‘strong’ cultures,
which are an important and systematic influence on employees.

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SWOT Analysis

14 SWOT Analysis
Introduction

A popular tool but one which tends to produce ‘felt’ assertions rather than exact measures: a strength
can soon become a weakness as the environment changes as it is inflexible due to resources being
accumulated round it.

Definition

SWOT means the formal analysis of the internal Strengths and Weaknesses and external Opportunities
and Threats of an organisation.

Explanation

The central purpose of the SWOT analysis is to identify strategies that align, fit or match an organisation’s
resources and capabilities to the demands of the environment in which the organisation competes.

To put it another way, the purpose of the strategic alternatives generated by a SWOT analysis should be
to build on organisation strengths in order to exploit opportunities and counter threats and to correct
organisational weaknesses.

Strategic choice is the process of choosing among the alternatives generated by a SWOT analysis. The
organisation has to evaluate various alternatives against each other with respect to their ability to achieve
major goals. The process of strategic choice requires the organisation to identify the set of business-level,
functional-level and corporate-level, strategies that would best enable it to survive and prosper in the
fast-changing environment that is a feature of modern business.

Strengths.

• Core competencies in key areas.
• Adequate financial resources.
• Well-thought-of by buyers.
• An acknowledged market leader.
• Well-conceived functional area strategies.
• Access to economies of scale.
• Insulated (at least somewhat) from strong competitive pressures.
• Proprietary technology.
• Cost advantages.
• Better advertising campaigns.

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SWOT Analysis

• Product innovation skills.
• Proven management.
• Ahead on experience curve.
• Better manufacturing capability.
• Superior technological skills.

Weaknesses

• No clear strategic direction.
• Obsolete facilities.
• Profitability issues because…
• Lack of management depth and talent.
• Missing some key skills or competencies.
• Poor track record in implementing problems.
• Falling behind in R&D.
• Too narrow product line.
• Weak market image
• Weak distribution network.
• Below-average marketing skills.
• Unable to finance needed changes in strategy.
• Higher overall unit costs relative to key competitors

Opportunities

• Ability to serve additional customer groups or expand into new markets or segments.
• Ways to expand product line to meet broader range of customer needs.
• Ability to transfer skills or technological know-how to new products or businesses.
• Integrating forward or backward.
• Falling trade barriers in attractive foreign markets.
• Complacency among rival firms.
• Ability to grow rapidly because of strong increases in market demand.
• Emerging new technologies.

Threats

• Entry of lower-cost foreign competitors.
• Rising sales of substitute products.
• Slower market growth.
• Adverse shifts in foreign exchange rates and trade policies of foreign governments.

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SWOT Analysis

• Costly regulatory requirements.
• Vulnerability to recession and business cycle.
• Growing bargaining power of customers or suppliers.
• Changing buyer needs and tastes.
• Adverse demographic changes.

Some key points on SWOT

• Too much detail should be avoided. Keep each variable short.
• Many variables may be relative rather than absolute and therefore will require some

judgement.
• Do not ignore ‘soft’ facts (e.g. organizational culture, leadership skills, etc.).
• Prioritise and combine variables.
• Be realistic in its assessment.

SWOT is not strategy. It only provides a platform for planning for the future.

Strategic Management
43

8 SWOT Analysis

8.2.4 Threats

• Entry of lower-cost foreign competitors.
• Rising sales of substitute products.
• Slower market growth.
• Adverse shifts in foreign exchange rates and trade policies of foreign governments.
• Costly regulatory requirements.
• Vulnerability to recession and business cycle.
• Growing bargaining power of customers or suppliers.
• Changing buyer needs and tastes.
• Adverse demographic changes.

8.3 Some key points on SWOT

• Too much detail should be avoided. Keep each variable short.
• Many variables may be relative rather than absolute and therefore will require some judgement.
• Do not ignore ‘soft’ facts (e.g. organizational culture, leadership skills, etc).
• Prioritise and combine variables.
• Be realistic in its assessment.
• SWOT is not strategy. It only provides a platform for planning for the future.

Internal analysis

Internal strengths
and weaknesses

External opportunities
and threats

key strategic issues

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al

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ee

d
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ac

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C
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n
ti
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Evolution of options and
selection of strategy

Implementation and
management of the

chosen strategy

External analysis

Fig 8.1 The ProcessFig 14.1 The SWOT Process

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Strategic Management

Generic Strategy

15 Generic Strategy
Introduction

The Generic strategy framework (Porter, 1980) comprises two alternatives each with two alternative
scopes. Unfortunately Porter confuses this by asserting that Focus – i.e. Narrow Scope – is the THIRD
generic strategy.

Clearly, however, as it depends on the former two major dimensions it cannot stand alone as a strategy
itself. It is better to use the model as a four-cell framework:

Definition

There are in essence only two generic strategies, Differentiation and Low-Cost Leadership each with a
dimension of Focus – broad or narrow.

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Generic Strategy

Figure 15.1 The generic business strategies

Explanation

A well-formulated competitive strategy, regardless of which type, is one that seeks to build a distinctive
competence in some key activity and then uses it to create a competitive advantage over other firms

This attempts to avoid the ‘muddling through’ and forces managers to make decisions – hard decisions.
The calculation of volume × margin = profit is used to highlight either volume as a goal or margin. Best
of both worlds is high margin and high volume but in really expensive products are seldom seen by
buyers as worth the extra cost if they are commonplace. This interacts with supply and demand curves –
as supply increases so costs and prices go down due to scale effects.

Two broad types of competitive strategies enable the firm to build competitive advantage at the business
level: low-cost leadership and differentiation. The strategies are also known as generic strategies, since
they are widely applicable to firms of all sizes and in all industries.

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Generic Strategy

Low-Cost leadership strategy

This aims to achieve competitive advantage by way of providing a product or service at a cost that is
less than that of rivals. Competitive advantage arises when the firm is able to earn higher profits than
its rivals by charging a product at market prices. Economic factors that sustain a low-cost leadership
strategy include high economies of scale, high experience curve benefits, and varying degrees of vertical
integration.

Benefits:

• Low production cost = higher profit.
• Allows the company to enter new markets.
• Most successful in price-sensitive markets.
• Creates barriers of entry to the industry

How to achieve cost leadership:

• Reduce unit costs (e.g. generic designs).
• Use cheaper materials.
• ‘No frills’ products.
• Increase productivity.
• Achieve economies of scale.
• Achieve ‘learning curves’.

Differentiation

Differentiation enables the firm to attempt efforts to distinguish its products from those of its rivals.

Differentiation strategies are based on

• providing products/services unique or different from those of competitors.
• providing customers with products or services that are perceived (or actually) higher in

value than those offered by rivals.
• increasing the buyer’s satisfaction
• increasing the buyer’s perceived value.

Benefits:

• Product/service will command a higher price.
• Demand for product/service will be less price elastic.
• Above average profits can be earned.
• Creates barriers to entry to new businesses wishing to enter the industry.

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Generic Strategy

How to achieve differentiation:

• Create products/services superior to competitors (e.g. design, performance, reliability).
• Offer superior after-sales service.
• Create superior supply chain.
• Create a strong brand.
• Offer superior product/service packaging

Focus – Broad or Narrow?

Broad

• Benefits:
• Allows spreading the risk across the different media to widen the market.
• It makes barriers to entry to markets costly and complex.

How to achieve broad focus

• Identify a suitable distribution channels across markets such as internet, chain stores, mail
order catalogues.

• Identify the specific needs, requirements and expectations of those channels.
• Establish the financial back-up is large enough to sustain the breadth.

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Generic Strategy

• Analyse competition of the market especially price/delivery.
• Produce products/services that meet the basic, broad, generic customer requirements.
• Decide whether to go for a differentiation of cost leadership within this market niche

(segment).

Narrow

focus seeks to provide high perceived value justifying a substantial price premium in a market niche.

Benefits:

• Requires a lower investment in resources since it is aimed at a market niche.
• Allows specialisation and greater knowledge of the niche market.
• It makes entry to new markets less costly and simpler.

How to achieve narrow focus

• Identify a suitable market customer group and its niche market (segment).
• Identify the specific needs, requirements and expectations of that group.
• Establish that the specific market niche (segment) is large enough to sustain the business.
• Analyse competition of the niche market.
• Produce products/services that meet the specific customer requirements.
• Decide whether to go for a differentiation of cost leadership within this market niche

(segment).

Key Points

• Cost leadership does not, in and of itself, sell products.
• Differentiation strategies can be used to increase sales volumes rather than to change a

premium price.
• Price can sometimes be used to differentiate.
• A Generic strategy cannot give competitive advantage.

An organisation may use a hybrid strategy:

• Seeks simultaneously to achieve differentiation and a price lower than that of competitors
• Strategy can be based on a combination of differentiation, price and cost control.
• May be used as an entry strategy in a market of established competitors (loss leaders).

Example
IKEA the furniture company uses low cost approach to create prices combined with
differentiation by way of its unique ‘Swedishness’ and style.

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Generic Strategy

Other strategies

These may include

• Diversify – extending the operation into new and profitable markets.
• Go international – expand the operations into another country or countries.
• Grow by acquisition.
• Form a joint venture – to pool resources.
• Liquidate – by terminating an unprofitable product line or even dissolving the company.
• Retrench – by curtailing operations, spinning off profit centre and SBUs, permanently or

temporarily.

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Strategic Management

Managing change

16 Managing change
This is a huge topic but here are some of the main issues when moving the strategy to adapt to the
environment.

Continuity

Incremental

Flux

Transformational

Fig 17.1 Change types

Continuity

Daft (1998) describes several features of this kind of gradual change over time:

• Continuous progression.
• Maintains equilibrium.
• Affects only one organisational part.
• Effected through the normal structure.
• New technology.
• Product improvement versus new product which create new markets.

Incremental or Step change

‘Step change’ describes a situation where the trend line for a particular factor stops becoming smooth
and there is a significant and unexpected jump in direction upwards or downwards.

There have been significant step-changes such as political coups or elections, storms and environmental
disasters which have changed the environment organisations must work in forever.

Because step change is impossible or at least difficult to spot in advance, strategic planning has moved
from trend analysis towards scenario planning.

Flux

This represents turbulence in the environment where trends are destroyed and existing cyclical activity
is interrupted in a random way, possibly by civil war and strife, which ebbs and flows as power changes
hands.

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Managing change

Transformational change

This aims to ‘unfreeze’ the present, affect change and re-freeze’ the future changes according to Lewin’s
model of force-field analysis.

It typically involves

• frame-breaking burst
• entire organisation
• creating a new structure
• breakthrough technology
• reaches new equilibrium

17.2 Lewin’s Force Field analysis

Methods of making change happen

Kotter and Schlesinger (1979) identify six main methods of dealing with resistance; these are:

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Managing change

• Participation and Involvement increases the probability that people will be committed
to implementing the change and, if their views are taken into account, this may enhance
the effectiveness of the change programme. This method is particularly appropriate when
the individuals initiating the change do not have all the necessary information to design a
change programme and when the people affected by the change have considerable power
to resist it. However, as is the case with education and communication, this approach to
dealing with resistance to change can be time consuming particularly if it results in the
design of an inappropriate change programme.

• Education and Communication this is useful when the basic problem is a lack of
information about the need for, or the nature of, the planned change. If people can be
persuaded about the change they will be more likely to help with its implementation, but
this approach can be very time consuming and will not work by itself if there are other
reasons than misunderstanding for resisting the change.

• Facilitation and Support involves the use of techniques such as training, counselling and
group discussions designed to reduce fear and anxiety. This is particularly appropriate where
the principal reason for resistance is based on insecurity and adjustment problems. Some
changes do of course really threaten employee aspirations and job security: in these cases
facilitation and support may help but it will not address the fundamental cause of resistance.

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Managing change

• Negotiation and Agreement may be necessary where a group clearly stands to lose out in
some way because of the change, particularly if this group has considerable power to resist
the change. If applied effectively this method of dealing with resistance to change may help
to avoid major problems, but the disadvantages are that it can be expensive and also alert
other groups to negotiate for compliance with the change.

• Manipulation and Co-optation manipulation is an approach which relies on presenting
partial or misleading information to the people resisting the change. Co-optation involves
identifying key individuals resisting changes and buying them off by giving them positions
of authority to help implement the changes. Although this may be a quick and relatively
inexpensive approach it will probably result in future problems if the people involved realise
they have been manipulated.

• Explicit and Implicit Coercion involves the use of force, or the threat of force, to enforce
the implementation of change. This type of approach may be necessary if the parties
involved are operating from fixed positions and there are fundamental disagreements over
objectives and/or methods. It does, however, raise ethical and legal problems as well as
involving considerable risk of making the situation worse.

These approaches are not mutually exclusive and managers may find it effective to use a combination
of them. The most appropriate approach in each instance will depend on a variety of factors, including
the goals of the change programme and the likely reactions of the people involved. One of the problems
of choosing the right approach is that people will not always openly admit the real reasons why they
oppose changes. In particular, those reasons relating to self-interest are likely to be disguised as technical
objections, arguing that the proposed system will not work: attempts to deal with these technical
objections will not get to the root cause of the resistance to change.

To assist organizations in managing change, a number of change management approaches have emerged in
the last decade. Among these, the following three models have been commonly used to introduce change:

• Strategic Information Systems (SIS)
• Theory of Constraints (TOC)
• Organizational Development (OD).

These approaches are outlined below.

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Managing change

Strategic Information Systems

The innovative use of computer technology has enabled a wide range of firms in many different
industries to create new products, provide support services and reduce costs, giving them a competitive
advantage over other firms and service sectors. During the 1970s, a number of organizations began to
use Information Systems and Information Technology (IS/IT) in ways that fundamentally challenged
the way their business was conducted. By introducing the SIS model, several major organizations gained
significant advantages over their competitors and had a major effect on the structured relationship and
economics of their industries – such as American Airlines’ SABRE system of booking.

Materials Resource Planning II can be seen as an operational strategy level use of SIS as it enables the
right components to arrive Just-In-Time to the right operational stage in production. This eliminates
wasteful stock-holdings and so releases cash.

SIS is used to support strategic decision-making or to support or shape organizations’ competitive strategy,
or it might be used as a combination of both.

The strategic potential of IS/IT is enormous because it can be instrumental in:

• Raising entry barriers.
• Increasing the negotiating power with suppliers.
• Creating new dependencies for customers.
• Offering new products services or worthy alternatives and changing the ground for

competition or the nature of the stakes.

The competitive advantage of SIS achievements also included innovation and further advantages by
introducing a product or process change that results in a fundamental transformation in the way business
is conducted in the industry.

The systematic approach is based on two main ingredients:

• a set of guidelines indicating how information technology can support the business, and
• a planning and implementation strategy

(Wiseman, 1988).

However, despite the importance of SIS, organizations have not always been able to ensure commensurate
financial returns and information systems have been mainly used to automate existing processes rather
than as an opportunity for business change.

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Managing change

The Theory of Constraints (TOC)

Although new technology may be necessary in order to make major improvement this technology is
not sufficient to achieve results. Technology simply allows or creates opportunity for reality to change.
For success the rules must also be changed (Goldratt, 2000).

TOC is based on the simple fact that multi-phase processes in whatever setting can only move at the
pace of the slowest step. The way to speed up the process is to use a catalyst to work on the slowest step
and make it work at capacity to speed up the whole process (Gibb, 2000). TOC emphasizes finding and
supporting the main limiting factor(s) or constraints. Constraints can be an individual, a team, a piece
of equipment or a local policy, or the absence of some tool or piece of equipment.

Goldratt (2003) suggests that five steps are needed to maximize the performance of a value chain:

1. Identify the system constraint.
2. Decide how to exploit the constraint – throughput is governed by the speed of the

constraint.
3. Subordinate and synchronize everything else to the above decisions. Subordinate the

constraint by finding different and better ways for the constraint to work and revoke tasks it
does not need to do.

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Managing change

4. Improve the performance of that same value chain within the system so that all parts of the
system understand its importance and work to get the most out of it.

5. If in any of the above steps the constraint has shifted, then go back to step 1.

The Goldratt Institute has worked with many organizations over the past 16 years and has found on many
occasions that organizations are structured, measured and managed in parts rather than as a whole. This
may well result in conflicts between people representing different part of the organizations (Goldratt
Institute, 1996). The TOC approach to change advocates that if one of the barriers that blocks those parts
from working together as an integrated system is removed, significant and sustainable improvement in
each and every area results.

Building upon this the fundamental questions and strategies of TOC and using the five steps of focusing,
participants identify the answers to the following three essential questions:

1. What to change.
2. What to change to.
3. How to change.

1. What to change: the thinking process

In deciding what to change, TOC applies ‘cause and effect’ logic or ‘thinking process’ as used
in the hard sciences. This is in order to understand how many of the issues are interlinked
and so improve the overall system — identifying the core conflict causing the symptoms or
‘undesirable effects’ is essential, especially as the constraints may shift from one place to another
(Goldratt Institute, 2001 a, b).

The core problem in an organization is inevitably an unresolved conflict that kept the
organization trapped and/or distracted. This core conflict has devastating effects. It is common
for organizations to create policies, measurements and behaviour in an attempt to treat those
undesirable effects. Such subsystems, often referred to as ‘band aid’ fixes, must be removed,
modified or replaced.

2. What to change to: the cloud process

An organization needs to identify and break assumptions that allow the core conflict to persist
and challenge them until a solution to the core conflict is identified. The cloud approach is
a structured, systematic and dynamic thinking tool that enables people to analyse conflict
(Goldratt Institute, 2001b).

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Managing change

3. How to change: the current and future reality trees

To validate the identification of the core conflict, the next process is the development of a logical
‘current reality tree’ to identify the conspiring formal and informal policies, measurement and
behaviour that support the existence of undesirable effects. From this a ‘future reality tree’ can
be developed which maps the overall course for getting from current reality to a point where
the solution/strategy is fully implemented (Goldratt and Cox, 1992; Newbold Adams, 1988).

Taking into consideration the unique culture that exists in every organization, a plan is
developed to transition an organization from where it is today to realizing the strategy. This
should include what actions must be taken by whom and when, because resistance to change
frequently blocks even the best laid strategies and plans as Ritson and Waterfield 2005. Found
in their study Managing change: the Theory of Constraints in the mental health service.

Organizational Development

While it emphasizes goals, the particular feature of OD is the notion of process and of organizational
learning (Argyris and Schon, 1996). OD is ‘An effort planned organisation wide and managed from the
top to increase organisation effectives and health through planned interventions in the organisation
process using behavioural science knowledge’ (Beckhard, 1969, p. 2), suggesting a long-range focus.

Change involves not just alteration to the formal aspects of the organization but also to informal
human aspects. Brunsson and Olsen (1993) suggest that reforms are easier to initiate than to decide on
and easier to decide on than to implement, but employees on the receiving end of the reforms do not
support them because they recognize that they are based on faulty premises, are self-contradictory or
destructive. Consequently, one underlying assumption is that people are most productive when they
have a high-quality working life.

The OD approach believes that people at all levels must be individually and collectively supportive in
the engineering of change. Its success is to engender a means of improving organizational capacity to
change, to permanently improve an organization’s problem-solving and renewal processes, and so it has
special emphasis in work teams and intergroup culture. It involves the organization as a system as well
as its parts. It is participative, drawing on the theory and practices of the behavioural sciences. It has top
management support and involvement, and involves a facilitator who takes on the role of change agent.

It follows that if one wishes to create change there is no point in concentrating upon individuals in isolation
as they will be experiencing group pressure to conform, therefore the focus should be on influencing
and trying to change group norms, roles and values (Cummings and Huse, 1989).

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Pettigrew (1985), Pettigrew and Whipp (1991) do not reject the participative approach of OD but rather
they argue that it provides only a partial analysis of the circumstances and contexts of organizational change.

Fig 17.3 The OD Model

The principal question is:

which of the three methodologies would be most successful in achieving successful change?

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Growth and

Decline

Growth and Decline

Models of organisational growth: evolution and revolution

Economists as well as managers are interested in organisational growth, and some economists have
put forward what is known as the ‘S-curve hypothesis’: this suggests that firms will typically have short
formative periods, followed by periods of rapid growth, before these tail off into greater stability. The logic
behind this approach is that when an owner first sets up a business there will be an initial period when
the firm has to establish itself in the market place. It may then be able to demonstrate some competitive
market advantage, which permits the owner to plough back substantial profits to exploit the opportunity.
The injection of capital from these profits provides a platform for rapid growth, which will eventually
tail off because of loss of competitive advantage and/or profit-taking by the owner.

The S-curve hypothesis is interesting to organisation theorists because it suggests that there are a number
of different stages of growth, raising different managerial problems. Therefore, a number of writers
studying problems of organisation and management have put forward stage models of growth to explain
the internal process and problems of growth.

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The simplest models of organisational growth take the concept of a ‘product or organisational life cycle’
from marketing and apply it to stages of an organisation’s development. Thus there is likely to be an
initial stage of establishing the organisation, followed by growth, stability, and eventually decline. This
is illustrated in

Figure 18.1

Initially, a venturer or entrepreneur acts as a catalyst and product champion during the birth and
early youth stages of organisational development. As the organisation progresses to early maturity,
the entrepreneur will be supplemented or replaced by professional managers. These people are good
at running an established business and achieving further growth using their expertise in strategy,
organisation and finance.

However, the danger is that the successful organisation becomes unwieldy or complacent in the maturity
stage (see comments in Chapter 1 about the decline of ‘excellent’ firms in the section evaluating the goal
model of effectiveness) and the managers become overly bureaucratic. In other words, the departments
and divisions within the firm become major barriers to effective communication and problem solving,
and the use of fixed rules results in risk aversion and lack of innovation. Stagnation leads to decline, and
reversing this decline will require a Heraclean effort from managers with very special qualities. Cowen
(1984) suggests these Heraclean managers (the term derives from the Greek hero Heracles, better known
as Hercules) fall into two types:

a) skilled seasoned veterans, who see a challenge and know exactly what they are doing (Lee
Iacocca’s work in turning around Chrysler in the USA is given as an example);

b) those who do not know enough about the business to believe ‘it can’t work here’ and turn
it around by ignoring the normal rules (the turnaround of United Airlines by Ed Carlson is
quoted to exemplify this).

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The organisational life-cycle approach is useful but largely descriptive. In order to analyse why these
things happen, some explanation is required of the dynamics within the organisation. One way of
understanding these is provided by Greiner (1972), who has also put forward a stage model of growth.
He argues that the underlying dynamic in each stage is evolutionary growth which eventually creates
a situation of revolutionary crisis, when the organisation’s existing ways of doing things are no longer
efficient and effective. If managers can establish ways of overcoming each crisis there will be a platform
for further growth. Failure to deal with a particular crisis will result in decline or demise. Greiner’s stages
of growth and the crises involved are illustrated in Figure 5.5. A rapidly growing organisation will have a
steep line of growth and relatively short periods between crises. Slow growth will produce a flatter line,
and consequently longer periods between crises.

As an organisation passes through the various stages of birth, growth, maturity and decline, the leadership/
management style may need to change. One of the ways of explaining this process is to use Greiner’s
Life Cycle model.

PHASE 1 PHASE 2 PHASE 3 PHASE 4 PHASE 5

Large

Small

Size of
organisation

Young MatureAge of organisation

1. Crisis of
LEADERSHIP

2. Crisis of
AUTONOMY

3. Crisis of
CONTROL

RED TAPE
4. Crisis of

5. Crisis of ?Revolution stages

Evolution stages

1. Growth through
CREATIVITY

2. Growth through
DIRECTION

3. Growth through
DELEGATION

4. Growth through
CO-ORDINATION

5. Growth
through

COLLABORATION

Fig 18.2 Greiner’s Theory of Growth

Greiner identifies five phases of growth. Each evolutionary period is characterised by the dominant
management/leadership style used to achieve growth, while each revolutionary period is characterised
by the problems that must be solved before growth can continue.

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When the organisation is small, the leadership is personal and informal. The founders of the young
business are generally actively involved at this stage. With their energetic and opportunistic leadership
style, the creative potential can be channelled into growth. As the organisation grows, production becomes
more efficient and there comes a need for skills relating less to products and marketing issues and more
to the co-ordination of the organisation’s activities. This is a crisis of leadership.

As the business expands, the organisation becomes ‘structural’ with a hierarchy of positions and jobs
moving to greater specialism. This phase of growth exposes weakness in delegation. Management finds
it more difficult to keep detailed control as there are too many activities and it is easy to lose a sense of
the wider picture.

The response to the business problems of phase two is delegation. This has the advantage of
decentralising decision-making. The person at the top of the management tree gets further
away from the bottom and relies more and more on systems and bureaucracy. The managers
needs to delegate, requiring less of a hands on approach and more of a people person and
manipulator style of leadership.

During the fourth phase, the addition of internal systems and procedures helps to co-ordinate
the activities and use the resources optimally. Management reward emphasises profit share and
stock options that focus on both short and long term growth. However, the increased complexity
can lead to a crisis of red tape as the procedures inhibit useful action.

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The crisis of red tape is resolved by increased informal collaboration. Control is cultural rather than
formal. Growth is encouraged through participation and mutual goal setting. Managers focus on problem-
solving activities, which ensure the organisation’s survival but also emphasises innovation for continued
growth. The leadership style should encourage collaboration and co-operation, whilst managers focus
on long-term high-level strategic development matters.

The first phase of growth is achieved by some creative idea, product or service which enables the
organisation to become established in the market place. This is essentially the first part of the S-curve
hypothesis and the first stage of the organisational life cycle. Eventually, however, a crisis occurs when
the entrepreneur’s informal and personal approach to managing the business simply cannot cope with
its increased size: this is the crisis of leadership.

If the organisation and the entrepreneur can adopt more formal systems of management, there will be
a basis for further growth through direction. This period of growth will last for a considerable period
if the organisation is growing slowly, but will be short-lived for the rapidly growing organisation. In
both cases a crisis situation will eventually arise, because the organisation has reached a size where the
slowness and costs of making decisions in a centralised way through the formal hierarchy are proving
to be major stumbling blocks: there is a crisis of autonomy.

Only if ways are found of operating in a more decentralised way will the crisis of autonomy be overcome.
Decentralisation will involve the owner and senior managers delegating powers of decision-making to
members of the organisation closer to the customers or production processes than they are. There will
almost certainly be reluctance to do this, because of the perceived risks involved, but it is essential, if
the crisis is to be solved, to permit growth through delegation.

Delegation should permit quicker and more effective decision-making. In this way further growth can
be achieved, and the organisation is very likely to achieve some of this by diversifying into new areas
of business. The next crisis will be when senior managers start to fear that they are losing contro l over
the highly decentralised and diversified organisation. They have to find a solution that does not involve
reverting to their earlier directive methods.

The solution to the crisis of control usually involves the implementation of more sophisticated
management accounting information systems to permit effective monitoring of decisions without the
need to intervene in actually making them all. Other actions may be to introduce product groups and
formal planning procedures to improve co-ordination. These actions will facilitate growth through co-
ordination in phase 4.

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Growth and Decline

The final crisis identified by Greiner is one of red tape. This occurs when the procedures and systems
introduced in earlier phases of growth start to become obstacles to its continuation. By this time
the organisation will be very large, and is likely to be operating on a divisional basis, with some
important functions and activities provided by a central headquarters. The tension between divisions
and headquarters may eventually result in a mutual lack of trust and harmful political internal conflicts.
Ways have to be found to encourage collaboration and trust to overcome this crisis if the organisation
is to proceed to phase 5, the final one in the model: in reality there may be other phases after this but
they will only be relevant to the very largest organisations operating on a global scale.

Evaluation of growth models

Knowledge of the processes outlined above should help managers to anticipate problems they are likely
to encounter as organisations grow, and to be aware of key variables at each stage of growth. However,
managers must also be aware of the limitations of the models.

The organisational life-cycle approach does not explain the underlying process of growth, and is not
particularly helpful in providing insights into the points at which transitions from one stage to the next
take place. Greiner’s model is more precise in these respects, but still has limitations, such as:

• it implies consistent, linear growth when in practice varying growth rates are likely at each
stage

• it is vague about how exactly to measure size, and this means it is difficult to predict when
crises are likely to happen in particular instances

• it does not explicitly deal with organisational decline
• it might give the impression that growth is the normal state of affairs for all organisations,

when it clearly is not.

Despite these limitations, models of growth, such as the one put forward by Greiner, do provide managers
with some useful general insights into this complex process.

Decline

Throughout the early 1990s, because of the depressed state of their national economies, many managers
in Europe and the USA have been more concerned with the problems of managing decline rather than
growth. The problems of managing decline pose particular problems and also place in sharp perspective
the ethical dilemmas involved in many aspects of management.

Slatter (1984) has suggested the following eleven factors which individually, or in various combinations,
contribute to organisational decline:

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1. poor management, typified by factors such as an overly autocratic chief executive, neglect of
the organisation’s core business and a weak board of directors

2. inadequate financial control, particularly when the management accounting
3. systems are poorly designed, management accounting information is not used by senior

managers, and methods of overhead allocation distort costs
4. competitive weaknesses due to products in decline and heavy emphasis on price competition
5. high cost structures, which may be the result of many factors, such as inability to take

advantage of economies of scale or operating inefficiencies
6. changes in market demand that the organisation has not anticipated and cannot respond to
7. adverse movements in commodity prices can be significant in certain industries
8. lack of marketing effort can cause decline; when it is a major contributory factor it is usually

related to weaknesses in the senior marketing staff, and associated with other fundamental
problems such as price and product competition

9. too many big projects involving major capital expenditure
10. unwise acquisitions, such as buying organisations which themselves have a weak competitive

position, or paying too much for them. However, the most common problem is poor
management of the organisation once it has been acquired

11. poor financial policies, particularly overtrading and/or inappropriate financial sources
12. overtrading, so that sales grow at a faster rate than the organisation is able to finance from

its cash flow and borrowings.

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Growth and Decline

When attempting to manage a situation in which the organisation needs to recover from a depressed
situation, the strategic priorities will revolve around:

• reducing costs to improve efficiency; and
• improving competitiveness in order to increase revenue.

Initially, when an organisation encounters problems, and starts to decline in terms of revenue and/or
profits, the typical management reaction is to assume the situation is a temporary one requiring nothing
more fundamental than some cost cutting. Costs can be reduced anywhere in the supply chain, but
the most obvious and usual starting point is to reduce labour costs. At first, this may simply involve
altering working patterns to eliminate overtime or, as is increasingly the case, to replace full-time with
part-time jobs.

If this does not produce sufficient savings the next step is likely to be voluntary or compulsory
redundancies. The danger is that if the cuts are too severe there will be reductions in the quality of
the product and services to customers; the impact on employee morale will also make it difficult to
achieve the workforce commitment discussed in the previous chapter. Problems of employee morale
will be particularly severe if there is a series of cost reduction exercises over a prolonged period; these
will result in a loss of trust in management, an escalation in personal conflicts and increasing levels of
political activity.

Other cost-saving measures might include improving purchasing policies and procedures, redesigning the
product or service to reduce production costs, contracting out services that are not considered essential
to the core business, organisational changes to reduce duplication, improving financial control systems,
and so on. The difficulty is that certain types of cost-saving measures, such as improving factory layout,
might require some initial expenditure, which is not possible if the organisation is already experiencing
declining revenues. This exemplifies the problems caused by reactive management.

In some situations, this type of retrenchment, i.e. doing the same as before and cutting some costs, may
not be adequate to ensure survival. Managers may then have to consider more fundamental strategic
alternatives such as:

• turnaround, whereby the organisation will attempt to reposition itself for competitive
advantage. Most commentators believe that replacement of the existing top management
team is a precondition for the successful implementation of such a turnaround strategy.
Slatter has analysed the principal generic strategies for corporate turnaround and recovery
and related them to the initial causes of decline.

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Causes of decline and generic strategies

• divestment involving the external sale of part of the organisation or the internal closure of
units, as part of a rationalisation programme.

• liquidation of the business by selling it to one or more buyers; this entails an admission of
failure by the senior managers, and the fear of loss of face may mean this alternative is not
considered seriously until there are no others available.

All four strategies (retrenchment, turnaround, divestment and liquidation) associated with decline
require managers to make difficult decisions, which may have adverse effects on all of the organisation’s
stakeholders Ð particularly on its employees. These issues will be considered later in the context of
‘business ethics and social responsibility’.

Large-scale redundancy programmes do not assist this process, but managers sometimes have to balance
the negative effects on staff against economic realities. This requires them to take into account the relative
importance of factors such as effectiveness, effort, loyalty, experience and efficiency.

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Globalization and International Strategy

18 Globalization and International
Strategy

Definitions:

International business: Profit-related activities conducted across national boundaries.

International management: Process of planning, leading, organising and controlling in organisations
engaged in international business.

Explanation

Organisations develop from Domestic markets towards International markets at different rates and some
industries are more prone to this process (e.g. the oil industry) than others (eg constructions, transport,
and services like insurance).

Internationalisation brings risks – currency fluctuations, political changes, etc. so organisations may be
slow to develop s fully global presence.

Methods of international development

In the first instance organisations might create an Export Department or website
Next, they might open a marketing office in the host country
Then they might invest in production facilities –much more risky.
Other avenues include:

– Licensing of products or production techniques
– Strategic alliances with partners from the host country
– Wholly- or partly-owned subsidiaries – may include both marketing and production, and

may issue shares locally.

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I Domestic II International or
Transnational

III Multinational IV Global

Strategic
Orientation

Domestically
orientated
against home
competitors

Export-orientated, multi-
domestic

Multi-national Global

Stage of
Development

Initial foreign
investment

competitive positioning
internationally

Explosion Global

Structure Domestic – i.e.
functional plus
import/purchasing
dept

Functional or Divisional
home structure by
product or region
plus Divisionalised
international structure by
geographical region

Worldwide
geographic by
product

Matrix, transnational

Market Moderate,
domestic

Large, multi-domestic Very large,
multi-national

Whole world

Fig 19.1 Internationalisation

Source Adler N. pp. 7–8; in Daft R “Organisational Theory and Design” 6th Edition p. 259.

Domestic means the home market, though there may be some exports often these are through agents
and the firms does not se itself as anything except a local provider for local tastes.

Multi-domestic means that the firm has different competitive and product design issue sin each of its
theatres of operation, sometimes warehouses and offices will be established abroad.

Multination means marketing and production facilities in many other countries and has more than one
third of its sales outside the home area. Explosion happens if these take off due to their potential for
growth.

Global organisations are interlinked competitively across the world and not just on a domestic-domestic
basis. they transcend a single country of origin. Structure is extremely complex and often evolves into
an international matrix of geographical scope versus product ranges.

Global firms like Procter and Gamble, Unilever and Matsushita operate in 40–75 countries. The structural
problems of holding these together and getting synergistic responses from each are colossal.

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Three types of host country

• Developed countries
High level of economic and industrial development

• Less developed countries (LDCs)
Low economic or industrial development

• Newly industrialised countries
Emerging LDCs – major exporters of manufactured goods.

Each has its own set of factors which might encourage or discourage investment.

Fig 19.2 Diamond of national advantage: (Porter, 1990)

Factor conditions

Factors can be categorized into two forms:

• “Home-Grown” resources /Highly specialized resources
• “Natural” endowments

In “Home-Grown” resources, Porter pointed out the local concentration of skilled labour, including the
different schools of film, in analyzing Hollywood’s dominance in movies.

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“Natural” endowments include such as oil reserves (the basis of the US oil industry’s hegemony) and
resource constraints – Japan’s relative lack of space has spurred JIT.

Related and Supporting Industries

For many firms, the presence of related and supporting industries is of critical importance to the growth
of that particular industry. A critical concept here is that national competitive strengths tend to be
associated with “clusters” of industries. Japanese auto plants in the UK surround themselves with key
suppliers to create clusters.

Demand Conditions

A strong domestic market stimulates the firm and provides cash flow in its own currency to aid expansion
overseas. Again, the Japanese car and electronics industries are examples of high demand domestically
and the leading firms are able to pre-test products on aspiring and critical demand segments.

Strategy, Structure and Rivalry

National performance in particular sectors is inevitably related to the strategies and the structure of the
firms in that sector. Competition plays a big role in driving innovation and domestic competition is
direct and impacts strongly.

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The role of government

The role of government acts as a catalyst and challenger; it is to encourage – or even push – companies
to raise their aspirations and move to higher levels of competitive performance. It must encourage
competition and create the conditions for efficiency such as in labour market reforms, quality initiatives,
and protection from foreign competitoin.

We can use the PEST factors to analyse the bases of international strategy, but the N or Natural element
from the SPENT acronym is also very useful if used to understand locational factors, such as terrain,
extreme weather, isolation etc.

Political

• •Political risk
• •Expropriation
• •Indigenisation laws
• •Tariffs
• •Import quotas
• •Administrative protections

Economic

• •Balance of trade
• •Exchange rate
• Inflation rate
• Wage level

Sociocultural

• •Attitudes, values, norms, beliefs
• •Behaviours
• Demographic trends
• Culture
• Education system

Technology

• Communication technology – broadband, phone, mail etc.
• Infrastructure – cities, ports, industrial districts, fuel supplies, and maintenance technologies
• Transportation – roads, rail, airports, navigable rivers
• Existing factories, equipment, skill levels

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Organising international business

The structure of international organisations varies with the internal culture and the type of product/s
which are to be marketed. These also vary with the stage of development of the organisation in terms
of the extent of its internationalisation.

They include:

• •World-wide functional divisions
• •World-wide product divisions
• •International divisions
• •Geographic regions
• •Global matrix
• •Networked structure
• Adapting to cultural differences – see below

MULTINATIONAL CORPORATIONS (MNCs)

Definition

Organisations engaging in international management vary in size and the extent that their business
activities across national boundaries.

Alternative orgnaisational structures:

• World-wide integration from the home country base
• National responsiveness to the host country
• Regional responsiveness to a wider market
• Multifocal emphasis – globalisation

These alternatives produce different orientations towards international management (after Perlmutter)

• – Ethnocentric – based on home country norms and staffing
• – Polycentric – based on host country norms and staffing
• – Regiocentric based on the wider, regional area
• – Geocentric – not based on any particular area.

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international Human Resource Management (IHRM)

This is a complex area which we can relate to the earlier CIPD segmentation of HRM, and so includes

• Recruitment and Selection
• Reward – pay levels and salary progression
• Relations – trade union recognition
• Training and Development/promotion

But significantly for Intern internationalised organisations, special attention is paid to

• Reward – to take account of local taxes, welfare, housing costs etc.
• Assignment policies – see below.
• Repatriation of failed executives.
• •Adjustment of leadership styles to fit local norms and culture.

There are three bases for Assignment policies under IHRM according to Dowling, Schuler, and Welch 1994
Expatriates or Parent Country Nationals (PCNs)
Host Country Nationals (HCNs)
Third Country Nationals (TCNs)

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Each international setting will have its own balance of these categories, often influenced by local
government polices such as quotas for local nationals, or provision of skill-enhancement procedures
and structures.

Social responsibility and ethical issues

• International social responsibility
Benefit versus harm of MNC’s in LDC’s

• Ethical issue of ‘questionable payments’
Business payments raising significant ethical questions of right or wrong either in the host
country or in other nations

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The Basis of Strategy: Structure

19 The Basis of Strategy: Structure
Alfred Chandler Jr. (1962) suggests that the best strategies need structural alterations, such as the
Divisional form for innovation and differentiation, or the functional form for cost-leadership. Before
organisations can consider the best structure, however, they need to firstly determining the structural
alternatives. This section outlines the basic structural forms.

The Structure of Industries

Here we consider three types of classification:

Stage of development

2. Technology
3. Product

Stage of development

Economists define industry types by three or four stages of development:

• Primary: extraction of natural raw materials includes oil drilling, farming, mining,
quarrying, forestry, and fishing. Low returns, producing commodities undifferentiated from
each other.

• Secondary: manufacturing, transforming primary materials – heavy industries e.g. steel
making, medium industries for example cars – light industries e.g. electronics. Lighter ones
are easier to locate and re-locate. Heavy ones tend to be near sources of raw inputs.

• Tertiary: services – insurance, banking, hotels, possibly restaurants (but note they do
manufacture food)

• Quaternary? Tourism? Not really an industry but a collection of activities

Technology

Joan Woodward’s (1965) survey of UK firms revealed ten types, and three major groupings:

Unit/Small batch

Mass Production

Automated Process

These are detailed below.

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The Basis of Strategy: Structure

She conducted an extensive, comparative empirical study which measured a firm’s comparative
performance relative to its industry peers and compared this indicator to its structural dimensions such
as span of control, number of management levels, management style, etc.

The research team was amazed when the 100 surveys from manufacturing organisations indicated no
direct statistically significant relationship between the type of structure and the level of performance.
A relationship between structure and performance surfaced only by introducing an extra variable: the
type of technology: the way of organising production.

Woodward’s study showed there was no ‘one best way’ of organising. Her data showed that the successful
firms were the ones where there was congruence between the type of technology they were using
and their organisational structures and processes. This can be considered as ‘contingency theory’ or
‘appropriateness’ – linked to the environment.

Different technologies generated different requirements and the successful firms recognised this.

Joan Woodward described the technical complexity of a manufacturing process as the degree of its
mechanisation – unit technology as the least complex and the continuous process production as the most.

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The Basis of Strategy: Structure

Unit and continuous process technologies required non-routine behaviour while mass production
was better served by mechanical structures characterised by routines and procedures. Managers of
commercially successful companies were the most aware of their firms’ technological characteristics.
So, certain activities naturally “go with” certain structures. Woodward found that by knowing an
organization’s primary system of production, you could predict their structure:

According to Buchanan and Huczynski (1997 p. 420) technology was defined within three main types:

•

Group 1 Unit/Small batch Production:

• Group 2 Large Batch and Mass Production:

Group 3 Process Production:

Under these were sub-categories:

Group 1 Unit/Small batch Production:

• Production of units to customer requirements
• Production of prototypes
• Fabrication of large equipment in stages
• Production of small batches to customers’ orders

All these technologies that produce one or several products simultaneously. Companies make one-of-
a-kind custom products, or small quantities of products. Examples: constructing houses, shipbuilding,
aircraft manufacture, surgical teams, craftwork – furniture maker, tailors, printers of engraved wedding
invitations.

• In these companies, typically, people’s skills and knowledge is more important than the
machines used.

• Relatively expensive to operate: work process is unpredictable, hard to pre-program or
automate.

• Flat organization (few levels of hierarchy).
• CEO/MD has low span of control (few direct reports).
• Relatively low percentage of managers
• Organic, flexible structure

Group 2 Large Batch and Mass Production

• Production of large batches
• Production of large batches on assembly lines
• Mass production

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The Basis of Strategy: Structure

Companies that sell huge volumes of identical products make heavy use of automation and assembly lines.

• Bigger than small batch
• Taller hierarchies
• Bottom level is huge (supervisor span of control is 48)
• Relatively greater number of managers (because hierarchy is so tall)
• Mechanistic, bureaucratic structure
• Relatively cheap to operate

Examples: cars, razor blades, aluminium cans, toasters, electronics, cosmetics.

Technologies in assembly line operations plants produce standardized, identical products based on
routines and standard procedures.

Group 3 Process Production

• Process Production combined with a product for sale by large batch or mass production
methods

• Process Production of chemicals in small batches
• Continuous flow of liquids gases and solid shapes

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The Basis of Strategy: Structure

Technologies at ongoing, non-discreet, capital intensive production processes that require minimal
manual involvement. Primarily companies that refine liquids and powders Machines do everything;
humans just monitor the machines and plan changes.

• These organizations are tall and thin or even inverted pyramid: almost nobody at the bottom
• At the very top there is an organic structure
• Lower levels more mechanistic, but because machines do everything, there is not much

paper work, low level supervision, etc.

Examples: chemical companies, oil refineries, bakeries, dairies, distilleries/breweries, electric
power plants, sugar refining, cement, margarine, dairy.

The type of industry defines the need for capital investment and so the returns on investment vary:

High-volume business are low margin and usually primary. One change in the supply chain makes a
big, instant, impact on profits

• Low-volume businesses rely on innovation and are subject to competition e.g. demise of
Nokia.

Be aware of where your organisation and industry lies!

Joan Woodward was one of the most influential contributors to Contingency School which is based on
the premises that there is no single best way to manage because every situation and every manager is
different.

Product Classification

Standard Industrial Classifications – SICs – exist in most countries and divide industries by products.

The oil industry for example is split into different sectors such as oil exploration and production, shipping
and transportation, refining, is different from:

UK Standard Industrial Classification of Economic Activities definition “Manufacture of refined
petroleum products” (SIC 2007:19.2) and the US code 324110 Petroleum Refining (US SIC 2009).

Farming of dairy cows is primary different from milk production.

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The Basis of Strategy: Structure

Ownership

• public sector.
• private sector.
• The private versus public ownership:
• Privately-owned.

many Virgin companies are not publically quoted on stock exchanges so Branson keep the
details to himself as to whether they are making money.

• Publically quoted
– share ownership distribution – private versus institutional shareholders – types of

share – debentures, voting shares ordinary shares. Complex. Facebook founder has 25%
of shares but 57% of voting shares.

Other types include Cooperatives and Trusts.

Internal Structure

Definition: ‘Structure’ is the allocation and control of work tasks.

This implies power relationships based on the acceptance of managerial power by subordinates and
society – this use of power is termed the ‘legitimacy’ of management – which Max Weber called its
‘authority’.

All organisations have some form of structure, based on ‘the established pattern of relationships among
the individuals, groups and departments within it’.

There are two structures – a vertical structure of authority and responsibility where clear limits of financial
authority exist, and a horizontal structure of groupings of activities designed to use the resources towards
goal-attainment.

The horizontal structure can be changed from time to time, to suit the environment (see later sections
on the internal and external environments).

The basic vertical structure of an organisation is a relatively static framework within which processes
such as communication, leadership and decision-making take place.

In most organizations, structure will be illustrated in the form of a chart.

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The Basis of Strategy: Structure

Functional Structure

This is the most common form of structure. This divides the organisation up into its main activities or
functions (production, sales, accounting and so on) in which all similar specialist activities are grouped
together into interdependent departments.

A manager is placed in charge of each function under the overall control of the owner or a senior manager.

Advantages of a functional structure

• Specialised resources are used efficiently.
• Quality is enhanced by other specialists from the same functional area.
• Opportunities exist for extensive division of labour.
• A career structure enables people to advance within their functional specialism.
• It is easier to manage specialists if they are grouped together, especially when the manager

has the same experience.
• It fosters communication between specialists and enhances the development of skill and

knowledge.
• It does not duplicate specialist resources throughout the organisation and promotes

economies of scale.
• It is suited to conditions which stress functional specialism, where the environment is stable,

and when the technology is routine, requiring little interdependence between departments.

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The Basis of Strategy: Structure

Figure 2.3.1? Functional structure

Disadvantages of a functional structure

Increased need for interdepartmental co-ordination and scheduling.

• Communication, co-ordination overload the vertical hierarchy.
• Inefficient co-ordination of functional departments.
• Responsibility for overall outcomes is unclear.
• Interdepartmental conflicts.
• Little creativity and innovation.
• Difficulties in identifying profitable and unprofitable products.

These problems are likely to occur with professionalism and a role culture where job demarcations are
felt to be important. When the organisation reaches a certain size, they are likely to be exacerbated
especially if it has developed a wide range of products or services. Burns and Stalker (1961) devised the
term ‘mechanistic’ for firms where the interconnections are strong as they are unsuited to changeable
environments and non-routine technologies.

A more flexible and responsive form is needed than the rigidly functional by adopting a holding company
or a divisional structure in which profit centres based on particular products or geographical areas are
created.

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The Basis of Strategy: Structure

Divisional structure

A divisional structure (see Figure 2.2) can help to overcome the limitations of the holding company and/
or a functional structure, as it contains within it functional specialists but groups its activities around
products or geographical regions. These two ways of grouping activities are supposed to ensure a closeness
to the customer which is not really possible in a functional structure.

Advantages of divisionalisation

• It provides excellent co-ordination across functional departments.
• Since departmental units are often small, as well as self-contained, employees identify with

the product or project rather than their own function.
• Since each division can, for example, react to customer requirements, it is well suited to

changeable environments.

It is particularly useful for large organisations. Cellular manufacturing can even be considered a kind of
internal divisionalisation with an emphasis on internal customers, just-in-time links between different
‘products’ and the dynamism created through teamwork.

The emphasis on profit centres, should promote clear accountability, longer planning horizons, and
the development of future senior executives with general management experience as divisional leaders.

Example: Sloan (1985) developed a true divisional structure for the disparate firms owned by General
Motors Corporation in the 1930s, bringing together a central function to garner expertise from the
different firms such as Pontiac, Cadillac and Chevrolet.
GM ‘leap-frogged’ over Ford, who had a functional structure, and has kept its lead ever since

Disadvantages of divisionalisation

• There may be a costly duplication of resources across departments.
• Specialists may become isolated and fail to further their specialist skills.
• Competing demands on people may create stress.
• Co-ordination across divisions is difficult.

Tension between the centre and divisions is a crucial problem of control. Too much control stifles
innovation

Divisional CEOs gain too much power and can introduce wild excesses of spending on favoured ‘pet’
projects

Example: in Rolls Royce the RB211 engine project overruns nearly bankrupted the company.

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The Basis of Strategy: Structure

Product Divisions

People and resources are grouped according to an organisation’s products. General Motors has specific
products – Chevrolet, Cadillac, Pontiac.

This enables technical excellence and concentration on fewer product lines, and a liaison with a smaller
set of customers, realising more creativity in marketing and sales through focus, teamwork and goal
consensus. This format is used most successfully where there is a variety of products, each addressing
different markets.

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The Basis of Strategy: Structure

Figure 20.2 Divisional structures

Geographical Divisions

Where organisations have few products, such as IBM, they may group activities according to sales area
and be literally closer to the customer.

This enables regional differences to appear in marketing research. In this way IBM gets to know the
details of the businesses in an area and its sales team focus on local contacts e.g. meeting senior people
from potential clients informally at the golf club or racetrack

Matrix structure

Divisionalisation may eventually have to be adapted to include formal mechanisms to promote closer
inter-divisional collaboration: the result will be a matrix structure in which vertical and horizontal formal
relationships are recognised.

A matrix structure seeks to add flexibility and lateral co-ordination to the traditional vertical hierarchy.

One way of doing this is to create project teams made up of members drawn from a variety of different
functions or divisions: each individual then has a dual role, as he or she maintains functional/divisional
responsibilities as well as membership of the project team.

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The Basis of Strategy: Structure

Example: US President John F Kennedy demanded ‘a man on the moon within ten years’. The achievement
of this goal was apparently due to the new structure NASA adopted to link the functional specialists in
the background departments intimately with the problem-solvers on the construction and research and
development team for the Apollo mission. This mixture became known as a ‘matrix’.

Figure 2.3

Advantages of a Matrix:

• improves decision-making by bringing a wide range of expertise to problems that cut across
departmental or divisional boundaries;

• replaces formal control by direct contact;
• assists in the development of managers by exposing them to company-wide problems and

decisions;
• improves lateral communication and co-operation between specialists.
• suits rapidly changing environments because the equal balance of power between functional

and product management aids communication and co-ordination.
• facilitates adaptation to unfamiliar and unexpected problems. People can be flexibly

relocated across products or projects, aiding the speedy implementation of new ones.
Employees have the opportunity to develop either functional or general management skills.

• it is useful for medium-sized organisations with a medium number of products or for task-
centred organisations.

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The Basis of Strategy: Structure

Disadvantages of a Matrix:

• A lack of clear responsibility;
• Clashes of priority between product and function;
• Functions lose control of the psychological contract;
• Career development can often be stymied;
• Difficult for one specialist to appraise performance of another discipline in multi-skilled

teams;
• Project managers are reluctant to impose authority as they may be subordinates in a later

project;
• Employees may be confused by reporting to two bosses;
• Managers will need to be able to resolve interpersonal frictions and may need training in

human relations skills;
• Managers spend a great deal of time in meetings to prioritise tasks.
• The complexity of the matrix structure makes it difficult to implement successfully.

Indeed some commentators are very critical of this form of organisation, and question whether it should
be adopted at all.

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The Basis of Strategy: Structure

Complex forms of organisation

Definition:

The complex forms attempt to overcome the inadequacies of other structures through collaboration
between existing organisations.

Explanation

Why? These pressures are essentially economic and in response to Japanese and Pacific Rim, Chinese and
Indian penetration of Western markets. At the same time globalisation means that scale economies are
necessary to maintain price differentials and so mergers of parts of businesses where there is strategic
fit is becoming commonplace.

How? Increasingly organisations are forming complicated vertical and horizontal relationships through
demergers, downsizing, delayering and margin retreat from product scope and geographical spread.

What? Such organisations would range from co-operatives between organisations and their suppliers, to
all forms of partnerships and alliances in which co-ordination of resources was based on co-operation
between the parties concerned.

Mergers are a form of complex organization often defensive in nature. Mergers are increasingly common –
such as the recent spate of financial institutions’ mergers following the credit crunch of 2007/8.

Joint ventures should mean that each sponsoring organisation has a degree of equity participation, while
partnerships may not, and may or may not share assets.

Consortia are short-term legal entities with sunk costs from each of the partners and which terminate
at the end of the project.

Alliance is a term used for a weaker non-legal-entity kind of operation where firms simply contract to
work together on a gain-share/pain-share basis. Termination clauses would vary with the nature of the
co-operation, as would sharing of facilities and the purchase of equipment.

Example: Various partnerships exist in the automotive industry – Renault engines in Volvo cars.

Networks have been described as a link between supplier and purchaser in the supply chain but a more
accurate and useful division is between different suppliers, imitating the co-ordination methods employed
within the firms.

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The Basis of Strategy: Structure

Example: In Italy experiments have been made to introduce networks in technologically similar industries
in areas called ‘business districts’ in the textile industry, contractors are based in the same region, work
for several different firms, sometimes in alliances or partnerships with other contracts, sometimes as
sole contract-holder. Technology transfer opportunities arise for the major textile firms as contractors
learn the businesses of other firms.

The Flexible firm model

Atkinson’s (1984) Flexible Firm Model was entitled ‘Manpower strategies for flexible organisations’ and
specified three types of flexibility and a diagram illustrating the most important two types – functional
and numerical.

Functional flexibility – was flexibility over tasks – staff capable of doing different things – core employees
were well-trained and valuable

Numerical flexibility – comprised employees in a First Peripheral Group – internal workers who are
expected to be flexible by adding to the numbers already there; Second Peripheral Group – became
more important – it involved part-time, temporary, jobshare, government schemes – external additions;
subcontractors, agency temps; self-employment.

Financial Flexibility – performance related pay, bonuses (lump sums) commission (rate or %).

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References

20 References
Adler N pp. 7–8; in Daft R Organisational Theory and Design 6th Edition p. 259

Andrews, KR 1971 The concept of corporate strategy Irwin NY: Dow-Jones

Ansoff, HI 1965 Corporate Strategy – an analytic approach to business policy for growth and expansion
Boston: McGraw-Hill

Argyris C, Schon D. 1996. The Learning Company: A Strategy for Sustainable Development. McGraw
Hill: New York.

Atkinson J 1984 Manpower Strategies For Flexible Organisations Personnel Management 16 28 3rd
August pp. 28–31

Barney J 1991 Firm resources and sustained competitive advantage Journal Of Management 17, 1, 99–120

Beckhard R 1969. Organisational Development: Strategies and Models. Addison-Wesley: Reading, MA.

Brunsson N, Olsen J 1993. The Reforming Organisation Making Sense of Administrative Change. Thomson
Learning: London.

Burns, T and Stalker, GM (1961), The Management of Innovation. London: Tavistock.

Chandler AJ 1962 Strategy and structure: chapters in the history of the American industrial enterprise
Cambridge Mass MIT Press

Clausewitz C Von On War (Translated by Howard M and Paret P) Oxford: Oxford University Press

Cummings T, and Huse E 1989. Organisational Development and Change. London: Macmillan

Daft, R (1998), Organizational Theory and Design. New York: West Publishing

Deal T and Kennedy A (1982) Corporate Cultures : The Rites and Rituals of Corporate Life. Harmondsworth:
Penguin Books

Fortune/Mission-http://www.missionstatements.com/fortune_500_mission_statements.html

http://www.missionstatements.com/fortune_500_mission_statements.html

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References

Gibb H (2000). Theory of Constraints. Bandolier Journal www.ox.ac.uk/bandolier

Goldratt E, Cox J (1992). The Goal. Macmillan Press: London

Goldratt E (2000). Goldratt Institute Workbook

Goldratt E (2003). Goldratt Institute Workbook

Goldratt Institute (1996). The TOC Way. www. goldratt.co.uk

Goldratt Institute (2001a). www. goldratt.co.uk

Goldratt Institute. (2001b). TOC for Education. www.goldratt.co.uk

Grant, RM (1995, 1998, 2004, 2008), Contemporary Strategy Analysis. Oxford: Blackwell

Greiner, L 1972. Evolution and Revolution as Organisations Grow Harvard Business Review, 50, pp. 37–46

Guest DE Michie J Sheehan M and Conway N 2000a Employment relations, HRM and business
performance; an analysis of the 1998 Workplace Employee Relations Survey London CIPD

Guest DE Michie J Sheehan M Conway N and Metochi M 2000b Effective people management: initial
findings of the Future of Work study London CIPD

Johnson G and Scholes K 2002 Exploring corporate strategy London Prentice Hall

Harrison R (1972) Understanding Your Organisation’s Character. Harvard Business Review 50 (23)
119–123)

Hofer CW and Schendel D (1979) Strategy formulation: analytical concepts St Paul: West

Hofstede, G (1997). Cultures & organisations: software of the mind. Second edition. McGraw-Hill

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References

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Lindblom, CE (1959). The Science of Muddling Through. Public Administration Review, 79–88

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Journal XI: 171–195

Mintzberg, H (1987), Crafting Strategy Harvard Business Review, 65:4, pp 44–55

Mintzberg, H and Waters, JA (1985) Of strategies deliberate and emergent Strategic Management Journal,
6:3, pp. 257–272

Morgan G (1986, 1997) Images of organisation London: Sage

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Stacey, R (1996). Complexity and Creativity in Organizations, Berrett-Koehler, San Francisco

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_GoBack
1 Introduction
2 Why Strategy?
3 The Formulation of Strategy
4 Schools of strategy
5 Levels of strategy
6 Process of strategy
7 Types of Strategy
8 Stakeholder theory
9 External Analysis
10 Internal Analysis
11 Integration
12 �Human resources management HRM
13 Culture
14 SWOT Analysis
15 Generic Strategy
16 Managing change
17 Growth and Decline
18 �Globalization and International Strategy
19 The Basis of Strategy: Structure
20 References

Management 515

Managing in the Global Environment

GLOBALIZATION

There was a time when most regions were economically self-sufficient. Locally produced foods, fuels and raw materials were generally processed for local consumption. Trade between different regions was quite limited.
Today, the economies of most countries are so interconnected that they form part of a single, interdependent global economy. Globalization refers to rapid increase in the share of economic activity taking place across national borders.
Globalization goes beyond international trade. It includes the way in which goods and services are produced, created, delivered, and sold and the movement of labor, raw materials, and capital.

3
World Per Capita Income

Here is a graph of world-wide per capita income since the year zero.
Note the inflection just after 1800? What caused this inflection?
This is several decades after the establishment of the United States. The colonial naval powers of England and Spain are diminished. The trade barriers put in place by these countries are largely gone. The economic strangle hold of Denmark is gone. France is coming out of its own revolution and not focused on international affairs.
International trade is advancing because the in advances in technology (larger, more seaworthy ships) and fewer trade barriers.
Increases in international trade have a direct positive impact on the incomes of nations.
3

4
Definitions
Global Organization. An organization that operates and competes in more than one country
Global Environment. Set of forces and conditions in the world outside the organization’s boundaries that affect the way it operates and shape its behavior
Economic
Technological
Socio-cultural
Demographic
Political
Laws and regulations

The international business environment can be defined as the environment in different sovereign countries, with factors exogenous to the home environment of the organization, influencing decision making on resource use and capabilities.
The external environment includes the social, political, economic, regulatory, tax, cultural, legal, and technological environments. To function effectively and efficiently, firms operating internationally must understand the social environment of the host country in which they are operating.
Today there are thousands of multinational corporations which operate in many parts of the globe.
4

5
More Definitions
Global Outsourcing. The purchase or production of inputs or final products from overseas suppliers to lower costs and improve product quality or design
Globalization. The set of specific and general forces that work together to integrate and connect economic, political, and social systems across countries, cultures, or geographical regions so that nations become increasingly interdependent and similar

Outsourcing has acquired a negative connotation for many people. In most cases, those most directly affected by the consequences of outsourcing are the most vocal opponents.
If you look at outsourcing dispassionately, it is nothing more than conducting business operations in the most cost-effective manner. It is not until these business actions cross national borders do people get upset. Efficient business operations leads to economic profit, which is better for society. So outsourcing is good for the many, but can be bad for a few. These few tend to be vocal.
This gives politicians an opportunity to use conflict to their own benefit. Companies that outsource are characterized as evil and money grubbing with executives who don’t care about their employees. The reality is that, in most cases, outsourcing is just good business.

6
Barriers to Global Entry
Economies of scale. Cost advantages with large operations in one location
Tariffs. A tax that government imposes on imported or, occasionally, exported goods. Intended to protect domestic industry and jobs from foreign competition
Culture. Language barriers and cultural practices can make managing overseas businesses difficult
Distance. Markets can be essentially closed because of the costs of communications/transportation over long distances
Brand loyalty. Customers’ preference for products may not be seen in other countries or cultures

Companies can face barriers to creating a global footprint.
Even if a business can overcome all of the barriers within it power to influence, tax policy may be insurmountable. As governments change, tariff policy can change making previously profitable business suddenly unprofitable.
6

7
General Global Environment
Socio-cultural Forces. Pressures emanating from the social structure of a country or society or from the national culture
Social structure. The traditional system of relationships established between people and groups in a society
National culture. The set of values that a society considers important and the norms of behavior that are approved or sanctioned in that society
Technology. Electronic equipment that managers use in to achieve desired outcomes—United States vs. rest of world

Despite all of the challenges facing business, globalization can be a good thing. The free flow of labor and goods across borders tends to benefit all countries involved.
Advances in technology offer the greatest potential for business to expand into the global environment. With a few exceptions, electrons are allowed to flow across borders unfettered.
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General Global Environment
Economic Forces. Interest rates, inflation, unemployment, economic growth, and other factors that affect the general health and well-being of a nation or the regional economy of an organization
Demographic Forces. Outcomes of changing attitudes toward, the characteristics of a population, such as age, gender, ethnic origin, race, sexual orientation, and social class
Political and Legal Forces. Outcomes of changes in laws and regulations, such as deregulation of industries, privatization of organizations, and increased emphasis on environmental protection.

Economic conditions can greatly affect the ability to conduct business in other countries. For example, the European Union, which was intended to reduce barriers to member nations, has had other consequences. The bad economies of Greece, Spain, and Italy have reduced opportunities for companies wanting to do business in England, Germany, and France.
The mass migration of displaced emigrants from the Middle East into Europe had driven up social costs which governments want to pass along to businesses.
Governments can even nationalize business assets. That is what happened in Venezuela. Businesses lost all of their assets in just a few months.
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Process of Globalization
Human capital. The flow of people around the world through immigration, migration, and emigration
Political capital. The flow of influence using diplomacy, persuasion, aggression, and force of arms to protect the access of a country to the forms of capital in other countries
Resource capital. The flow of natural resources, parts, and components between companies and countries, such as metals, minerals, lumber, energy, food products, information technology, and repair parts
Financial capital. The flow of money capital across world markets through overseas investment, credit, lending, and aid

As I said previously, the free flow of labor, capital, and resources tends to benefit all countries involved. Sadly, when politicians get involved, barriers tend to grow. Many politicians have very short-sighted views of the world and do not see the consequences of creating barriers to global commerce.
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Changes to the Global Environment
Changes in Distance and Communication. Improvement in transportation technology and fast, secure communications have greatly reduced the barriers of physical and cultural distances
Lowering of Trade Barriers. Opened enormous opportunities for managers to expand the market for their goods and services. Allowed managers to now both buy and sell goods and services globally. Increased intensity of global competition such that managers now have a more dynamic and exciting job of managing

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National Culture
Values. Ideas about what a society believes to be good, right, desirable and beautiful. Provide the basic underpinnings for notions of individual freedom, democracy, truth, justice, honesty, loyalty, love, sex, marriage, etc.
Norms. Unwritten, informal codes of conduct that prescribe how people should act in particular situations and are considered important by most members of a group or organization
Folkways. Routine social conventions of daily life (e.g., dress codes and social manners)
Mores. Behavioral norms that are considered central to functioning of society and much more significant than folkways (e.g., theft and adultery), and they are often enacted into law.

The national culture has a very large affect on the ability of firms to conduct business in foreign lands. Differences between cultures may have an effect on how to effectively manage foreign employees and manage foreign stakeholders. These differences may create managerial challenges for companies. Differences between national cultures are mainly found in the deep rooted values of the respective cultures. These cultural values can shape how people expect companies to be run, and how relationships between leaders and followers should be. Ideally, these expectations are balanced between the employer and the employee, but many times the cultural distance results in great differences that can cause problems for the management.
When employing people from different cultural backgrounds, companies may benefit from trying to generate a unified organizational culture. Employees from other national cultures can be socialized into the culture of the respective company, and hence learn the practices of the respective corporate culture, even though these practices might be contradictory to the practices normally found in the employee’s national culture. However, if the company practices are very different from cultural norms, this can be very hard, if not impossible.
Companies like McDonalds want to create a uniform corporate culture, to strengthen its world-wide image and maintain universal quality. Nonetheless, even McDonalds tailors its menu and pricing to accommodate local cultural norms.
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Global Environmental Analysis
Economic or social factors play a big role in a company’s decisions. This analysis and the monitoring of those factors reveal chances and risks for the company’s business. This analysis can be conducted at the macro and micro level
PESTLE analysis
Political
Economic
Social
Technological
Legal
Environmental

When exploring whether a business wants to expand into a foreign market, models such as Porter’s Five Forces, SWOT, and PEST (or PESTLE) can be useful.
View this video: https://www.youtube.com/watch?v=mCdcdf-b8AU
View this video: https://www.youtube.com/watch?v=4mkVc6ZZtJw

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Advantages of a Global Environment
Access to labor
Knowledge, skills, abilities
Cost of labor
Access to natural resources. Partnerships with governments may results in access to otherwise unavailable rare natural resources
Reduced transportation costs. Collocating manufacturing with raw materials can reduce costs and strengthen supply chain
Tax advantages. Many countries have favorable tax laws

Positive effects
–Increased economic development in the host country
–Expanded infrastructure in the host country
–Transfer of modern management techniques to emerging economies
–Greater interdependence among business partners. Some argue that economic interdependence leads to improved conditions for lasting peaceful conditions
Negative effects
–Increases the power of MNC. Many fear this rising power
–MNCs externalize cost to countries, e.g., use low cost, polluting processes that would not be allowed in home country
–Competition results in too many concessions. Host countries may give breaks to MNC that end up hurting the local population
–MNCs may influence local policies to the detriment of the local population
–Companies incorporate in low tax countries which removes tax revenues from home countries

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Impact on labor in host country
Positive
Increased job opportunities
Upgraded education system
More access to training
Negative
Job displacement
Lower labor standards
Downward wage pressure
Exploitation of workers

In the global economy jobs are becoming more temporary and insecure.
A survey of American workers showed that millennials can expect to hold 7 to 10 jobs over their working life. This may be more a function of the changing cultural norms; however, one can argue that the access to foreign workers can increase the likelihood of American workers being displaced.
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Economic Considerations
Currency Exchange
Most countries demand payment in their own currency
An increasing exception is crude oil
Trade Balance
Capital inflows and outflows
United States has been running a trade deficit for decades
Tariffs, quotas, and embargos
Free trade areas

Some argue that globalization leads to growing inequality in economic development. Corporate profits have grown in the richest countries, which stunts economic development in host countries.
Increased likelihood of economic disruptions in one nation can affect all nations
The fact that some economies are benefiting more than others does not necessarily mean that workers from those benefiting economies are seeing an improvement in their own quality of life, income, or economic standing

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Social and Political Concerns
Political Stability
Governments change
Civil unrest and war is not healthy for all business
Universal Human Rights
Cultural norms of one country may be considered a human rights violation in another
One-size-fits-all policies may not fit all
Environmental Impact. Varying environmental standards may have an impact on the firm’s image at home

Globalization can lead to rapid trends of urbanization in host countries. This may create an urban population more vulnerable to hunger, isolation, exploitation, and disease
Native cultures are being erased at a rapid rate
Globalization leads to a greater risk of diseases being transported unintentionally between nations, increase in the chances of civil war within developing countries, and open war between developing countries as they vie for resources
Decreases in environmental integrity can lead to polluting corporations taking advantage of weak regulatory rules in developing countries

The threat that control of world media by a handful of corporations will limit cultural expression
International aid sources have decreased while those agencies which dispense aid have come increasingly under the control of the richest economies
Globalization is here to stay. I think it is a good thing. Some are concerned, even fearful. You can decide for yourself.
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Management 515

Control, Change, and Decision Making

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Definitions
Organizational Control. Managers monitor and regulate how efficiently and effectively an organization and its members are performing the activities necessary to achieve
organizational goals
Control Systems. Formal, target-setting, monitoring, evaluation and feedback systems that provide managers with information about whether the organization’s strategy and structure are working efficiently and effectively.
A system must be managed. The bigger the system, the more difficult it is to manage it to perform optimally

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Types of Control Systems using IT
Feed forward control. Control that allows managers to anticipate problems before they arise. Giving stringent product specifications to suppliers in advance, e.g., ongoing customer research
Concurrent control. Control that gives managers immediate feedback on how efficiently inputs are being transformed into outputs so managers can correct problems as they arise, e.g., equipment sensors, daily reports
Feedback control. Control that gives managers information after outputs are completed, e.g., customer surveys, quality control inspections

In a feed-forward system, the control variable adjustment is not error-based. Instead it is based on knowledge about the process and predictions of outputs. Some standards are needed for the control system to be reliable. Sometimes pure feed-forward control without feedback is called ‘ballistic’, because once a control signal has been sent, it cannot be further adjusted; any corrective adjustment must be by way of a new control signal. In contrast ‘cruise control’ adjusts the output in response to the load that it encounters, by a feedback mechanism.
Concurrent control is accomplished through feedback. The control system applies constraints or adjustments which typically result in some change in ongoing operations. Operational consistency and correctness can usually be achieved without significantly reducing performance. Concurrency control can require significant additional complexity and overhead.
Feedback control systems are similar to concurrent systems, except that the feedback information is usually after the fact, e.g., after a batch is completed, after a product is delivered to a customer. Adjustments will affect a future run not the current run.
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Basic Concurrent Control Process
System
Controller
Sensor
Input
Output

Operations

Here is a visual of the basic control process.
At some point in operations, a sensor measures some aspect of production. If the result is out of tolerance, a signal is sent to the controller. The controller then adjusts operations to return to tolerance.
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Flavors of Control Systems
Discrete. Found in manufacturing. Robotic assembly can be characterized as discrete process control
Batch. Requires that specific quantities of raw materials be combined in specific ways for particular durations to produce an intermediate or end result, e.g., bread
Continuous. A physical system represented through variables that are smooth and uninterrupted over time, e.g., the water temperature in a nuclear reactor
Applications having mixed elements are often called hybrid applications

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Organizational Control Systems
Type of Control Mechanisms
Output Financial measures
Organizational goals
Operating budgets
Behavior Direct supervision
Rules and standing operating procedures
Management by objectives
Clan Norms, values, and culture
Socialization
Policies
Reward and punishment

Here is a table of control systems that are common in business.
Even organizational culture can be viewed as a control system. Individuals who violate organizational norms can suffer pressure to return to acceptable behavior.
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Control Process Design
A four step process
1. Establish standards and goals
2. Measure actual performance
3. Compare results against standards
4. Take corrective action, if needed

The steps to designing a control process are quire simple. Simple to state, difficult to execute.
Step one is the most critical. You must establish the RIGHT measures and standards.
Ideally, you want to measure outcomes. Outcomes can be very hard to measure.
Outputs tend to be easier to identify and measure, so firms tend to measure outputs as an indicator of outputs.
Ideally, measures should be SMART:
Specific – target a specific item or goal
Measurable – quantifiable in some meaningful unit, e.g., dollars, days, errors, units
Assignable – who is responsible for this specific result?
Realistic – results must be realistically be achievable, given available resources.
Time-related – specify when the result(s) can be achieved.

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Examples of Control Measures
Profit Ratio. Measures how efficiently managers are using the organization’s resources to generate profits
Return on Investment (ROI). Net income before taxes divided by total assets. Most commonly used financial performance measure
Operating margin. Operating profit divided by sales revenue. Another measure of how efficiently an organization is using its resources

Business tend to use financial measures as indicators of performance.
These measures can be useful if the goals of the firm are financial based, i.e., profit. Some organizations are less concerned about profit and more concerned with social issues.
U.S. government agencies tend to misuse financial measures, partly become their desired outcomes are very nebulous or difficult to measure.
For example, the U.S. Department of Health and Human Services measures the number of individuals receiving Medicare Benefits. This is easy to track and helps justify budgets, yet the linkage between the number of people receiving benefits and the mission to “advance the quality of life for all Americans” is tenuous at best.
[Build a SMART measure exercise.]
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Some More
Liquidity ratio. Measures how well managers have protected organizational resources to be able to meet short-term obligations
Leverage ratio. Measures the degree to which managers use debt or equity to finance ongoing operations
Activity ratio. Shows how well managers are creating value from organizational assets, e.g., inventory turnover

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Goal Setting
Corporate managers set goals for divisions that will allow the organization to achieve corporate goals
Division managers set goals for each activity or function that allow the division to achieve division and corporate goals
Activity or functional managers set goals for each employee that are linked to activity/function, division, and corporate goals

Goal setting involves the development of an plan or strategy designed to guide the organization towards a goal. Goal setting can be guided by goal-setting criteria (or rules) such as SMART criteria.
More specific and ambitious goals tend to lead to better performance than easy or general goals. As long as the organization or individual accepts the goal, has the ability to attain it, and does not have conflicting goals, there is a strong positive correlation between goal difficulty and task performance.
In business, goal setting encourages participants to put in substantial effort. If every member has defined expectations, little room is left for inadequate or marginal effort to go unnoticed.
Managers cannot create motivation. Goals are therefore an important tool for managers, since goals have the ability to function as a self-regulatory mechanism that helps employees prioritize tasks.

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Behavior Control
Direct supervision
Actively observe the behavior of subordinates
Teach subordinates appropriate behaviors
Intervene to take corrective action
Most immediate and potent form of behavioral control
Can be an effective way of influencing employees
Very expensive because a manager can only manage a relatively small number of subordinates effectively (5-7)
Can demotivate subordinates if they feel that they are under such close scrutiny that they are not free to make their own decisions (micro-managing)

Direct supervision generally means to be physically present, or within an immediate distance, such as on the same floor, and available to respond to the needs of something or someone. Precise definitions vary by context and the organization.
For example, in the context of employment law, it may involve defining the degree of control over a worker’s tasks, a role of a manager.
Direct supervision on a job may be defined by the degree of supervision by a person overseeing the work of other persons, by which the supervisor has control over and professional knowledge
In business, micromanagement is a management style in which a manager very closely observes or controls the work of subordinates. It generally has a negative connotation.
The notion of micromanagement can be extended to any social context where one person takes a bullying approach, in the level of control and influence over the members of a group. Often, excessive obsession with the most minute of details causes a management failure in that the focus on the major details is loss and worker performance is reduced.
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Bureaucratic Control
Control through a system of rules and standard (standing) operating procedures (SOPs) that shapes and regulates the behavior of divisions, functions, and individuals
Rules are easier to make than discard, leading to bureaucratic “red tape” and slowing organizational reaction times
People might become so used to automatically following rules that they stop thinking for themselves

Historically, bureaucracy was government administration managed by departments staffed with nonelected officials. Today, bureaucracy is the administrative system governing any large organization.
Since being coined, the word “bureaucracy” has developed negative connotations. Bureaucracies have been criticized as being too complex, inefficient, or too inflexible.
Others have defended the necessity of bureaucracies. The German sociologist, Max Weber, argued that bureaucracy constitutes the most efficient and rational way in which one can organize human activity, and that systematic processes and organized hierarchies were necessary to maintain order, maximize efficiency and eliminate favoritism. Weber also saw unfettered bureaucracy as a threat to individual freedom, in which an increase in the bureaucratization of human life can trap individuals in an “iron cage” of rule-based, rational control.
Former Speaker of the U.S. House of Representatives opined that government bureaucracy must be so large and complex that no tyrant can make it work.
However, a large complex bureaucracy in a business will likely put that business at a competitive disadvantage.
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Clan Control
The control exerted on individuals and groups in an organization by shared values, norms, standards of behavior, expectations, policies, rewards, and punishments
One example is an organization’s “values statement”

Clan control is the control of the members of an organization through shared values, belief structures, and cultural norms, rather than through traditional bureaucratic control procedures. A clan control strategy allows employees a high degree of operational latitude, relying on commonly-held goals and behavioral expectations to produce desired strategic outcomes.
A clan control strategy can he unhealthy for an organization. It can lead to a mob mentality, where actions are taken based on emotion and not logic; groupthink, where all members begin to think alike and do not challenge assumptions; and a divergence from organizational goals in favor or group goals.
See “Principle-Agent Problem: https://en.wikipedia.org/wiki/Principal%E2%80%93agent_problem
The principle-agent problem (Agency Theory) will be address often in the course. If you are unsure of the concept, please drop me an email.
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Management by Objectives (MBO)
Formal system of evaluating subordinates for their ability to achieve specific organizational goals or performance standards and to
meet operating budgets
Specific goals and objectives are established at each level of the organization
Managers and their subordinates together determine subordinates’ goals
Managers and their subordinates periodically review the subordinates’ progress toward meeting goals
Critical element of most performance/rewards systems

Review the Wikipedia page: https://en.wikipedia.org/wiki/Management_by_objectives
Note the contributions of Peter Drucker and W. Edwards Deming.
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Change
Organizational change. Movement of an organization away from its present state and toward some desired future state to increase its efficiency and effectiveness
Evolutionary change. Gradual, incremental, and narrowly focused constant attempt to improve, adapt, and adjust strategy and structure incrementally to accommodate changes in the environment
Revolutionary change. Rapid, dramatic, and broadly focused. Involves a bold attempt to quickly find ways to be effective. Likely to result in a radical shift in ways of doing things, new goals, and a new structure for the organization

Change is a topic the deserves its own semester-long class. What we will cover here is just the tip of the iceberg.
The points that I want you to take away are:
Change requires leadership. The leader inspires or persuades you that change is necessary and you need to be a part of the change.
View these videos: https://www.youtube.com/watch?v=1OCAT0Uk5j0 and https://www.youtube.com/watch?v=fW8amMCVAJQ (Dancing guy)
Managers are involved in managing the elements of change, but remember the basic role of a manager is to keep the status quo. Change is unsettling to the concept of management.
Revolutionary change tends to be top-down and evolutionary change, bottom-up.

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Organizational Change
Assess the need for change Decide to make a change Implement change Evaluate change
Recognize that a problem exists
Identify the root cause(s) Describe the ideal future state (vision)
Identify obstacles and uncertainty Select methodology (top down or bottom up)
Introduce and lead change Compare pre-change and post-change performance
Compare to ideal performance (benchmarking)

Change is hard
People resist change
Change takes leadership (not management)

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Implementing Change
Top Down Change. A fast, revolutionary approach to change in which top managers identify what needs to be changed and then move quickly to implement the changes throughout the organization
Bottom-up change. A gradual or evolutionary approach to change in which managers at all levels work together to develop a detailed plan for change.

Top-down change tends to be less effective than bottom-up change.
If the leader can convince the organization that change is necessary, a top-down approach can be successful. However, top-down change tends to be coercive—the boss demands change happen so it better happen. Human nature, on the other hand, resists change. Even if a change is made, people tend to revert to the previous state after the initial pressure for change is lifted.
Bottom-up change tends to be more successful because it only get started and thrives if all involved are convinced that change is in the individual’s self interest.
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Evaluating Change
Benchmarking. The process of comparing one company’s performance on specific dimensions with the performance of other, high-performing organizations
Many flavors of benchmarking exist
Lots of software from which to chose
Everyone is looking for the “best practice”
Industry standards
Competitor’s results

Benchmarking is the process of comparing business performance against standards or other companies. In the process of best practice benchmarking, management identifies the best firms in the firm’s industry and compares results and processes.
Benchmarking may be a one-off event, but is often treated as a continuous process in which organizations continually seek to improve their practices.
Benchmarking against industry standards can be justified. I question the utility of comparing your firm against a competitor. No wise competitor is going to voluntarily give away a competitive advantage. In short, other firms will lie.
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Nature of Decision Making
The process by which managers respond to opportunities and threats that confront them by analyzing options and making determinations about specific organizational goals and courses of action
In response to opportunities. Occurs when managers respond to ways to improve organizational performance to benefit customers, employees, and other stakeholder groups
In response to threats. Events inside or outside the organization are adversely affecting organizational performance

Decision-making is as a problem-solving activity that ends when a solution deemed to be satisfactory is identified. Decision making can be rational or irrational and can be based on explicit or tacit knowledge. If you are unsure of the difference between explicit and tacit knowledge, please see Wikipedia.
A major part of decision-making involves the analysis of a finite set of alternatives described in terms of evaluative criteria. Alternatives are ranked in terms of how attractive they are to the decision-maker(s) when all the criteria are considered simultaneously.
Logical decision-making is an important part of all science-based professions, where specialists apply their knowledge in a given area to make informed decisions. Experts may use intuitive decision-making rather than structured approaches. They make decisions that fit their experience and arrive at a course of action without weighing alternatives.
The decision-maker’s environment can play a part in the decision-making process.
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Methods
Programmed Decision. Routine, virtually automatic process.
Decisions have been made so many times in the past that managers have developed rules or guidelines to be applied when certain situations inevitably occur
Non-Programmed Decisions. Non-routine decision making that occurs in response to unusual, unpredictable opportunities and threats. Rules do not exist because the situation is unexpected or uncertain and managers lack the information they would need to develop rules to cover it

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Intuition. Feelings, beliefs, and hunches that come readily to mind, require little effort and information gathering and result in on-the-spot decisions
Tacit versus explicit knowledge
The power of “Blink”
Reasoned judgment . Decisions that take time and effort to make and result from careful information gathering, generation of alternatives, and evaluation of alternatives
Requires quantitative information
Analysis of alternatives (AoA)
Beware of analysis paralysis
See “game theory”
Based On?

Tacit knowledge is the kind of knowledge that is difficult to transfer to another person by means of writing or words. For example, the game “Twenty Questions” makes use of tacit knowledge.
I am thinking of something.
Is it living? Yes
Is it a person? No
Is it an animal? Yes
Is it a mammal? Yes
Does it have four legs? Yes
Is it a domestic animal? Yes
Is it a farm animal? No
At this point, you should have a limited number of guesses. Your tacit knowledge of the general characteristics of things allows you to include or exclude options. With just a few more focused questions, you should be able to reduce your options to one.
Explicit knowledge is knowledge that can be readily articulated, codified, accessed and verbalized. It can be easily transmitted to others. Most forms of explicit knowledge can be stored in some medium. The information contained in encyclopedias and textbooks are good examples of explicit knowledge.
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Classic Decision Making Model
A prescriptive model of decision making that assumes the decision maker can identify and evaluate all possible alternatives and their consequences and rationally choose the most appropriate decision in light of what managers believe to be the most desirable future consequences for their organization
List all alternative courses of action with consequences
Rank each alternative from least to most preferred according to personal preference
Select the alternative that leads to most desired future consequences

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Step Assumptions
List All reasonable alternatives are known or knowable
All relevant information on each alternative is available

Rank Managers possess the mental faculty to process information
Managers are able to eliminate personal biases
Select Managers are able to accurately predict consequences
Unforeseen consequences are insignificant
Managers can set aside self interest (Agency Theory)

Weaknesses of the Classic Model

The fallacy of the classic decision making model is that the assumptions listed above hold.
It is foolish to believe this.
Decision makers can list many alternatives, but some are simply not knowable. It is beyond human ability to list all possible alternatives.
Not all managers are that smart. Theoretically , smart people may make reasoned decisions, but these decisions may not be wise. I cringe at the decisions of managers of below average intelligence.
Humans are inherently bad at making predictions about the future.
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Administrative Model
An approach that explains why decision making is inherently uncertain and risky and why managers usually make satisfactory rather than optimum decisions
Bounded rationality. Cognitive limitations that constrain one’s ability to interpret, process, and act on incomplete information, uncertainty, ambiguity, and in the face of time constraints. The number of alternatives a manager must identify is so great and the amount of information so vast that the manager cannot come close to evaluating all possible alternatives leading to satisficing (choosing an acceptable, or satisfactory response rather than trying to make the best decision)

The Bounded Rationality (or Administrative) model is based on the concept developed by Herbert Simon. This model does not assume individual rationality in the decision process.
Instead, it assumes that people, while they may seek the best solution, normally settle for much less, because the decisions they confront typically demand greater information, time, processing capabilities than they possess. They settle for “bounded rationality or limited rationality in decisions. This model is based on certain basic concepts.
In war, the common belief is that “a poor plan, aggressively executed is always better than the perfect plan, late.”
The trade-off for time might be the death of the organization. In these cases, a satisfactory decision is not only adequate, but necessary.
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Retrospective decision model (or implicit favorite model)
Attempts to rationalize a decision post hoc
Associated with choice-supportive bias and confirmation bias
Retrospective Decision Model

This decision-making model focuses on how decision-makers attempt to rationalize their choices after they have been made and try to justify their decisions. This model has been developed by Per Soelberg. He made an observation regarding the job choice processes of graduating business students and noted that, in many cases, the students identified implicit favorites (i.e. the alternative they wanted) very early in the recruiting and choice process. However, students continued their search for additional alternatives and quickly selected the best alternative.
The total process is designed to justify, through the guise of scientific rigor, a decision that has already been made intuitively. By this means, the individual becomes convinced that he or she is acting rationally and taking a logical, reasoned decision on an important topic.
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Errors in Decision Making
Indecision
Postponing the decision until the last minute
Failure to isolate the root cause
Failure to properly assess the reliability of informational sources
Wrong choice of analytical methodology
No follow through on the decision

The quality of the decisions can make the difference between success and failure. Therefore, it is imperative that all factors affecting the decision be properly evaluated and investigated.
a. Indecisiveness: Decision-making is full of responsibility. The fear of its outcome can make some people timid about taking a decision. This timidity may result in taking a long time for making a decision and the opportunity may be lost. This trait is a personality trait and must be looked into seriously.
b. Postponing the decision until the last moment: This is a common feature which results in decision-making under pressure of time which generally eliminates the possibility of thorough analysis of the problem which is time consuming as well as the establishment and comparison of all alternatives. Even though some managers work better under pressures, most often an adequate time period is required to look objectively at the problem and make an intelligent decision. Personality also has an affect on decision making. Introverts tend to require more time to think about a situation before making a decision.
c. A failure to isolate the root cause of the problem: It is a common practice to cure the symptoms rather than the causes. For example, a headache may be cause by a deep-rooted emotional problem. An aspirin will not cure the root problem.
d. A failure to assess the reliability of informational sources: Very often, we take it for granted that the other person’s opinion is very reliable and trustworthy and we do not check for the accuracy of the information ourselves. The opinion of the other person is taken, so that if the decision fails to bring the desired results, the blame for the failure can be shifted to the person who had provided the information. This is a poor reflection on the manager’s ability and integrity.
e. The method for analyzing the information may not be a sound one: Since most decisions have to be based upon a lot of information, the procedure to identify, isolate and select the useful information must be sound and dependable. Usually, it is not operationally feasible to objectively analyze more than five or six pieces of information at a time. A model must be built which incorporates and handles many variables in order to aid the decision makers. Choosing the right model is critical.
f. Do implement the decision and follow through: Making a decision is not the end of the process, rather it is a beginning. Implementation of the decision and the results obtained are the true barometer of the quality of the decision. Duties must be assigned, deadlines must be set, evaluation process must be established and contingency plans must be prepared in advance. The decisions must be implemented and results checked to get the best outcomes.
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Why Information is Incomplete
Uncertainty. The probabilities of alternative outcomes cannot be determined or are less than 1.
Ambiguous Information. Information that can be interpreted in multiple and often conflicting ways
Time constraints and information costs. Managers have neither the time nor money to search for all possible alternatives and evaluate potential consequences
Inaccurate information

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Biases
Heuristics. Rules of thumb that simplify the process of making decisions
Systematic errors. Poor decisions that people make over and over due to a system or process weakness
Prior Hypothesis Bias. Results from the tendency to base decisions on strong prior beliefs even if evidence shows that those beliefs are wrong
Representativeness. Results from the tendency to generalize inappropriately from a small sample or from a single vivid event or episode

In this and the next few slides, I am listing several common cognitive biases that affect decision makers and the decision making process.
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Illusion of Control. The tendency to overestimate one’s own ability to control activities and events
Escalating Commitment. A source of cognitive bias resulting from the tendency to commit additional resources to a project even if evidence shows that the project is failing
Selective search for evidence. Willingness to gather facts that support certain conclusions but disregard other facts that support different conclusions
Premature termination of search for evidence. Accepting the first alternative that looks like it might work
Biases 2

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Biases 3
Inertia. Unwillingness to change thought patterns that we have used in the past in the face of new circumstances
Selective perception. Actively screening-out information that we do not think is important
Wishful thinking or optimism bias. Tendency to see things in a positive light distorting perception and thinking
Choice-supportive bias. Distortion of our memories of chosen and rejected options to make the chosen options seem relatively more attractive

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Recency. Tending to place more attention on more recent information and either ignore or forget more distant information
Repetition bias. Willingness to believe what we have been told most often and by the greatest number of different of sources

Anchoring and adjustment. Making decisions that are unduly influenced by initial information that shapes our view of subsequent information
Biases 4

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Groupthink and peer pressure. A desire to conform to the opinions held by the group
Source credibility bias. Rejecting something if we have a bias against the person, organization, or group to which the person belongs
Incremental decision making and escalating commitment. Looking at a decision as a small step in a process which tends to perpetuate a series of similar decisions
Biases 5

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Attribution asymmetry. Tending to attribute our success to our abilities and talents, but attributing our failures to bad luck and external factors, while attributing other’s success to good luck, and their failures to their mistakes
Role fulfillment. Conforming to the decision making expectations that others have of someone in our position
Underestimating uncertainty. Tending to underestimate future uncertainty because we tend to believe we are smarter than we truly are: 75-25
Biases 6

Underestimating uncertainty. People tend to overestimate their skill and performance. Repeated studies have show that 75 percent of all workers believe they are in the top 25 percent of performers.
[Bias survey]
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Bias Survey

Here is a distribution of a set of answers of a set of questions posed to on-ground classes over several semesters.
Note how left-skewed the distribution is. This suggests an inflated self-sense of ability, which is consistent with findings in many other experiments.
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1 1 7 6 8 14 2 0 1 3 20 14 3 1 3 6 18 10 4 0 1 6 20 11 5 1 0 11 20 6 6 0 1 11 19 7 7 0 2 10 20 6 8 0 7 6 17 8
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Group Decision Making
Can be superior to individual making
Choices are less likely to fall victim to personal cognitive biases
Ability to draw on combined skills of group members (diversity of thought, skills, and experiences)
Improved capacity to generate feasible alternatives
Potential for “buy-in” when other stakeholders contribute to the decision

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Likely to greatly extend the time needed to reach a decision
Can be difficult to get multiple managers to agree because of individual agendas (parochial thinking)
Can be undermined by political dirty tricks
Can lead to groupthink
Group Decision Disadvantages

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Groupthink
Pattern of faulty and biased decision making that occurs in groups whose members strive for agreement among themselves at the expense of accurately assessing information relevant to a decision
Often motivated by a desire to minimize conflict
Can be cultural
Usually occurs when group members rally around a central manager’s idea and become blindly commited to the idea without considering alternatives
The group’s influence tends to convince each member that the idea must go forward

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Organizational Learning
Organizational learning. Managers seek to improve a employee’s desire and ability to understand and manage the organization and its task environment so as to raise effectiveness
Learning organization. An organization in which managers try to maximize the ability of individuals and groups to think and behave creatively and thus maximize the potential for organizational learning to take place
Creativity. A decision maker’s ability to discover original and novel ideas that lead to feasible alternative courses of action

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Promoting Group Creativity
Brainstorming. Managers meet face-to-face to generate and debate many alternatives
Production Blocking. Occurs because group members cannot simultaneously make sense of all the alternatives being generated, think up additional alternatives, and remember what they were thinking
Nominal Group Technique. A decision making technique in which group members write down ideas and solutions, read their suggestions to the whole group, and discuss and then rank the alternatives

Nominal Group Technique
Useful when an issue is controversial and when different managers might be expected to champion different courses of action
Provides a more structured way to generate alternatives in writing and gives each manager more time and opportunity to come up with potential solutions
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Delphi Method
A decision-making technique in which group members do not meet face-to-face but respond in writing to questions posed by the group leader
Unusually a multi-round event
All contributions are anonymous
All contributors see all contributions
Delphi seems to have advantages over other predictive methods because:
Participants reveal their reasoning
It is easier to maintain confidentiality
Potentially quicker forecasts when experts are readily available

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Delphi Method
Typically used for predictive analysis or to generate an “expert opinion”
Typically three or four rounds, but can be more until a majority opinion emerges

Here is a graphic of the Delphi method.
Some critics have claimed that Delphi leads to groupthink. If structured correctly, I do not believe this to be the case.
Review this video: https://www.youtube.com/watch?v=uV9xFqblEy4
You can stop at 03:40.
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