leading people
see attachments
Project 2: Situation Audit
For this project, you will be creating a situation audit of your own organization. You will prepare to conduct your audit over the next 12 steps of this project, during which you will review various aspects of your organization, including its
mission
, goals, and values. You will be given the opportunity to submit different parts of your audit for instructor feedback prior to submitting your final situation audit. Read the full description of the final deliverable and the steps to completion.
Begin your situation audit by going to
Step 1: Organize Your Work
.
When you submit your project, your work will be evaluated using the competencies listed below. You can use the list below to self-check your work before submission.
· 1.3: Provide sufficient, correctly cited support that substantiates the writer’s ideas.
· 1.6: Follow conventions of Standard Written English.
· 6.3: Analyze an organization’s internal strengths and weaknesses for strategic value.
· 6.4: Develop and recommend strategies for an organization’s sustainable
competitive advantage
.
· 8.1: Evaluate major business/organizational systems and processes and make recommendations for improvement.
· 8.3: Identify and distinguish among organizational structural types and their respective implications for performance.
· 9.1: Design organizational structures, systems, and processes that support the strategic goals of the organization.
· 9.2: Evaluate how human capital serves as a source of competitive advantage.
· 10.2: Analyze financial statements to evaluate and optimize organizational performance.
· 10.3: Determine optimal financial decisions in pursuit of an organization’s goals.
Step 1: Organize Your Work
Student Expectations
You are expected to find necessary information about the organization you chose for the situation audit and to integrate relevant MBA concepts and course materials with those facts. Throughout your situation audit, you must demonstrate your understanding of both your organization and the MBA concepts and course materials by explaining and applying the course concepts and supporting them with examples from your organization. The sources you use, whether from course materials or the organization, should be properly cited with in-text and a reference list.
Final Deliverable Instructions: A Situation Audit and Preliminary Analysis of Key Factors
Your boss has tasked you with preparing a situation audit that presents an overview of your organization (or an approved alternative). In this report, you’ll focus on analyzing several key internal factors that, taken together, provide a portrait of your organization. The information you will rely on for this report must be publicly available or available for review by faculty, as necessary.
Format Requirements
Use the
Situation Audit Template
provided below. Your Situation Audit report will be 18 to 22 double-spaced pages, excluding a required cover page, a brief executive summary, and a list of references. See
Executive Summaries
for guidance on writing this section. You may also use appendices for helpful supplementary information, but these will not be included in the page limit for this report. Use
APA formatting
for in-text citations and references.
Now that you have a better understanding of the project requirements, follow these guidelines:
· Read over these brief guidelines about
conducting research on your organization
. Discuss with your instructor any limiting factors you may encounter as you write this report. After you’ve discussed these issues with your instructor, if you believe it’s best for you to research an organization other than your own, please read this information about
using an outside organization
.
· If necessary, schedule any meetings in advance with your organization’s personnel to obtain the necessary information.
· Use the step-by-step Situation Audit Template as your outline and guide for the entire report, start to finish.
Next, proceed to Step 2, where you will write an overview description of your organization.
Step 2: Establish Key Organizational Facts
To start, write a brief overview description
creating an organizational fact sheet
of your organization, including the following information:
· when it was established and by whom
·
legal forms of organization
and tax status
· its current CEO
· its industry or industries
· its size
· its general purpose
Typically, such overviews in a report of this size are no more than one page (approximately 250 to 300 words).
Remember to apply the perspective of an
outside consultant
to your analysis. Be as objective as possible. Also, consider the audience for this report: key
stakeholders
including, board members, new employees, and anyone else who would benefit from this overview.
When you have finished your overview description, proceed to Step 3, where you will identify the
mission,
vision
, values, and goals
of your organization.
Step 3: Identify Mission, Vision, Values, and Goals
Now that you’ve identified the key facts about your organization, turn your attention to your organization’s mission, vision, values, and goals. Taken together, these elements can help drive organizational decisions, positively impact employee performance, and influence many of the other organizational components you’ll be examining for this report.
The mission, vision, values, and goals should be reviewed periodically to determine whether adjustments are needed in light of key environmental factors or changes in the organization’s performance or capacity.
Follow the steps below to analyze your organization’s mission, vision, values, and goals:
· Find your organization’s mission and look at whether and how it has changed over time. If it has changed, what process changed it?
· Analyze the extent to which your organization’s mission (1) is well understood, (2) continues to inform key decisions, and (3) is well aligned with what the organization is actually doing.
· If your organization does not have a formal mission statement, read
deducing a mission
.
· Analyze your organization’s vision and
core values
. Consider whether the vision and core values are in alignment with and supportive of the organization’s mission. Are the vision and core values widely understood and accepted within the organization?
· If you cannot find formal statements about your organization’s vision or core values, read
Deducing Vision and Core Values
.
· Next, determine whether your organization practices strategic
goal setting
. Analyze whether these goals are explained clearly and whether they make sense given the organization’s mission, vision, and values. In other words, look for alignment of mission, mission, values, and goals.
When you have completed Step 3, submit your organizational overview and fact sheet and your organization’s mission, vision, values, and goals for review and feedback in the dropbox located in the last step of this project. Then proceed to Step 4.
Step 4: Analyze Organizational Strategy and Objectives
While it is important to have a clearly defined and well-understood mission, along with key goals, vision, and values, success is unlikely without corresponding actions guided by an
organizational strategy
with measurable objectives.
Your audit should include a brief overview of your organization’s strategy. Remember, this report will be used in part to orient new employees to the company, so you don’t need to conduct a detailed analysis. You will, however, have a chance to do a more thorough examination of these elements in future projects.
Follow the guidelines below while working on this part of your report:
· Find and analyze your organization’s organizational strategy. For publicly traded companies, this should be relatively easy to locate, whichmay not be true for the organization where you work.
· If possible, confirm the process used in creating, reviewing, and revising these objectives, as well as who contributes and how.
· Include a preliminary evaluation of success in achieving objectives.
· Cite the tools and methods you used to reach your conclusions, such as the
balanced scorecard and key performance indicators (KPIs)
.
When analyzing your organization’s strategy and objectives and their implications for performance, it is useful to consider critics of strategic planning who point out that very successful ventures sometimes result from a series of unintended or unexpected activities. Therefore, you will also want to be on the lookout for evidence that some of the successes realized by your organization may not be the result of a rational strategic planning process.
Next, proceed to Step 5, where you will examine strategy types and competitive advantage.
Step 5: Identify Strategy Types and
Competitive Advantage
Now that you have reviewed your organization’s strategy and objectives, it is time to critically analyze the type or types of strategies your organization may be using, and include that analysis in your audit.
Business Unit and Corporate Strategies
First, review the major types of
organizational strategies
. Then, figure out which apply to your organization.
Competitive Advantage
Even if your organization is successfully implementing its strategic and financial objectives, its activities may not be contributing to competitive advantage.
Try to identify what your organization’s sources of competitive advantage are (if any) and present a preliminary assessment of the relative value of these advantages. You will have an opportunity to examine competitive advantage in greater depth later in your MBA program.
Also, see if you can identify your organization’s
core competencies
and reach any supportable conclusions about whether they are used to achieve competitive advantage, and how.
After your review of strategy types and competitive advantage, continue to Step 6, which examines
organizational size
and structure.
Step 6: Determine Organizational Size and Structure
Like strategy types and competitive advantage, organizational size and structure also have implications for accomplishing the organization’s mission, vision, goals, and objectives (MVGOs).
Organizational Size
Review your organization’s size and determine how much it has changed over the last five years. Include in your audit an analysis of how your organization’s size impacts its ability to accomplish its strategic objectives.
Organizational Structure
Organizational structure refers to the pathways that define who reports to whom. It is most easily discovered by studying an organizational chart. If your organization does not have a chart, or if the chart doesn’t reflect reality, read Organizational Structure for help constructing an organizational chart. Having a chart for your organization will be helpful in determining which of the numerous structural types best apply.
Include in your report an analysis of whether the current structure aligns with and impacts the organization’s MVGOs and, if not, the likely consequences.
Then proceed to Step 7.
Step 7: Analyze
Critical Resources
Now that you’ve examined your organization’s big picture—MVGOs, size, and structure—you’re going to analyze the critical resources of your organization for inclusion in your report.
Critical Resources
As you analyze your organization’s critical resources, follow the guidelines below:
· Consider whether your organization has the critical resources needed to accomplish its MVGOs, whether these are being used effectively, and whether they are being leveraged for competitive advantage.
· Read about
resource-based theory
and
resource dependency theory
to learn more about how and why certain resources may serve as a source of strength for an organization.
· Consider whether your organization has valuable, rare, inimitable, and nonsubstitutable (VRIN) resources
(characteristics of resources)
that it can use toward a competitive advantage, and whether these are sufficient given the market or markets in which your organization is operating.
Types of Critical Resources
Briefly explain the relevance of resource-based theory and resource dependency theory to an organization’s critical resources; then analyze and discuss two or three highlights that pertain to your organization’s human, financial, technological, and physical resources. Integrate, as appropriate, the VRIN characteristics (valuable, rare, inimitable, and non-substitutable) in your discussion of the four critical resources listed below. Each critical resource should be discussed separately.
·
human resources
·
financial resources
·
technology resources
· buildings and equipment
(physical resources)
· other types of resources you consider important (e.g., information)
When Step 7 is complete, prepare your findings for inclusion in the final report. Then proceed to Step 8.
Step 8: Examine Leadership, Governance, and Management
Now it’s time to shift your focus to the organization’s
leadership
. Management styles, leadership styles, and
governance
structures can have an immense impact on the daily experience of employees at all levels. Leadership can also positively or negatively affect the execution of all the elements you’ve studied thus far: strategy, resource allocation, competitive advantage, etc.
Read the resources below and prepare a summary and analysis of how each principle applies to your organization. (If you believe one of these topics is not relevant for your organization, you may be able to skip it. Before making this decision, consult with your professor):
· management and
leadership styles and effectiveness
·
management control systems
· organizational leadership
· governance
When you have completed Steps 7 and 8, submit them for feedback in the drop box located in the last step of this project. Then proceed to Step 9, where you will review the elements of a
SWOT analysis
.
Step 9: Evaluate Strengths and Weaknesses
An analysis evaluating the strengths, weaknesses, opportunities, and threats, known as a SWOT analysis, is an important task when analyzing an organization’s situation, especially when the information is intended for use in strategy development and related decision making.
For the purposes of this report, however, your interest is in internal organizational factors, and you will therefore focus on strengths and weaknesses.
Review the elements of a SWOT analysis, concentrating on the S and W portions.
Then use the results of your analyses in Steps 2 through 8 to help identify the strengths and weaknesses of your organization.
When Step 9 is complete, prepare your findings for inclusion in your final report. Then proceed to Step 10.
Step 10: Explore Capacity for Learning and Change
The last step before working on all your conclusions and recommendations for this report is to examine your organization’s capacity to learn and change. Learning organizations are organizations that systematically measure their performance against sound criteria and metrics and then take concrete actions to change and make improvements.
However, organizations—and people—vary considerably in their ability to decide upon, implement, and manage change. Therefore, managing change is extremely important and often goes hand-in-hand with the desire to improve organizational performance.
Think about your organization’s attempts to improve its performance in key areas. If the organization has tried to make changes in key areas, were the attempts a success or a failure? Explain the reasons you associate with the organization’s success in making changes or the organization’s failure to succeed. (If you cannot identify any attempts by your organization to make changes, think of a key area in your organization that could be improved and briefly explain the reasons you think your organization would succeed or fail if an attempt to make changes in that area was launched.)
For further guidance, read these resources on
organizational change
and
learning organizations
.
When Step 10 is complete, prepare your findings for inclusion in your final report. Then proceed to Step 11.
Step 11: Form Conclusions and Recommendations
It’s time to wrap everything up. You will now finalize your situation audit report by making recommendations based on the conclusions and research that you’ve done.
In priority order, with one (1) being the highest rank, list and explain, in no more than a few sentences for each conclusion, your report’s 3 to 5 most important conclusions. Follow each conclusion with a specific recommendation that is expressed in no more than a few sentences.
Once discussed with senior management, these recommendations and conclusions may form the basis of future strategic plans and objectives for your organization.
When you have finished this step, continue to Step 12 to submit your final situation audit report.
Step 12: Submit Your Work
The final deliverable should include the work from all steps above and should reflect the feedback you’ve received from your instructor on the interim deliverables that you’ve submitted.
When you submit your project, your work will be evaluated using the competencies listed below. You can use the list below to self-check your work before submission.
· 1.3: Provide sufficient, correctly cited support that substantiates the writer’s ideas.
· 1.6: Follow conventions of Standard Written English.
· 6.3: Analyze an organization’s internal strengths and weaknesses for strategic value.
· 6.4: Develop and recommend strategies for an organization’s sustainable competitive advantage.
· 8.1: Evaluate major business/organizational systems and processes and make recommendations for improvement.
· 8.3: Identify and distinguish among organizational structural types and their respective implications for performance.
· 9.1: Design organizational structures, systems, and processes that support the strategic goals of the organization.
· 9.2: Evaluate how human capital serves as a source of competitive advantage.
· 10.2: Analyze financial statements to evaluate and optimize organizational performance.
· 10.3: Determine optimal financial decisions in pursuit of an organization’s goals.
CourseResource
Situation Audit Template
Your situation audit report should include the following elements:
· cover page—not included in page limit
· executive summary—1 page; not included in page limit
· introduction—1 page
· fact sheet—1 page; see Step 2
· mission, vision, values and goals—1 page; see Step 3
· stragegy and objectives—1 page; see Step
4
· strategy types and competitive advantage—2 to 3 pages; see Step 5
· organizational size and structure—2 to 3 pages; see Step 6
· critical resources—2 to 3 pages; see Step 7
· leadership, governance, and management—2 to 3 pages; see Step 8
· strengths and weaknesses—1 to 2 pages; see Step 9
· learning and change—1 to 2 pages; see Step 10
· conclusions and recommendations—1 page; see Step 11
· references—not included in page limit
· addenda—if needed, is not included in page limit
· submit—see Step 12
Note: The Situation Audit Report is expected to be 18 to 22 pages, excluding the cover page, executive summary, and references. The page ranges listed above are guidelines. The student can decide how many pages to allocate to a given topic so long as the report does not exceed the maximum number of pages allowed. However, where the suggested page ranges are longer, the intent is to highlight the areas of the report deemed to require more analysis. These particular areas of the report go beyond a statement of organizational facts. They require significant academic readings and a grasp of relevant concepts, which are expected to be integrated into the student’s analysis. Please carefully read the Student Expectations section in Step 1, Organize Your Work.
In developing the report, students should follow the exact order of the template using the same headings to separate sections of the report. Each step is to be included in the final submission. APA format must be followed throughout. See Writing Skills under Grading in the Syllabus for writing expectations.
In Step 1, Organize Your Work, please read carefully the section entitled, Student Expectations.
Creating an Organizational Fact Sheet
Fact sheets vary depending upon the organization and intended audience. For the purposes of this project, your fact sheet should be a one-page overview of important information any new or prospective employee or board member would find helpful. You should adapt the fact sheet you create to fit your specific organization.
Organizations in the nonprofit sector use varyinglanguage and approaches to share similar important types of information. To see an example, you can look for the Facts section or About section on the website of the American Red Cross or United Way.
If you scan the Internet for organizational fact sheets, you will find many different templates and examples. You will also find that different types of organizations use different labels for the areas on their websites where they share information. Corporations sometimes use an About page to share information of general interest to all stakeholders and then create a one-page fact sheet targeted primarily at investors. To see examples, search the corporate website of companies like Exxon Mobil or IBM.
Those who work in large government departments may find many different fact sheets. For example , if you search the About section one the US State Department website, you will probably find yourself on a page intended as a starting place for people interested in a career. If you work for a small or new business that does not yet have a fact sheet, you might find the toolkit for small- and medium-size enterprises on the International Monetary Fund’s website helpful.
Fact sheets typically provide information that can be independently verified (i.e., facts), while About pages convey something about the organization’s intended purpose and areas of focus. In it’s simpliest form, a fact sheet focuses primarily on presenting key facts about the organization, but it might also link to the organization’s mission, vision, values, and strategy.
Below are examples of information you may wish to include in a one-page fact sheet:
· name of organization
· location
· when organization was created
· legal status
· focus
· purpose, products, or services
· size (i.e., number of employees)
· leadership (i.e., CEO and members of the executive leadership team)
· mission and vision
· other important facts appropriate for your organizational type
Legal Forms of Organization
An organization may operate in one of several sectors, which determines its legal form of organization. The following questions can help clarify what legal form of organization a company or initiative has.
Which sector is your organization operating in: private, public (i.e., government), or nonprofit?
· If private, review Law in Business (Varner, 2007), located in the
Resources
section below, to determine which of the following best describes your organization:
· proprietorship
· partnership
· corporation
· If public (government), which of the following best describes your organization:
· federal
· state
· local
· If a nonprofit organization see A Nonprofit Organization (Dicke, 2011), located in the Resources section below. This article provides some general information about the sector and can help you determine its tax status. Many organizations will likely qualify as a 501(c)(3), which is the most common type of nonprofit. If you have an interest in learning more, you might want to explore some of the websites that provide useful information about this sector. One example is the Urban Institute’s National Center for Charitable Statistics (NCCS), which provides information and research about the sector. Another potentially useful resource is the Charity Navigator, which helps contributors understand the different types of 501(c) organizations and their status for tax purposes. Of course, another very useful source is the IRS website. If, for example, you work for a trade or professional association—a 501(c)(6)—you could search the IRS site for the term business leagues.
Developing a Consultant’s Perspective
When examining an organization you know well, one of the challenges is achieving sufficient distance to ensure you are being as objective as possible. It can be helpful to think about what you would expect of an outside consultant if one were hired by your organization. Then imagine yourself in that role, assuming those same responsibilities and needing to meet the same expectations. This is what is meant by developing a consultant’s perspective.
We expect consultants to have the expert knowledge required to address a particular project or task. We also expect and need consultants to be skilled at recognizing how their own experiences, beliefs, and values, as well as those of others, can influence thinking and decisions. When thinking about situations at work, it is typical for us to have ideas about why they are as they are and, sometimes, how they might be made better. When a consultant is brought in to look at the same situation he or she may have some good preliminary ideas thanks to expert knowledge, but will need to conduct a careful investigation before reaching any conclusions or recommendations. This is what you will want to do for this project. In other words, you will need to develop the required expertise and make every effort to ensure your approach, findings, conclusions, and recommendations are sound and supportable.
To achieve sufficient distance it can be helpful to imagine that you are a consultant for another organization that is similar to yours but that you do not know. In addition, actually write down your beginning assumptions, ideas, and possible biases, and then figure out what you can do to avoid being influenced by them. Depending upon the situation, you might imagine what would happen if the organization accepted your initial hunches, analysis, or recommendations and the situation was made worse. In other words, take the time to imagine the harm you might do if your initial ideas are wrong, and then take the necessary steps to limit this possible outcome. Discussing any issues or concerns with your professor is also important.
Stakeholders
There are many individuals and groups who have a stake in what an organization does and in how well it does it. Stakeholder theory proposes that organizational performance relies on recognition and inclusion of key stakeholders in the organization’s major decisions. The need to manage stakeholders effectively is an important responsibility and potential challenge for leaders and managers (Fassin, 2012; Loi, 2016).
Read the article Stakeholder located in the resources section below for more about what a stakeholder is and why this is important to recognize all stakeholders.
References
Fassin, Y. (2012). Stakeholder management, reciprocity and stakeholder responsibility. Journal of Business Ethics, 109(1), 83–96. doi:10.1007/s10551-012-1381-8
Loi, T. H. (2016). Stakeholder management: A case of its related capability and performance. Management Decision, 54(1), 148–173. doi:10.1108/MD-06-2015-0244
Mission
,
Vision
, Values, and Goals
Mission and vision both relate to an organization’s purpose and are typically communicated in some written form. Mission and vision are statements from the organization that answer questions about who the organization is, what it values, and where it’s going. A study by the consulting firm Bain and Company reports that 90 percent of the 500 firms surveyed issue some form of mission and vision statements (Bart & Baetz, 1998). Moreover, firms with a clearly communicated, widely understood, and collectively shared mission and vision have been shown to perform better than those without them, with the caveat that these statements related to effectiveness only when strategy, goals, and objectives were aligned with them as well (Bart, Bontis, & Taggar, 2001).
A mission statement communicates the organization’s reason for being, and details how it aims to serve its key stakeholders. Customers, employees, and investors are the stakeholders most often emphasized, but other stakeholders, like government or communities (relating to social or environmental impact), can also be discussed. Mission statements are often longer than vision statements. Sometimes, mission statements also include a summation of the firm’s values, or beliefs in which the organization is emotionally invested. The Starbucks mission statement, for example, has described four guiding principles that also communicate the organization’s values (Starbucks, n.d.):
· creating a culture of warmth and belonging, where everyone is welcome.
· acting with courage, challenging the status quo and finding new ways to grow our company and each other.
· being present, connecting with transparency, dignity and respect.
· delivering our very best in all we do, holding ourselves accountable for results.
A vision statement, in contrast, is a future-oriented declaration of the organization’s purpose and aspirations. The mission statement lays out the organization’s “purpose for being,” and the vision statement then says, “based on that purpose, this is what we want to become.”
Strategy
should be directly based on the organization’s vision, since the strategy is intended to achieve the vision and thereby satisfy the organization’s mission. Typically, vision statements are brief. Sometimes the vision statement is also captured in a short tag line, such as Toyota’s “Let’s Go Places” statement that appears in most communications to customers, suppliers, and employees. Similarly, Wal-Mart’s tag-line version of its vision statement is “Save money. Live better.”
Any casual tour of business or organization websites will expose you to the range of forms that mission and vision statements can take. To reiterate, mission statements are longer than vision statements, often because they convey the organization’s core values. Mission statements answer the questions, Who are we? and What does our organization value? Vision statements typically take the form of relatively brief, future-oriented statements and answer the question, Where is this organization going? Increasingly, organizations also add a values statement, which either reaffirms or states outright the organization’s values that might not be evident in the mission or vision statements.
Roles Played by Mission and Vision
Mission and vision statements play three critical roles: (1) communicate the purpose of the organization to stakeholders, (2) inform strategy development, and (3) develop the measurable goals and objectives by which to gauge the success of the organization’s strategy. These interdependent, cascading roles, and the relationships among them, are summarized in the figure below.
Key Roles of Mission and Vision
First, mission and vision provide a vehicle for communicating an organization’s purpose and values to all key stakeholders. Stakeholders are those key parties who have some influence over the organization or stake in its future, including employees, customers, investors, suppliers, and institutions such as governments. Typically, these statements are widely circulated and discussed often so that their meaning is broadly understood, shared, and internalized. The better employees understand an organization’s purpose, through its mission and vision, the more able they will be to understand the strategy and its implementation.
Second, mission and vision create a target for strategy development. One criterion of a good strategy is how well it helps the firm achieve its mission and vision. To better understand the relationship among mission, vision, and strategy, it is sometimes helpful to visualize them collectively as a funnel. At the broadest part of the funnel, you find the inputs into the mission statement. Toward the narrower part of the funnel, you find the vision statement, which has distilled the mission in a way that it can guide the development of strategy. In the narrowest part of the funnel, you find the strategy—it is clear and explicit about what the firm will do, and not do, to achieve the vision.
Vision statements also provide a bridge between the mission and the strategy. In that sense, the best vision statements create a tension and restlessness with regard to the status quo. They foster a spirit of continuous innovation and improvement. London Business School professors Gary Hamel and C. K. Prahalad (1993) describe this tense relationship between vision and strategy as stretch and ambition. Indeed, in a study of CNN, British Airways, and Sony, they found that these firms displaced competitors with stronger reputations and deeper pockets through their ambition to stretch their organizations in more innovative ways.
Mission, Vision, Strategy, Goals and Objectives for Stakeholders
Third, mission and vision provide a high-level guide, and the strategy provides a specific guide to the goals and objectives showing success or failure of the strategy and satisfaction of the larger set of objectives stated in the mission. In the cases of both Starbucks and Toyota, you would expect to see profitability goals, in addition to metrics on customer and employee satisfaction, and social and environmental responsibility.
Conclusion
Mission and vision both relate to an organization’s purpose and aspirations, and are typically communicated in some form of brief written statements. A mission statement communicates the organization’s reason for being and how it aspires to serve its key stakeholders. The vision statement is a narrower, future-oriented declaration of the organization’s purpose and aspirations. Together, mission and vision guide strategy development, help communicate the organization’s purpose to stakeholders, and inform the goals and objectives set to determine whether the strategy is on track.
References
Bart, C. K., & Baetz, M. C. (1998). The relationship between mission statements and firm performance: An exploratory study. Journal of Management Studies, 35, 823–853.
Bart, C. K., Bontis, N., & Taggar, S. (2001). A model of the impact of mission statements on firm performance. Management Decision, 39(1), 19–35.
Hamel, G., & Prahalad, C. K. (1993, March–April). Strategy as stretch and leverage. Harvard Business Review, 75–84.
Starbucks. (n.d.) Our mission. Retrieved from https://www.starbucks.com/about-us/company-information/mission-statement
Mission
An organization should have a clearly defined mission that guides decisions and (along with an organizational vision) future directions. While organizations’ missions are typically stable, changes in scope and sometimes even purpose do occur. Sometimes these changes are intentional, and the rationale is easy to discover. but sometimes this is not the case. A common occurrence known as mission creep can happen when an organization’s scope expands, often incrementally, in a direction that was not originally intended. You will also see changes in mission caused by market expansion or contraction, mergers and acquisitions, innovation, changing societal needs, and so on.
Another common occurrence, known as mission proliferation, can happen when different parts of the organization articulate and publish independent missions, often to help inspire and direct those working in subunits. In theory, each subunit mission statement should align with and support the organization’s mission, but this is not always the case and deviations from the organization’s mission may contribute to confusion. This outcome may be especially true in organizations that are large and complex, or in ones where decision making is decentralized.
An organization’s mission may be found in a formal published statement or explained verbally be the CEO or another senior leader. Public sector organizations sometimes have two organizational mission statements—an official version that is long and detailed, and an abbreviated version used for public dissemination. A mission can change over time, and it can be instructive to examine the process used the bring about that change. It is also useful to ask whether there is evidence an organization’s mission is having a positive impact on its performance.
Check Your Knowledge
Question 1
What purposes should an organizational mission serve?
An organization’s mission should clarify the purpose and serve as a guide for decisions and future directions.
Question 2
What is mission creep?
Mission creep is an unplanned gradual expansion of an organization’s scope, often in an unintended direction.
Question 3
One of the potential challenges associated with organizational missions is mission proliferation. Explain what this means and why it can be problematic.
Mission proliferation occurs when different parts of an organization create their own missions and mission statements. The problem arises when this is done without giving sufficient attention to how these departmental or unit missions contribute to the overall organizational mission.
Question 4
What are some of the things that a mission statement should accomplish?
· provides a broadly phrased statement of the firm’s long-term goals
· distinguishes the organization from others in the same industry
· for the organization’s product or market, clarifies the scope of operations
· defines the organization’s goals and aspirations
· (ideally, it provides a focus for the organization’s actions
Source: Cavanagh, 2008, para. 1.
Question 5
What are some of the problems that can occur in the absence of an effective and organizational mission and well-written mission statement?
· Managers may make decisions based upon their individual biases, priorities, and preferences.
· Time and resources may be wasted through pursuing actions that do not contribute to the achievement of the organization’s goals.
· The organization may not perform as well in the marketplace as competitor organizations that do have strong mission statements.
Source: Cavanagh, 2008, paras. 4, 6, 15.
Question 6
Below are mission statements for Coca-Cola and Pepsi published on their corporate websites in 2016. Apply what you have just read about effective missions and mission statements to an analysis of these two examples.
1. Which statement does the best job describing the company’s purpose and why? What about if you were an investor?
2. Would your conclusion change if you were looking at this from the perspective of a customer? What about if you were an employee?
Coca-Cola Our Mission Our Roadmap starts with our mission, which is enduring. It declares our purpose as a company and serves as the standard against which we weigh our actions and decisions. To refresh the world… To inspire moments of optimism and happiness… To create value and make a difference.
Pepsi As one of the largest food and beverage companies in the world, our mission is to provide consumers around the world with delicious, affordable, convenient and complementary foods and beverages from wholesome breakfasts to healthy and fun daytime snacks and beverages to evening treats. We are committed to investing in our people, our company and the communities where we operate to help position the company for long-term, sustainable growth.
Pepsi’s mission statement is specific about the business the company is in: food and beverages. The statement also clarifies the standards Pepsi holds itself to by including the terms delicious, affordable, convenient, wholesome, and healthy in its statement. Finally, Pepsi ends its mission statement by speaking to important corporate values.
In contrast, if you didn’t know the business Coca-Cola is in its mission statement wouldn’t help you figure it out. The phrase “refresh the world” might serve as a hint for some but if you had never heard of Coca-Cola it would be pretty difficult to figure out what the company actually does. The other parts of the firm’s mission statement are equally vague. One possible advantage of Coca-Cola’s mission statement is that it leaves scope for creativity and innovation if the company’s leadership chooses to diversify.
With these observations as background, it is fairly easy to argue that Pepsi’s mission statement does a better job of specifying the organization’s purpose. As for the investor’s perspective, much would depend upon the person’s priorities. Someone looking for a dynamic company open to expanding its scope of business might be drawn to Coca-Cola’s mission. An investor interested in a company committed to its current business might find more comfort in Pepsi’s mission statement.
Of course, a wise investor would want much more information about both companies. A potential customer would almost certainly find Pepsi’s mission statement more useful. Similarly, employees would probably be attracted to Pepsi’s mission statement because it includes a commitment to investing in its people.
Deducing a Mission
You may find your organization does not have a formal written mission statement. Alternatively, you might find there is such a statement, but that it does not seem to reflect what your organization is doing.
As Cavanagh (2008) suggests in the article you just read about missions and mission statements, if you find one of these situations applies to you, try to deduce the mission by answering the following questions:
· Who are we as an organization?
· What do we do?
· Why do we do it?
· What should we be doing?
· What do we stand for?
Once you have decided what your organization’s mission is, you will then want to verify your conclusions to ensure what you include in your report is as accurate as possible:
· Is there evidence that the majority of the organization’s resources are committed to the purpose you have identified?
· Is there evidence that key organizational stakeholders know what the organization’s purpose is?
· Is there evidence these stakeholders agree on the organization’s purpose?
· Do the organization’s leaders speak about this purpose?
References
Cavanagh, G. (2008). Missions and mission statements. In R. W. Kolb (Ed.), Encyclopedia of business ethics and society. doi: 10.4135/9781412956260.n523. Retrieved from (http://sk.sagepub.com.ezproxy.umgc.edu/reference/ethics/n523.xml).
Vision
Responsibility for articulating an organization’s vision typically rests with the CEO and leadership team. While a mission describes the present purpose of the enterprise, vision is about a desired future. When done well, vision statements serve as a source of ongoing inspiration for all stakeholders, helping them see what is possible if everyone commits and performs optimally. In Vision, located in the Resources section below, Porterfield (2004) explains more about the purpose of an organizational vision and vision statement as well as how they should be developed and communicated.
· Vision: By: Rebecca I. Porterfield
· In:
Encyclopedia of Health Care Management
· Edited by: Michael J. Stahl
· Subject:Health Care Management, Health Care Management & Administration
Collins and Porras (1991) examine the challenges of creating a single vision for large multidivisional and geographically dispersed organizations. They write about how difficult it can be for a leader to craft a compelling vision and how sometimes the resulting statement ends up being more about mission than vision. In presenting their proposed framework for vision creation, Collins and Porras emphasize the importance of agreement about core values and beliefs, sharing examples that are as relevant now as they were when their article was published.
Furthermore, an analysis of powerful vision statements led Kantabutra and Avery (2010, p. 3) to propose seven important characteristics:
· conciseness
· clarity
· future orientation
· stability
· challenge
· abstractness
· desirability or ability to inspire
Consult an online library to find out more about how a vision should be developed, the appropriate role of leaders in formulating them, their relative importance for organizational success, and other questions related to the development of an organization’s vision.
Namely, an organization’s vision statement should be powerful and serve as a compelling source of inspiration for stakeholders.
References
Collins, J. C., & Porras, J. I. (1991). Organizational vision and visionary organizations. California Management Review, 34(1), 30.
Kantabutra, S., & Avery, G. C. (2010). The power of vision: Statements that resonate. Journal of Business Strategy, 31(1), 37-45. doi:10.1108/0
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Porterfield, R. (2004). Vision. In M. J. Stahl (Ed.), Encyclopedia of health care management (pp. 586-586). Thousand Oaks, CA: SAGE Publications Ltd. doi: 10.4135/9781412950602.n837
Core Values
The article Values of Organizations and
Leadership
(Irdy, Brown, & Yang, 2006) in the Resources section below provides a brief discussion of corporate values and their intended purpose. As you can probably imagine, it is not difficult to find examples of organizations with a published list of inspiring values that do not actually serve to guide decisions and behaviors. As a classic example, Enron included a list of values, including integrity, in its annual report, right before the company’s downfall (Lencioni, 2002). Other examples are easy to find. An examination of Fortune’s five biggest corporate scandals of 2015 (Matthews & Gandel, 2015) finds Volkswagen’s lies about its emission controls at the top of the list. Meanwhile, the company’s online values page focuses on its commitment to responsibility and sustainability.
Resources
Values of Organizations and Leadership
: Values of Organizations and Leadership
· By: Beverly Irby, Genevieve Brown & Ling Ling Yang
· In:
Encyclopedia of Educational Leadership and Administration
· Edited by: Fenwick W. English
· Subject:Leadership, Educational Administration & Leadership (general)
This lack of congruence between statements and actions has led to discussions about whether the benefits associated with creating and communicating a set of shared values outweigh the risks of not being able to deliver on implicit promises. Associated with this debate is the perception that all organizations rely on the same basic value statements (Anderson & Jamison, 2015). If almost every firm shares exactly the same list of values, there is reason to suspect they have relatively little meaning as guidelines for decisions and actions and certainly do not serve to distinguish an organization from its peers.
While for some, the answer to this dilemma is to not make or post a corporate value statement, remaining silent presents its own problems. Strong and meaningful corporate values that are well embedded in and aligned with all systems, policies, and practices are a critical component of corporate culture and create a healthy and positive climate. When presented with difficult decisions and ethical challenges, having core values that have been effectively communicated and are well understood can make a significant difference in helping managers and leaders make the right choice.
Developing an organization’s core values requires input and buy-in from all key stakeholders. It is therefore important to consider whether there is evidence that employees know what the core values are and that they rely on them when examining options, making decisions, and taking action.
References
Anderson, S. E., & Jamison, B. (2015, May). Do the top U.S. corporations often use the same words in their vision, mission, and value statements? Journal of Marketing and Management, 6(1), 1 – 15.
Irby, B., Brown, G., & Yang, L. (2006). Values of organizations and leadership. In F. W. English (Ed.), Encyclopedia of educational leadership and administration (Vol. 2, pp. 1053-1053). Thousand Oaks, CA: SAGE Publications Ltd. doi: 10.4135/9781412939584.n587
Lencioni, P. M. (2002, July). Make your values mean something. Harvard Business Review,80(7), 113. Retrieved from www.scopus.com
Matthews, C., & Gandel, S. (December 27, 2015). The 5 biggest corporate scandals of 2015. Fortune Magazine.
Check Your Knowledge
Question 1
An organization’s values are defined as ________.
· the beliefs and attitudes held and displayed by the organization;
· the principles that guide behavior within the organization.
Source: Irby, Brown & Yang, 2006, para. 1.
Question 2
What are some of the challenges associated with establishing an organizational values statement?
Once a statement of values has been created, it must be honored throughout the organization. Otherwise, there is the potential for significant embarrassment in the marketplace (e.g., Enron and Volkswagen). If a list of core values is not sufficiently unique to distinguish an organization from other organizations in the same sector, it may not be of much benefit.
Question 3
What are some of the benefits of having a clearly identified statement of values?
· A potential employee is likely to be attracted to an organization that espouses values aligned with his or her personal values.
· Leaders make decisions that are informed by an organization’s core values.
Source: Irby, Brown & Yang, 2006, paras. 3, 4.
Question 4
When an organization is developing a set of core values and a statement of values, who needs to be involved?
All key stakeholders should provide input and “buy-in” to ensure the widest possible acceptance.
Deducing Vision and Core Values
You might find that formal vision and values statements do not exist for your organization, though they are relatively common in large corporations. What should you do if this is the case?
While each person’s situation differs, most of you probably will not want to begin by going around and asking leaders, managers, and others in the organization what their vision and values are. Why? Some leaders and managers may not have thought very much, if at all, about a vision for the organization or might not find it easy to explain their thinking clearly. Thus, an important first step is to see what you are able to deduce on your own. Once you have done this, you will be in a better position to ask good questions that will help you validate your preliminary conclusions.
You’ll want to follow the same process for discovering organizational values. In brief, values are what people believe should be, not necessarily what is. As you have just read in the article “Values of Organizations and Leadership,” by Irby, Brown, and Yang (2006), “The values held within a group or an organization are the values shared by the group’s members, which go beyond individual values.”
If you were to ask individuals about the organization’s shared, core values, you might find few people who are able to answer your question and some disagreement among those who try to do so. At an organizational level, you may have heard discussions about treating colleagues or clients with respect, showing care, leaders and managers modeling behavior for other employees, the organization’s role and responsibilities to its community, ensuring a good work-life balance, being an employer of choice, and so on. Such discussions offer useful clues as to what the organization’s core values might be, but it is important to consider whether there is evidence these good intentions are matched with corresponding decisions and actions.
One way to deduce an organization’s vision and values is to “follow the money.” In other words, major financial decisions and budget allocations can tell you a lot about what is important to a business. Even the most skilled anthropologists can take years before they feel comfortable that they really understand the shared values of a group, organization, or community, so if you find this a challenging task you are not alone.
If you work for a company in the private sector, you will undoubtedly have heard and thought a lot about the value placed on profitability. Especially in recent years, you may also have heard about the organization’s attention to the triple bottom line, which emphasizes the need to not just consider financial factors, but also to consider the social and environmental impacts of doing business (Slaper & Hall, 2011). Again, terms like this offer clues but not necessarily evidence about actual values.
So, what should you do if there appears to be no formal statement of vision and values for your organization? Here are a few suggestions:
· First, be sure you have done enough reading and research to ensure you know what these terms mean and how and why they may be important.
· Next, look to see if any competing or comparable organizations have a published vision and values statement. You might be able to use this information to figure out what is similar or different in your organization.
· Reviewing annual reports, speeches, news releases, and other publicly available documents can be helpful in forming some preliminary ideas about how the leaders would ideally like to see the organization developing. These can also help you see what key stakeholders hold important.
· Consult with your professor before interviewing anyone or attempting to collect information from others in the organization.
· In some cases, values may prove too difficult for you to deduce and too sensitive for you to investigate. Your best solution might be to report that there is no written statement of values and include a brief summary of the evidence you found about the relative importance of this omission for organizational performance.
References
Irby, B., Brown, G. & Yang, L. (2006). Values of organizations and leadership. In F. W. English (Ed.), Encyclopedia of Educational Leadership and Administration (Vol. 2, pp. 1053-1053). Thousand Oaks, CA: SAGE Publications Ltd. doi: 10.4135/9781412939584.n587
Slaper, T. F., & Hall, T. J. (2011). The triple bottom line: What is it and how does it work?. Indiana Business Review, 86(1), 4-8. Retrieved from http://ezproxy.umgc.edu/login?url=http://search.ebscohost.com/login.aspx?direct=true&db=bth&AN=66506015&site=ehost-live&scope=site
Goal Setting
You may find your organization has a set of major, strategic goals designed to help ensure that its mission and vision for the future are accomplished. These goals are sometimes clearly articulated, communicated widely, and incorporated in annual performance reviews. The following questions are often pertinent when analyzing an organization’s goals:
· Have the goals been created with input from key stakeholder groups within the organization?
· Do the goals align with and support the organization’s mission, vision, and values?
· Are the goals widely communicated and understood by key stakeholders?
· Are they reviewed regularly and revised in light of changing situations and priorities?
· Are they supported with the necessary resources?
· Are the goals operationalized in the form of specific and measurable objectives?
· Do the goals result in specific intended actions?
There are several common challenges associated with goal setting, including lack of clarity, inadequate communication to all key stakeholders, creation of multiple competing or conflicting goals, and goals that are either too specific or too broad. Additionally, unintentionally (and sometimes intentionally) setting goals that are likely not achievable can create incentives to cut corners or make poor or unethical decisions (Kayes, 2005). As Ordóñez, Schweitzer, Galinsky, and Bazerman (2009) write, a classic example of this situation is the decision by Lee Iacocca, then CEO of the Ford Motor Company, to set an overly ambitious and unrealistic goal that resulted in production of the Ford Pinto, with dire consequences.
Sometimes you will find the terms goals and strategic objectives used interchangeably. When considering goal setting, your main interest is in determining whether an organization has articulated specific and measurable benchmarks it will accomplishto get where it wants and needs to go.
Read the
Encyclopedia of Management
entry on goals and goal setting in the Resources section below for more information.
References
Kayes, D. C. (2005). The destructive pursuit of idealized goals. Organizational Dynamics, 34(4), 391 – 401. doi:10.1016/j.orgdyn.2005.08.006
Ordóñez, L. D., Schweitzer, M. E., Galinsky, A. D., & Bazerman, M. H. (2009). Goals gone wild: The systematic side effects of overprescribing goal setting. Academy Of Management Perspectives, 23(1), 6-16. doi:1
0.5
465/AMP.2009.37007999
Resources
Goals and Goal Setting
: Goals and Goal Setting
From: Encyclopedia of Management(6th ed.)
Publisher: Gale, a Cengage Company
Document Type: Topic overview
Pages: 5
Page 348
Goals and Goal Setting
Check Your Knowledge
Question 1
What are the four basic functions that organizational goals should accomplish?
· provide guidance and direction
· facilitate planning * motivate and inspire employees
· help organizations evaluate and control performance
Source: Barney & Griffin as cited in “Goals and goal setting,” 2009, para. 2.
Question 2
What is the relationship between an organization’s strategic goals and mission and vision statements?
Strategic goals are established to support the mission and vision statements of the organization.
Source: “Goals and goal setting,” 2009, “Types of goals and objectives.”
Question 3
Briefly describe an MBO (management by objectives) process that might be used for developing strategic goals.
The mission must first be developed by the organization’s leadership. At the same (top) level of management, the mission statement is then used as the basis for determining the organization’s strategic goals. The next level of management uses these strategic goals to design tactical goals and objectives. (This is a top-down approach.)
Source: “Goals and goal setting,” 2009, “Goal-setting approaches.”
Question 4
What are some of the challenges associated with setting strategic goals?
· Goals may not be sufficiently clear.
· Goals may not be communicated adequately to key stakeholders.
· Newly created goals may be in conflict or competition with previously set goals.
· Goals may be too specific or too broad.
· Goals may be overly ambitious (i.e., impossible or almost impossible to achieve).
Question 5
Conflicting Strategic Goals Creating a set of strong strategic goals can be relatively easy. The hard part generally happens during implementation. This is especially the case when it is necessary to choose between two equally important goals. What do you do, for example, when the only apparent path to meeting financial goals appears to be to achieve “efficiencies” by reducing the cost of labor?
What if an important competing strategic goal is to become an employer of choice? While you may believe it is possible to be an exemplary employer when undertaking a workforce reduction, it is likely that many will disagree. Briefly discuss the approach you might take when having to decide between two goals that appear equally important.
Responses will differ depending upon what is assumed about the context for these conflicting goals. The decision to become an employer of choice might have been made because the organization was not successful at attracting and retaining the talent needed to compete and perhaps even to survive. On the other hand, the organization might be confronting a major financial crisis where layoffs are essential for the organization’s survival.
The choice may be between saving some jobs rather than having to close down. Whatever the situation, it is important to collect information that allows the benefits and costs of the available options to be assessed objectively and the best among what may be no perfect solutions selected. Gathering input and listening to suggestions from employees is important when confronting conflicts between or among key organizational goals.
One common negative consequence of a workforce reduction is the voluntary loss of star performers who are able to find work elsewhere. Apart from general concerns about the health and well-being of the organization, one reason for such departures is that people foresee an unacceptable increase in workload.
Thus, while there may be reason to avoid sharing information about the seriousness of the situation (because of potential adverse market responses), seeking input from employees before implementing a layoff is advisable. Solutions like job sharing, furloughs, retirement incentives, and even pay cuts may be preferable to layoffs. Employees may be able to identify cost-cutting measures their managers have not considered.
Checking organizational values can help bring clarity to a difficult situation. Even when great care has been taken to craft an excellent set of strategic goals, leaders and managers need to be prepared to deal with conflicts that can arise between or among them. Often there is no easy or correct path to take. Sometimes the choice is between two equally difficult decisions. Knowing the values that are and have been critical to the organization’s success may make the choice a little easier.
An important lesson for leaders is to set strategic goals with great care, envisaging possible futures and likely responses. Also important are tracking progress in achieving goals, identifying changing conditions and analyzing the likely implications, recognizing early indications of likely conflicts between goals, and being prepared with contingency plans in the event things do not turn out as expected. Sometimes the best plan is to set a goal or goals aside rather than pursuing a course of action that appears headed for inevitable failure (Kayes, 2005).
Organizational Strategy
The definition of organizational strategy often covers decisions about which opportunities an organization will pursue and the development of a long-term action plan for achieving a goal. Osinga (2006) defines the concept as “a mental tapestry of changing intentions for harmonizing and focusing our efforts as a basis for realizing some aim or purpose in an unfolding and often unforeseen world of many bewildering events and many contending interests” (p. 55).
Organizational strategies occur at four levels: global, corporate, business, and functional:
· Global-level strategies are decisions surrounding the methods of pursuing international markets. The most important question here is whether or not the firm can continue to use what it does better than any other competitor (such as a competitive advantage) in that foreign market, and whether or not it can financially meet the specific needs of consumers in that foreign market.
· Corporate-level strategies are long-term actions designed to select the appropriate industry or industries in which to operate. The following questions can serve as guidelines for corporate-level strategies:
· Should we compete in areas similar to our current products?
· Should we purchase one of our suppliers so that we can buy our component parts cheaper?
· Should we buy a business unrelated to what we do now to spread out the economic risks we face?
· Business-level strategies are long-term actions designed to confer competitive advantage over industry rivals. Business-level strategies are concerned with, identifying consumers, meeting consumer needs, and defining the competencies needed to meet those needs.
· Functional-level strategies are the most specific of the levels of strategy, and are concerned with the actions of each function in a company. These must support the business-level strategies and involve the actual implementation of strategy. Generally, the lower levels of management are the executors of functional-level strategy.
Global-Level Strategy
Many organizations make the mistake of taking their existing domestic marketing model and simply dropping it into another location without forethought regarding the many cultural, social, economic, technological, and legal factors that are at play—and without deeply analyzing the conditions that may or may not be conducive to their business.
Sound global-level strategies identify opportunities that allow the firm to build on its competitive advantages, yet are customized to the local market conditions and realities. Of course, the very definition of a competitive advantage is market-specific; when moving into a different market, the competitive advantage may be put at risk. Strategists must be very careful that the competitive advantage can be protected and used, as opposed to being copied or stolen in other markets.
Poor global-level strategies are those that can be realized only by doing something the organization cannot currently do well. For instance, a US chocolate company entering the European chocolate market is not a good strategy if the organization does not have the brand recognition required to overtake many centuries-old brands already present in Europe.
Corporate-Level Strategy
Corporate-level strategy, considered from a single-market perspective (eliminating the global, in other words) requires the firm to think about itself at the highest level. Corporate-level strategy dictates where and how the organization aspires to improve, or to identify other opportunities it wishes to develop. A central aspect of corporate-level strategy is the idea of competitive advantage—an offering or competency the firm does better than anyone else that can it protect from being copied.
A firm that makes shoes may not have a competitive advantage in the shoes themselves (especially if they are considered by the consumer to be relatively generic), but it can develop such an advantage in the manufacturing and supply chain behind the distribution of the shoes. In this case, a good corporate-level strategy allows the company to use this same supply chain and distribution capability in an industry that does not have good supply chain utilization. This practice may seem counterintuitive, but think about the example. Say, for instance, that the electronics industry currently has terrible supply chain management. This firm could use its mastery of supply chain and distribution to improve that industry and meet organizational growth goals. It has nothing to do with shoes—only with opportunity.
Business-Level Strategy
Business-level strategy is concerned primarily with determining whether the organization’s existing set of products (determined in the global- and corporate-level strategies) are taking full advantage of the market opportunities available. For instance, are the products fully meeting the needs of the consumers? Of all segments of consumers? Are there opportunities to more fully meet the needs of the consumer—thereby creating more value, for which consumers are willing to pay more?
This part of organizational strategy is where the firm makes sure it is fully aligned with the needs of the consumer (whatever segment is in focus) in every way possible. It may find it needs to change product attributes, think of different segments to pursue, or engineer better products.
Functional-Level Strategy
Functional-level strategy is all about implementing the strategies determined at the global, corporate, and business levels. Here’s where the individual departments and units get their marching orders to fulfill the higher-level strategies. The product development office, for example, may get instructions to redesign the product for a foreign market; the marketing office may get directions to identify whether a new product offering would meet the needs of a specific segment. The production unit may get instructions to take over the operations of a subsidiary that was purchased; HR may be assigned to bring two workforces together. Only where the strategies are handed to the functional units do any of the higher-level strategies get accomplished.
It should be apparent that all four levels of strategy must be aligned and be complementary. The CEO’s office—the leaders most likely to approve global- and corporate-level strategies—can do nothing to realize a strategy without the functional-level units. All four must be directly aligned with overall organizational strategy, and all strategies must have specific time frames attached to them to ensure each part is accomplished in the appropriate time frame. Planning is a critical component to organizational strategy.
Strategy Frameworks
Low-Cost Producer versus Differentiation
The first dimension of business-level strategy relates to the approach a company takes to satisfy its customers. The concepts of low-cost producer and differentiation are essential for understanding business-level strategy because they define the two fundamental options a firm must consider when formulating its business-level strategy. The concept of low-cost producer refers to a strategy where the business concentrates on keeping its costs of operations at the lowest possible level. This means that significant effort is directed toward keeping costs for raw materials, labor, manufacturing, etc. as low as possible. Frequently, low-cost producers will also have fewer products with fewer options, which further aids in keeping costs low.
An example of a low-cost producer is Payless ShoeSource. If you visit a Payless shoe store, you will notice that there are few employees. Usually there is a cashier and a stockperson. The store décor is not expensive. The flooring is industrial strength, solid-color carpet, and the shelves are very functional, but made of metal and similar in design to what you would find in a warehouse. The shoes themselves are made from lower-quality materials. All of these characteristics are indicators of a low-cost producer.
A common area of confusion regarding low-cost producers is that low cost means low price. Usually, low-cost producers compete by selling for a lower price, but this is not always true. For example, Nike sells some athletic shoes for over $150 even though the cost to make that shoe is under $30. The point to remember is that the term “low-cost producer” refers to the cost of manufacturing, not the cost (price) to the customer.
The low-cost producer strategy has two primary advantages. Due to the lower costs involved, the company can better survive price wars with competitors because it can still make money when other higher cost competitors may actually lose money on a sale. A second advantage is that a low-cost producer makes it more difficult for a new entry into the market because newcomers can’t realize the same cost economies of the more experienced firm.
There are also two disadvantages of this strategy. The first is that competitors can usually imitate the processes that produce the cost reductions, so the advantage may be relatively short term. Second, the company might focus so much on cost reduction that the its products and services become inferior enough to lose business to the higher-priced competitors’ products.
Differentiation
refers to the methods companies use to set their products and services apart from the competition. There are many ways a company may differentiate its products or services, including the features offered, the expected life of the product, the way it advertises, the technology incorporated into the product, the level of customer service, and the convenience of the company’s location (Grant, 2008). When a company is able to differentiate itself effectively in one of these areas, it is called a distinctive competency. The best distinctive competencies are difficult to imitate.
There are several advantages to the differentiation strategy. First, differentiation tends to develop customer loyalty that protects the company from the competition. It is also possible to pass increases in the cost of operations on to the consumer. The difficulty in sustaining the differentiation strategy is that it may be easy to imitate, which erodes the product’s distinctiveness. A second threat to differentiation is the introduction of a substitute product that makes an older product obsolete. For example, the introduction of the miniaturized cell phone has negatively affected not only the sales of traditional landline phones, but also the sales of personal computers.
The final lesson concerning the low-cost producer and differentiation strategy concepts is that is takes an attitude of continuous improvement and adaptability to sustain any advantage gained by either approach.
Broad Market versus Focus Market
A second dimension of business-level strategy is the number of industry market segments a company chooses to compete in. The concept of a market segment refers to a subset of the products and services that constitute an industry. For example, the automobile industry has market segments: sedans, coupes, sports cars, sport utility vehicles, light trucks, vans, etc. If a company competes in virtually all of the market segments, it is said to have a broad market strategy. General Motors and Toyota, for example, compete in virtually all the market segments.
Companies that compete in only one market segment or just a few market segments are pursuing a focus market strategy. A focus company generally has a narrow product line. Ferrari persues a focus strategy, in that it makes only sports cars. (Actually, Ferrari is an extreme example of the focus strategy because it makes only high-priced, high-performance sports cars.) It is common for companies that begin with a focus strategy to expand into other segments of the market. Toyota began as a company focused on producing small, economy cars, but has evolved into a company that follows a broad strategy. Companies expand into new segments to spur growth.
Both the broad and focus strategies can be paired with either the differentiation or low-cost producer strategies, creating four possible business-level strategy choices, according to the marketing strategist, Michael Porter. Years after popularizing his original four-strategy concept, Porter added a fifth strategy option. These five types of business-level strategy are discussed in the next section.
Porter’s Five Business-Level Strategies
Porter’s business level strategies are sometimes referred to as generic because they apply to any type of business such as manufacturing, services, or nonprofit (Hill & Jones, 1994). Choosing a generic strategy is an important strategic planning step because each of the five strategies significantly influences the way company decisions are made. For example, decisions involving the differentiation approach are quite different from decisions involving the low-cost producer approach. To help you better understand these generic strategies, they are illustrated in the figure below, followed by a description of each of the five strategies.
Five Business-Level Strategies
Broad Differentiation Strategy
Broad differentiation strategy describes actions taken by a company to compete in all or most of an industry’s market segments by differentiating its products from those of competitors. Once again, differentiation may be accomplished in the areas described in the previous section. Another way to think of differentiation is to use the categories of quality, customer service, and innovation. A product or service may be perceived as better than the competition because its quality, customer service, or innovation is better than the competition. Generally, companies that pursue the broad differentiation strategy will charge higher prices for their differentiation. Some well-known companies that pursue this strategy are Sony (consumer electronics), Nordstrom (retail clothing, etc.), and McGraw Hill (publishing).
Focused Differentiation Strategy
Focused differentiation strategy is similar to the broad differentiation strategy, except that a company pursuing this strategy only competes in a single market segment or just a few of the market segments in the industry. Companies using this strategy seek to set themselves apart from the competition through differentiation. Generally speaking, these companies offer products in the higher end of the price range. Ethan Allen Furniture pursues this strategy, and its products are usually significantly higher priced than the competition because the company believes the value added or level of differentiation (primarily due to quality or innovation) justifies the higher price. Some other companies that pursue this strategy are Ferrari (sports cars), Rolex (watches), and Apple (select consumer electronics).
Broad Low-Cost Producer Strategy
This strategy describes actions taken by a company to keep its costs of operations as low as possible. Every aspect of the business is analyzed to identify a cheaper way to perform a given task. A broad low-cost producer strategy also means that the company offers products or services in virtually every market segment of the industry. A good example of a company pursuing this strategy is Payless Shoes, whose cost-cutting measures were described earlier. The advantage of this approach is that a lower price to consumers can be charged and the company can still make a profit.
Wal-Mart may be the most famous company that pursues the broad low-cost producer strategy. Wal-Mart’s particular strength is its supply chain. Although the stores may not appear to be high-tech, the company’s ordering and delivery systems are highly automated, and the organization has spent years finding the cheapest way to supply its stores with merchandise. Wal-Mart’s strategy is considered to be broad, because the company offers thousands of products in its stores.
Focused Low-Cost Producer Strategy
The focused low-cost producer strategy also seeks to keep the costs of operations as low as possible, but the company competes only in one or a few market segments. Companies pursuing this strategy select the market segment or segments where they believe there is the best opportunity to make a profit. McDonald’s is a well-known focused low-cost producer. The company seeks to compete by having efficient processes to prepare a limited menu. Its menu items require relatively few ingredients, and most of the items are delivered in single serving–size portions to make food preparation faster and easier. Companies pursuing the focused low-cost producer strategy (as well as those applying the broad low-cost producer strategy) make their profit through the volume of their sales.
Best-Cost Strategy
This strategy was added to Porter’s framework to recognize the feasibility of simultaneously pursuing both a differentiation strategy and a low-cost strategy. When Porter first published his typology of business-level strategies, he stated that pursuing both the differentiation strategy and the low-cost producer strategy wouldn’t work. His reasoning was that a company would be trying to do too many things at once, resulting in poor performance in both differentiation and low-cost approaches. He referred to this type of effort as stuck-in-the-middle.
Years later, Porter had to recognize that pursuing both the differentiation and low-cost producer strategies was possible due to major changes in technology. More specifically, technology related to manufacturing had evolved so companies could produce custom ordered products at virtually the same cost they incurred for mass-produced items.
One of the early pioneers of this strategy was Dell Computers. The Dell business model allowed customers to design the computer they wanted. Dell would build it, then charge a lower price than the other computer companies. Dell’s cost savings were in lower costs for component part inventories and a flexible manufacturing process that allowed different computers to be made with very little time spent adjusting the production line. Another way to think of the best cost strategy is that it attempts to offer the best value for the products. This means that you will get a product closer to your specific needs for a price that is probably lower than the competition’s. Many companies have grown into this strategy over a period of years. Toyota and BMW have evolved in their manufacturing processes so that they allow customers to make many custom-feature choices on their automobiles without any significant production cost increases.
Application of Business-Level Strategy
The descriptions of low cost and differentiation should provide you with the ability to determine if a company is pursuing one or both of these approaches. Whether the company is pursuing a broad or a focused strategy is determined by looking at the number of products or services offered compared to the total number of market segments in the industry. Due to technological advances, identifying a specific strategy has become more complicated, but the descriptions provided here should help you to determine the business-level strategy being pursued by any company.
Conclusion
Business-level strategy choices determine how a company chooses to compete in its industry. The strategy types are based on two concept pairs: differentiation vs. low-cost producer, and broad vs. focused market segments. Success by one company using a specific business-level strategy will draw the attention of competitors, who will try to imitate the competency or competencies of that successful company. The more complex the mix of competencies that create a company’s competitive advantage, the longer it will take competitors to copy it. It took the other personal computer manufacturers almost twenty years to imitate Dell’s supply chain and manufacturing competencies. Generally speaking, however, distinctive competencies in pursuing a business-level strategy are becoming more and more short lived. This trend puts a lot of pressure on companies in competitive industries to continuously seek to improve and adapt their business-level strategies.
References
Grant, R. M. (2008). Contemporary strategy analysis (6th ed.). Malden, MA: Blackwell.
Hill, C. W. L., & Jones, G. R. (1994). Strategic management: An integrated approach (8th ed.). Boston, MA: Houghton Mifflin.
Osinga, F. (2006). A discourse on winning and losing: Core ideas & themes of Boyd’s ‘Theory of intellectual evolution and growth’. Retrieved from http://www.au.af.mil/au/awc/awcgate/boyd/osinga_boyd_ooda_copyright2007
Check Your Knowledge
Question 1
What is an organizational strategy?
A strategy is a broad and general plan for moving an organization from having ideas to implementing those ideas (i.e., moving from the accomplishment of the organization’s mission, to achieving the vision).
Question 2
Is it necessary for an organizational strategy to be formally developed (i.e., the result of a thoughtful and rational decision process)? Provide an explanation for your response.
No. Strategies sometimes develop without a formal process, or are discovered, or are simply “the way we do things around here.”
Question 3
What are some of the challenges associated with organizational strategies?
· In a dynamic industry, the necessity of working with all key stakeholders to obtain buy-in for a strategy can mean that by the time the strategy is in place, it is already outdated.
· When establishing a strategy, it needs to be broad enough so that it is possible to adjust for changing circumstances, without being vague.
Question 4
Learning from strategy failures can be useful. Examples of such failures abound. Select one that interests you, and see how many contributing factors you can identify. It is relatively easy to discover the reasons for failures after they have happened. However, it is important for managers/leaders to be on the lookout for early indicators that the organization has adopted a strategy that is not going to work and then make timely adjustments to correct the problem. For the example you selected, consider some things that might have served as good indicators of a failing strategy.
The short article you read on strategy uses General Motors as an example. GM’s strategy for staying competitive was to give customers a greater number of choices in models (than competitors at the time) and to introduce annual styling changes. As the authors point out, this strategy worked well for quite a while and was adopted by other US automobile companies. Early indicators of strategy failure (that leaders could potentially have foreseen, but didn’t) included an increasing number of problems with quality (both during the manufacturing processes and once the vehicles were on the road), as well as higher costs associated with regulatory compliance. Another thing managers didn’t sufficiently anticipate was the threat of competition from outside the United States from firms that had maintained a focus on quality and on a narrower product line. Lessons leaders can take from this example include: (1) ensure access to rich information about operational issues and cost trends internally, and (2) pay attention to external forces for change in the global marketplace.
Resources
· a brief history of the term Strategy as used in the business world; From:
Encyclopedia of Small Business
(Vol. 2. 3rd ed.) Publisher: Gale
· a few common methods used for strategic planning are detailed in
Components of the Strategic Planning Process
·
Approaches to Formulating Business Strategy: A Review
Competitive Advantage
Competitive advantage is what an organization does better than anyone else—something that is difficult or impossible to copy. People often think that a competitive advantage lies in the product an organization produces, but that is not necessarily the case. A competitive advantage could come from any or all of the following factors:
· the product itself
· the organization’s brand
· a particular protected technology that results in the consumer seeing the product or service as better
· a method used to produce the product or service that results in a cost advantage over other producers
· exclusive access to a particular market or set of clients
The condition of being difficult or impossible to copy is unequivocally critical; if any competitors can copy your advantage, you will not have an advantage for long.
Not every firm has a true competitive advantage. A true competitive advantage becomes the organization’s primary basis for strategic direction. In other words, if the firm has a true competitive advantage in its brand, for example, it may be able to translate this brand into additional products or ventures. Of course, the firm must carefully protect its competitive advantage so as not to dilute it or expose it to copy.
A competitive advantage may last only a brief time, or it may last a long while. The firm often does not necessarily control the longevity of your competitive advantage. Consider the following issues for each of the sources of competitive advantage listed above:
· the product itself—If you have a competitive advantage from the product itself, you will keep that advantage only as long as the consumer finds your product superior to alternatives. If the consumer decides that a different product better meets their needs (and you cannot control this decision), you will lose your competitive advantage.
· the organization’s brand—There are many brands that have tried to leverage their competitive advantage and actually ended up diluting it and destroying any cachet the brand had with consumers. There are countless examples of companies that had a distinct brand that grew very fast, resulting in a brand that consumers no longer cared as much about: Abercrombie & Fitch, Coach, Gap, Michael Kors, Apple, etc.
· a particular protected technology—It is not the technology itself that gives you a competitive advantage, but the way the consumer feels about the product or service as a result of the technology being a part of it. If a competitor comes out with a different technology that results in their product better meeting the needs of the client, your technology may no longer offer a competitive advantage.
· a method to produce the product—There is little that keeps other companies from copying your methods, but there are instances when competing companies could not copy the culture that is integral to a method. In such cases, the competitive advantage can be long lasting. Walmart, for example, may have a competitive advantage based on the company’s supply chain and logistics, such that competitors simply cannot offer the same products at a better price. Note that this advantage is consumer-centric: Walmart’s customers consider price as the most important attribute in their shopping. Target and Kmart have struggled for decades to match Walmart’s supply chain capacity, but they have been unable to duplicate Walmart’s success. There is nothing inherently secret or different about Walmart’s logistics. Competitors simply have not been able to culturally and organizationally position themselves to match Walmart’s logistic success.
· exclusive access—As long as exclusive access is maintained, usually in the form of a contract, it will be difficult for others to enter. However, without careful relationship management (nonexploitation) during the term of the contract, the contract may not be renewed, and that competitive advantage will be lost very quickly.
As you can see, maintaining true competitive advantage requires hard work. The organization must nurture and care for its competitive advantage very carefully in order to keep it, and must also use that same competitive advantage as the basis for its strategic growth.
Strategy that does not center on a competitive advantage (i.e., strategy that can be copied by competitors or that is not fully aligned with customers’ needs) is usually short-lived.
Building Blocks of Competitive Advantage: Porter’s Five Forces and VRIN
Porter’s Five Forces
The prominent marketing strategist Michael Porter is perhaps best known for the Porter’s five forces model, a strategic framework designed to analyze an organization’s competitive strategies (Porter’s Five Forces Model, 2009). In his book, Competitive Strategy: Techniques for Analyzing Industries and Competitors (1980), Porter described the model as a way to assess profitability and competition in light of five competitive forces: suppliers, competitors, substitute products, customers or buyers, and potential entrants (see the figure below).
Resources
Competitive Advantage: Competitive Advantage
From: Encyclopedia of Management(6th ed.)
Publisher: Gale, a Cengage Company, Page 90 Competitive Advantage
VRIN
To describe the characteristics of competitive advantage, Jay Barney uses the acronym VRIN: valuable, rare, inimitable, and nonsubstitutable. Barney suggests, in essence, that the firm’s competitive advantage is truly a competitive advantage only if it is unique to the firm and can’t be copied by competitors. Let’s look at each characteristic individually:
· valuable—What the firm thinks has value is unimportant; a competitive advantage can be based only on something that the market or consumers think has value. For example, many suggest that Walmart’s competitive advantage is that it has such strong control over its supply chain that it can offer desirable prices for products. In other words, operating (overhead) costs are low enough that the consumer can receive a very attractive price for products. Here’s the question: Do low prices have value to the consumer? Clearly, the answer is yes. The competitive advantage Walmart owns, which enables it to offer lower prices, is therefore valuable. Evidence suggests that in the United States, other large-scale retailers have been unable to develop the logistical expertise that Walmart owns. This is a favorable circumstance for Walmart, given consumers’ strong preference for lower prices. On the other hand, a wine company that thinks its competitive advantage rests in the beauty of its label may be in for a rude awakening. While a beautiful label is important in the buying process, the contents of the bottle and quality are far more important. Consumers may choose a bottle with an ugly label if they know the winery makes excellent products. Thus, a label along may not be a good building block for competitive advantage.
· rare—If the competitive advantage offers value to the client, that value must also be rare, meaning that other companies aren’t doing the same thing. Many business owners, asked about their company’s competitive advantage, state that it is their customer service. Great customer service is important to clients, but any competitor can offer great customer service relatively easily; it is not rare. A product or service does not constitute an advantage if others do the same thing.
· inimitable—So you have a competitive advantage that is valuable and rare. But can competitors notice that competitive advantage and easily copy it? If so, it is not really a competitive advantage, as others can quickly remove the advantage by copying it, and you are back to square one. A company that has an easily recognized brand, such as Coca-Cola, which has positive consumer sentiment attached to it possesses a great competitive advantage, because it is valuable, rare, and inimitable. Other soft drinks companies have a very difficult time developing the same degree of advantage.
· nonsubstitutable—It is ideal for a company or product to have few or zero substitutes. The more distinctive the product or service is in consumers’ minds, the stronger the degree of competitive advantage will be for the firm. In the case of Coca-Cola, the product isn’t quite unique, which lessens Coca-Cola’s competitive advantage.
If a firm truly has a competitive advantage that meets these criteria, then it is a sustainable competitive advantage on which to build forward-looking strategy. If, on the other hand, the firm doesn’t have a true competitive advantage, it can consider strategies that will help it potentially build a competitive advantage based on these four building blocks. It can grow and build something it does well (but isn’t yet a competitive advantage) in a way that will enhance its value, its rarity, its inimitability, and its uniqueness.
References
Porter, M. (1980). Competitive strategy: Techniques for analyzing industries and competitors. New York: The Free Press.
Porter’s Five Forces Model. (2009). In Encyclopedia of management. (6th ed., pp. 714–717). Detroit. Gale.
Barney, J. B. (1991). Firm resources and sustained competitive advantage. Journal of Management, 17(5), 99–120.
Check Your Knowledge
Question 1
What are the three generic strategies, as defined by Porter, that can be used by an organization to gain a competitive advantage? Briefly explain each strategy.
· Cost leadership—the organization attempts to provide its products or services at a lower cost than its competitors.
· Differentiation—the organization works to provide a service or product that is unique in some respect other than price.
· Focus—the organization focuses its attentions more narrowly (on products, services, potential customer segments, or geographic areas), using price or differentiation strategies within that more narrow market.
Source: “Competitive Advantage,” 2009, para. 3.
Question 2
Within the discussion of competitive advantage, what are “critical tasks” and “core tasks”?
· Critical tasks can be parts of the organization that are instrumental in gaining a competitive advantage (e.g., research and development); or actual tasks such as market analyses and strategic cooperation with other businesses.
· Core tasks are the normal operations of the organization (e.g., human resources and production).
Source: “Competitive Advantage,” 2009, para. 5.
Question 3
What are some of the types of differentiation that an organization can potentially use to gain a competitive advantage?
· product differentiation
· service differentiation
· people differentiation
· image differentiation
· quality differentiation
· innovation differentiation Sample response
Source: “Competitive Advantage,” 2009, paras. 13-26.
Question 4
The five forces are factors that determine industry competition. They are as follows:
The five forces are factors that determine industry competition. They are as follows:
· suppliers
· rivalry within an industry
· substitute products
· customers or buyers
· new entrants
Source: “Porter’s Five-Forces Model,” 2009, para. 3.
Question 5
Briefly, what is the significance of Porter’s Five-Forces Model?
It is a model that can be used to assess long-term profitability within an industry, by examining the strength of each of the five forces, and the relationship among these forces.
Source: “Porter’s Five-Forces Model,” 2009, para. 4.
Question 6
The fifth force identified by Porter is “new entrants” (to an industry). Porter went on to identify six major barriers to entry. List the six barriers to entry.
· economies of scale
· product differentiation
· capital requirements for entry
· switching costs (the cost to a buyer of switching from one product or service to another)
· access to distribution channels
· cost disadvantages independent of scale (e.g., established companies have product technology)
Source: “Porter’s Five-Forces Model,” 2009, para. 9.
Core Competencies
A competency is something an organization is able to do with the resources and capabilities it has created, developed, or acquired. Core competencies build and rely upon the organization’s strengths and typically serve to distinguish it from its competitors. In other words, core competencies are difficult to replicate. One familiar example of core competencies is Apple’s approach to product design.
Especially in dynamic and highly competitive markets, where fast adjustments and innovation are critical for survival, guarding against complacency and over-reliance on past competencies is important.
Understanding, Finding, and Applying Core Competencies (Edgar & Lockwood, 2011), located in the Resources section below, offers a general overview of this topic and a framework that may be used to help discover an organization’s core competencies. The articles Edgar and Lockwood reference, including the seminal work on this topic, “The Core Competence of the Corporation,” by Prahalad and Hamel, may also be helpful.
References
Edgar, W. B., & Lockwood, C. A. (2011). Understanding, finding, and applying core competencies: A framework, guide, and description for corporate managers and research professionals. Academy of Strategic Management Journal, 10(2).
Prahalad C. K., & G. Hamel (1990). The core competence of the corporation. Harvard Business Review 68(3), 79–92.
Organizational Size
Measures of organizational size include the number of employees, the number of locations in which the organization operates, the number of clients or members served, the amount of revenue generated, and the products or services offered by the organization.
Organizational size has implications on a business’s ability to accomplish its missions, goals, values, objectives, and strategies. Smaller organizations may have fewer resources available to leverage toward growth and innocation. However, they may be more flexible and agile (Damanpour, 1992). Larger organizations may be slower than optimal to respond to changing circumstances and opportunities (Whetten, 1987), but they may have the resources and capacity needed to tolerate the risks associated with change and innovation (Gopalakrishnan & Damanpour, 2000).
This is a topic of considerable interest for those working in very small organizations, which have limited ability to take advantage of economies of scale. One of the biggest related issues of interest to scholarly experts, consultants, and practitioners has been the influence of size on change and innovation (Ford, 2009). While scholars have long studied the impact of size on organizational effectiveness and innovation, findings and conclusions have been mixed. Thus, we must not assume that large organizations inevitably will be inefficient and ineffective, or that small ones will be agile.
Leaders have used multiple approaches to avoid excessive and limiting bureaucracy as their organizations have grown, and various measures can be implemented to mitigate or eliminate size-related risks (see, for example, Bloodgood, 2006). For small organizations focused on innovation, options have included strategic partnerships and grants. Large organizations have experimented with creating separate R&D divisions, innovation incentive programs and awards, partnerships with start-ups, and so on. A famous example of what was then an innovative idea was Lockheed Martin’s creation in 1943 of a Skunk Works to work secretly, shielded from the organization’s huge bureaucracy, on the XP-80 project. Other examples of how big companies are managing to innovate despite their size include Intuit’s “’lean start-ins’ that gather ‘intrapreneurs’ together” and Whirlpool’s use of “i-mentors” (Kaplan, 2012). If you search the Internet, you will uncover interesting discussions and examples about how big companies are partnering with startups to speed innovation and take advantage of market opportunities.
You will find more discussions about this topic, often focused on specific sectors or industries, in the journal literature in UMUC’s library. To find research results that may be relevant for your particular context, you might begin by searching the library for work on organizational size and innovation and then narrowing your search depending upon your particular questions or interests. A few examples include work by Jaskyte (2013) on nonprofits, Arend (2014) and Laforet (2012) on small- and medium-size enterprises (SMEs), Islam & Amin (2015) on size and labor productivity in Africa, Leal-Rodriguez, Eldridge, Roldán, Lel-Millan, and Ortega-Gutiérrez (2015) on size as a moderating effect on organizational learning and innovation, and Vaccaro, Jansen, Van Den Bosh, and Volberda (2012) on size as a moderating factor for leadership effectiveness in managing innovation.
References
Arend, R. (2014). Entrepreneurship and dynamic capabilities: How firm age and size affect the ‘capability enhancement-SME performance’ relationship. Small Business Economics, 42(1),
33
-57. doi:10.1007/s11187-012-9461-9
Bloodgood, J. M. (2006). The influence of organizational size and change in financial performance on the extent of organizational change. Strategic Change, 15(5), 241-252. doi:10.1002/jsc.765
Damanpour, F. (1992). Organizational size and innovation. Organization Studies (Walter De Gruyter Gmbh & Co. KG.), 13(3), 375-402.
Ford, M. W. (2009). Size, structure and change implementation: An empirical comparison of small and large organizations. Management Research News, 32(4), 303-320. doi:10.1108/01409170910944272
Gopalakrishnan, S. and F. Damanpour (2000). The impact of organizational context on innovation adoption in commercial banks. IEEE Transactions on Engineering Management, 47, 14–25.
Islam, A.& Amin, M. (2015, December). Does firm size affect productivity? [Web log post]. Retrieved from https://www.weforum.org/agenda/2015/12/does-firm-size-affect-productivity/
Jaskyte, K. (2013). Does size really matter? Organizational size and innovations in nonprofit organizations. Nonprofit Management and Leadership, 24(2), 229-247. doi:10.1002/nml.21087
Kaplan, S. (2012). Four innovation strategies from big companies that act like startups. Co.Design. Retrieved from http://www.fastcodesign.com/1670960/4-innovation-strategies-from-big-companies-that-act-like-startups
Laforet, S. (2013). Organizational innovation outcomes in SMEs: Effects of age, size, and sector. Journal of World Business, 48(4), 490-502. doi:10.1016/j.jwb.2012.09.005
Leal-Rodriguez, A.L., Eldridge, S., Roldán, J.L., Lel-Millan, A.G., & Ortega-Gutiérrez, (2015). Organizational unlearning, innovation outcomes, and performance: The moderating effect of firm size. Journal of Business Research, 68(4), 803-809. doi:10.1016/j.jbusres.2014.11.032
Vaccaro, I. G., Jansen, J. P., Van Den Bosch, F. J., & Volberda, H. W. (2012). Management Innovation and Leadership: The Moderating Role of Organizational Size. Journal Of Management Studies, 49(1), 28-51. doi:10.1111/j.1467-6486.2010.00976.x. Retrieved from http://ezproxy.umgc.edu/login?url=http://search.ebscohost.com/login.aspx?direct=true&db=bth&AN=69703739&site=ehost-live&scope=site
Whetten, D.A. (1987, August). Organizational growth and decline processes. Annual Review of Sociology, 13, 335 – 358. DOI: 10.1146/annurev.so.13.080187.002003. Retrieved from http://ezproxy.umgc.edu/login?url=http://search.ebscohost.com/login.aspx?direct=true&db=sih&AN=10457997&site=ehost-live&scope=site
Check Your Knowledge
Question 1
What are some of the possible measures of an organization’s size?
· number of employees
· number of locations
· number of clients served
· amount of revenue generated
· number of products and/or services offered
Question 2
What are some of the challenges facing a small organization because of its size?
· A small organization may have fewer resources (than a large organization) with which to grow and innovate.
· It may be less able to take advantage of economies of scale.
Question 3
What are some of the challenges facing a large organization because of its size?
· It may not be able to respond as quickly to changes in the business environment.
· Larger organizations typically need to be more mindful to limit bureaucracy’s negative effects.
Question 4
What are some of the potential benefits of a small organization size?
· greater flexibility
· greater agility
Question 5
What are some of the potential benefits of a large organization size?
· access to more resources can make it easier to respond to change
· greater capacity potentially makes it easier to respond to changes in the business environment
Question 6
What are some of the tactics used by organizations to overcome size issues that can affect innovation?
· Small organizations can utilize strategic partnerships and grants.
· Large organizations can create separate R&D divisions, offer innovation incentive awards, and partner with start-up organizations.
Organizational Structure
Organizational structure refers to how individual work and team work within an organization are coordinated. To achieve organizational goals and objectives, individual work needs to be coordinated and managed. Structure is a valuable tool in achieving coordination, as it specifies reporting relationships (who reports to whom), delineates formal communication channels, and describes how separate actions of individuals are linked together. Organizations can function within a number of different structures, each possessing distinct advantages and disadvantages. Although any structure that is not properly managed will be plagued with issues, some organizational models are better equipped for particular environments and tasks.
Building Blocks of Structure
What exactly do we mean by organizational structure? Which elements of a company’s structure make a difference in how we behave and how work is coordinated? We will review four aspects of structure that have been frequently studied in the literature: centralization, formalization, hierarchical levels, and departmentalization. We view these four elements as the building blocks, or elements, making up a company’s structure. Then we will examine how these building blocks come together to form two different configurations of structures.
Centralization
Centralization is the degree to which decision-making authority is concentrated at higher levels in an organization. In centralized companies, many important decisions are made at higher levels of the hierarchy, whereas in decentralized companies, decisions are made and problems are solved at lower levels by employees who are closer to the problem in question.
As an employee, where would you feel more comfortable and productive? If your answer is “decentralized,” you are not alone. Decentralized companies give more authority to lower-level employees, resulting in a sense of empowerment. Decisions can be made more quickly, and employees often believe that decentralized companies provide greater levels of procedural fairness to employees. Job candidates are more likely to be attracted to decentralized organizations. Because centralized organizations assign decision-making responsibility to higher-level managers, they place greater demands on the judgment capabilities of CEOs and other high-level managers.
Many companies find that the centralization of operations leads to inefficiencies in decision making. For example, in the 1980s, the industrial equipment manufacturer Caterpillar suffered the consequences of centralized decision making. At the time, all pricing decisions were made in the corporate headquarters in Peoria, Illinois. This meant that when a sales representative working in Africa wanted to give a discount on a product, they needed to check with headquarters. Headquarters did not always have accurate or timely enough information about the subsidiary markets to make an effective decision. As a result, Caterpillar was at a disadvantage against competitors such as the Japanese firm Komatsu. Seeking to overcome this centralization paralysis, Caterpillar underwent several dramatic rounds of reorganization in the 1990s and 2000s (Nelson & Pasternack, 2005).
CAT Bulldozer
Changing their decision-making approach to a more decentralized style has helped Caterpillar compete at the global level.
Bauma 2007 Bulldozer Caterpillar 2
by
Aconcagua
is licensed under
CC BY-SA 3.0
.
However, centralization also has its advantages. Some employees are more comfortable in an organization where their manager confidently gives instructions and makes decisions. Centralization may also lead to more efficient operations, particularly if the company is operating in a stable environment (Ambrose & Cropanzano, 2000; Miller, et al.., 1988; Oldham & Hackman, 1981; Pierce & Delbecq, 1977; Schminke, et al.., 2000; Turban & Keon, 1993; Wally & Baum, 1994).
In fact, organizations can suffer from extreme decentralization. For example, some analysts believe that the FBI experiences some problems because its structure and systems are based on the assumption that crime needs to be investigated after it happens. Over time, this assumption led to a situation where, instead of following an overarching strategy, each FBI unit is completely decentralized, and field agents determine how investigations should be pursued. It has been argued that due to the change in the nature of crimes, the FBI needs to gather accurate intelligence before a crime is committed; this requires more centralized decision making and strategy development (Brazil, 2007).
Hitting the right balance between decentralization and centralization is a challenge for many organizations. At Home Depot, the retail giant with over two thousand stores across the United States, Canada, Mexico, and China, one of the major changes instituted by former CEO Bob Nardelli was to centralize most of its operations. Before Nardelli’s arrival in 2000, Home Depot store managers made a number of decisions autonomously, and each store had an entrepreneurial culture. Nardelli’s changes initially saved the company a lot of money. For example, for a company of that size, centralizing purchasing operations led to big cost savings because the company could negotiate important discounts from suppliers. At the same time, many analysts think that the centralization went too far, leading to the loss of the service-oriented culture at the stores. Nardelli was ousted after seven years (Charan, 2006; Marquez, 2007).
Formalization
Formalization is the extent to which an organization’s policies, procedures, job descriptions, and rules are written and explicitly articulated. Formalized structures are those in which there are many written rules and regulations. These structures control employee behavior using written rules so that employees have little autonomy to decide on a case-by-case basis. An advantage of formalization is that it makes employee behavior more predictable. Whenever a problem at work arises, employees know to turn to a handbook or a procedure guideline. Therefore, employees respond to problems in a similar way across the organization, leading to consistency of behavior.
While formalization reduces ambiguity and provides direction to employees, it is not without disadvantages. A high degree of formalization may actually lead to reduced innovation because employees are used to behaving in a certain manner. In fact, strategic decision making in such organizations often occurs only when there is a crisis. A formalized structure is associated with reduced motivation and job satisfaction as well as a slower pace of decision making (Frederickson, 1986; Oldham & Hackman, 1981; Pierce & Delbecq, 1977; Wally & Baum, 1994). The service industry is particularly susceptible to problems associated with high levels of formalization. Sometimes employees who are listening to a customer’s problems may need to take action, but the answer may not be specified in any procedural guidelines or rulebook. For example, while a handful of airlines such as Southwest do a good job of empowering their employees to handle complaints, in many airlines, lower-level employees have limited power to resolve a customer problem and are constrained by stringent rules that outline a limited number of acceptable responses.
Hierarchical Levels
Another important element of a company’s structure is the number of levels it has in its hierarchy. Keeping the size of the organization constant, tall structures have several layers of management between frontline employees and the top level, while flat structures consist of only a few layers. In tall structures, the number of employees reporting to each manager tends to be smaller, resulting in greater opportunities for managers to supervise and monitor employee activities. In contrast, flat structures involve a larger number of employees reporting to each manager. In such a structure, managers will be relatively unable to provide close supervision, leading to greater levels of freedom of action for each employee.
Research indicates that flat organizations provide a greater need satisfaction for employees and greater levels of self-actualization (Ghiselli & Johnson, 1970; Porter & Siegel, 2006). At the same time, there may be some challenges associated with flat structures. Research shows that when managers supervise a large number of employees, which is more likely to happen in flat structures, employees experience greater levels of role ambiguity—the confusion that results from being unsure of what is expected of a worker on the job (Chonko, 1982). This is especially a disadvantage for employees who need closer guidance from their managers. Moreover, in a flat structure, advancement opportunities will be more limited because there are fewer management layers. Finally, while employees report that flat structures are better at satisfying their higher-order needs such as self-actualization, they also report that tall structures are better at satisfying security needs of employees (Porter & Lawler, 1964). Because tall structures are typical of large and well-established companies, it is possible that when working in such organizations employees feel a greater sense of job security.
IKEA Storefront
Companies such as IKEA, the Swedish furniture manufacturer and retailer, are successfully using flat structures within stores to build an employee attitude of job involvement and ownership.
Ikea almhult
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Departmentalization
Organizational structures differ in terms of departmentalization, which is broadly categorized as either functional or divisional.
Organizations using functional structures group jobs based on similarity in function. Such structures may have departments such as marketing, manufacturing, finance, accounting, human resources, and information technology. In these structures, each person serves a specialized role and handles large volumes of transactions. For example, in a functional structure, an employee in the marketing department may serve as an event planner, planning promotional events for all the products of the company.
In organizations using divisional structures, departments represent the unique products, services, customers, or geographic locations the company is serving. Thus each unique product or service the company is producing will have its own department. Within each department, functions such as marketing, manufacturing, and other roles are replicated. In these structures, employees act like generalists as opposed to specialists. Instead of performing specialized tasks, employees will be in charge of performing many different tasks in the service of the product. For example, a marketing employee in a company with a divisional structure may be in charge of planning promotions, coordinating relations with advertising agencies, and planning and conducting marketing research, all for the particular product line handled by his or her division.
In reality, many organizations are structured according to a mixture of functional and divisional forms. For example, if the company has multiple product lines, departmentalizing by product may increase innovation and reduce response times. Each of these departments may have dedicated marketing, manufacturing, and customer service employees serving the specific product; yet, the company may also find that centralizing some operations and retaining the functional structure makes sense and is more cost effective for roles such as human resources management and information technology. The same organization may also create geographic departments if it is serving different countries.
Each type of departmentalization has its advantages. Functional structures tend to be effective when an organization does not have a large number of products and services requiring special attention. When a company has a diverse product line, each product will have unique demands, deeming divisional (or product-specific) structures more useful for promptly addressing customer demands and anticipating market changes. Functional structures are more effective in stable environments that are slower to change. In contrast, organizations using product divisions are more agile and can perform better in turbulent environments. The type of employee who will succeed under each structure is also different. Research shows that when employees work in product divisions in turbulent environments, because activities are diverse and complex, their performance depends on their general mental abilities (Hollenbeck, et al.., 2002).
Two Configurations: Mechanistic and Organic Structures
Functional Departmentalization Structure
An example of a pharmaceutical company with a functional departmentalization structure.
Divisional Departmentalization Structure
An example of a pharmaceutical company with a divisional departmentalization structure.
The different elements making up organizational structures in the form of formalization, centralization, number of levels in the hierarchy, and departmentalization often coexist. As a result, we can talk about two configurations of organizational structures, depending on how these elements are arranged.
Mechanistic structures are those that resemble a bureaucracy. These structures are highly formalized and centralized. Communication tends to follow formal channels, and employees are given specific job descriptions delineating their roles and responsibilities. Mechanistic organizations are often rigid and resist change, making them unsuitable for innovation and quick action. These forms have the downside of inhibiting entrepreneurial action and discouraging the use of individual initiative on the part of employees. Not only do mechanistic structures have disadvantages for innovation, but they also limit individual autonomy and self-determination, which will likely lead to lower levels of intrinsic motivation on the job (Burns & Stalker, 1961; Covin & Slevin, 1988; Schollhammer, 1982; Sherman & Smith, 1984; Slevin & Covin, 1990).
Despite these downsides, however, mechanistic structures have advantages when the environment is more stable. The main advantage of a mechanistic structure is its efficiency. Therefore, in organizations that are trying to maximize efficiency and minimize costs, mechanistic structures provide advantages. For example, McDonald’s has a famously bureaucratic structure where employee jobs are highly formalized, with clear lines of communication and specific job descriptions. This structure is an advantage for them because it allows McDonald’s to produce a uniform product around the world at minimum cost. Mechanistic structures can also be advantageous when a company is new. New businesses often suffer from a lack of structure, role ambiguity, and uncertainty. The presence of a mechanistic structure has been shown to be related to firm performance in new ventures (Sine & Kirsch, 2006).
In contrast to mechanistic structures, organic structures are flexible and decentralized, with low levels of formalization. In organizations with an organic structure, communication lines are more fluid and flexible. Employee job descriptions are broader and employees are asked to perform duties based on the specific needs of the organization at the time as well as their own levels of expertise. Organic structures tend to be related to higher levels of job satisfaction on the part of employees. These structures are conducive to entrepreneurial behavior and innovation (Burns & Stalker, 1961; Covin & Slevin, 1988). An example of a company that has an organic structure is the diversified technology company 3M. The company is strongly committed to decentralization. At 3M, there are close to 100 profit centers, with each division feeling like a small company. Each division manager acts autonomously and is accountable for his or her actions. As operations within each division get too big and a product created by a division becomes profitable, the operation is spun off to create a separate business unit. This is done to protect the agility of the company and the small-company atmosphere.
Conclusion
The degree to which a company is centralized and formalized, the number of levels in the company hierarchy, and the type of departmentalization the company uses are key elements of a company’s structure. These elements of structure affect the degree to which the company is effective and innovative as well as employee attitudes and behaviors at work. These elements come together to create mechanistic and organic structures. Mechanistic structures are rigid and bureaucratic and help companies achieve efficiency, while organic structures are decentralized, flexible, and aid companies in achieving innovativeness.
Discussion Questions
· What are the advantages and disadvantages of decentralization?
· All else being equal, would you prefer to work in a tall or flat organization? Why?
· What are the advantages and disadvantages of departmentalization by product?
Contemporary Forms of Organizational Structures
For centuries, technological advancements that affected business came in slow waves. Over 100 years passed between the invention of the first reliable steam engine and the first practical internal combustion engine. During these early days of advancement, communication would often go hand in hand with transportation. Instead of delivering mail hundreds of miles by horse, messages could be transported more quickly by train and then later by plane. Beginning in the 1900s, the tides of change began to rise much more quickly. From the telegraph to the telephone to the computer to the Internet, each advancement brought about a need for an organization’s structure to adapt and change.
Business has become global, moving into new economies and cultures. Previously nonexistent industries, such as those related to high technology, have demanded flexibility by organizations in ways never before seen. The diverse and complex nature of the current business environment has led to the emergence of several types of organizational structures. Beginning in the 1970s, management experts began to propose organizational designs that they believed were better adapted to the needs of the emerging business environment. Each structure has unique qualities to help businesses handle their particular environment.
Matrix Organizations
Matrix organizations have a design that combines a traditional functional structure with a product structure. Instead of completely switching from a product-based structure, a company may use a matrix structure to balance the benefits of product-based and traditional functional structures. Specifically, employees reporting to department managers are also pooled together to form project or product teams. As a result, each person reports to a department manager as well as a project or product manager. In a matrix structure, product managers have control and say over product-related matters, while department managers have authority over matters related to company policy. Matrix structures are created in response to uncertainty and dynamism of the environment and the need to give particular attention to specific products or projects. Using the matrix structure as opposed to product departments may increase communication and cooperation among departments because project managers will need to coordinate their actions with those of department managers. In fact, research shows that matrix structure increases the frequency of informal and formal communication within the organization (Joyce, 1986). Matrix structures also have the benefit of providing quick responses to technical problems and customer demands. The existence of a project manager keeps the focus on the product or service provided.
Matrix Structure
An example of a matrix structure at a software development company. Business analysts, developers, and testers each report to a functional department manager and to a project manager simultaneously.
Despite these potential benefits, matrix structures are not without costs. In a matrix, each employee reports to two or more managers. This situation is ripe for conflict. Because multiple managers are in charge of guiding the behaviors of each employee, there may be power struggles or turf wars among managers. As managers are more interdependent compared to a traditional or product-based structure, they will need to spend more effort coordinating their work. From the employee’s perspective, there is potential for interpersonal conflict with team members as well as with leaders. The presence of multiple leaders may create role ambiguity or, worse, role conflict—being given instructions or objectives that cannot all be met because they are mutually exclusive. The necessity to work with a team consisting of employees with different functional backgrounds increases the potential for task conflict at work (Ford & Randolph, 1992). Solving these problems requires a great level of patience and proactivity on the part of the employee.
The matrix structure is used in many information technology companies engaged in software development. The sportswear manufacturer Nike is another company that uses the matrix organization successfully. New product introduction is a task shared by regional managers and product managers. While product managers are in charge of deciding how to launch a product, regional managers are allowed to make modifications based on the region (Anand & Daft, 2007).
Boundaryless Organizations
Boundaryless organization is a term coined by Jack Welch during his tenure as CEO of GE. It refers to an organization that eliminates traditional barriers between departments as well as barriers between the organization and the external environment (Ashkenas et al., 1995). Many types of boundaryless organizations exist. One form is the modular organization, in which all nonessential functions are outsourced. The idea behind this format is to retain only the value-generating and strategic functions in-house, while the rest of the operations are outsourced to many suppliers. An example of a company that does this is Toyota. By managing relationships with hundreds of suppliers, Toyota achieves efficiency and quality in its operations. Strategic alliances constitute another form of boundaryless design. In this form, similar to a joint venture, two or more companies find an area of collaboration and combine their efforts to create a partnership that is beneficial for both parties. In the process, the traditional boundaries between two competitors may be broken. As an example, Starbucks formed a highly successful partnership with PepsiCo to market its Frappuccino cold drinks. Starbucks has immediate brand-name recognition in this cold coffee drink, but its desire to capture shelf space in supermarkets required marketing savvy and experience that Starbucks did not possess at the time. By partnering with PepsiCo, Starbucks gained an important head start in the marketing and distribution of this product. Finally, boundaryless organizations may involve eliminating the barriers separating employees; these may be intangible barriers, such as traditional management layers, or actual physical barriers, such as walls between different departments. Structures such as self-managing teams create an environment where employees coordinate their efforts and change their own roles to suit the demands of the situation, as opposed to insisting that something is “not my job” (Dess et al., 1995; Rosenbloom, 2003).
Learning Organization
s
A learning organization is one whose design actively seeks to acquire knowledge and change behavior as a result of the newly acquired knowledge. In learning organizations, experimenting, learning new things, and reflecting on new knowledge are the norms. At the same time, there are many procedures and systems in place that facilitate learning at all organization levels.
In learning organizations, experimentation and testing potentially better operational methods are encouraged. This is true not only in response to environmental threats but also as a way of identifying future opportunities. 3M is one company that institutionalized experimenting with new ideas in the form of allowing each engineer to spend one day a week working on a personal project. At IBM, learning is encouraged by taking highly successful business managers and putting them in charge of emerging business opportunities (EBOs). IBM is a company that has no difficulty coming up with new ideas, as evidenced by the number of patents it holds. Yet commercializing these ideas has been a problem in the past because of an emphasis on short-term results. To change this situation, the company began experimenting with the idea of EBOs. By setting up a structure where failure is tolerated and risk taking is encouraged, the company took a big step toward becoming a learning organization (Deutschman, 2005).
Learning organizations are also good at learning from experience—their own or a competitor’s. To learn from past mistakes, companies conduct a thorough analysis of them. Some companies choose to conduct formal retrospective meetings to analyze the challenges encountered and areas for improvement. To learn from others, these companies vigorously study competitors, market leaders in different industries, clients, and customers. By benchmarking against industry best practices, they constantly look for ways of improving their own operations. Learning organizations are also good at studying customer habits to generate ideas. For example, Xerox uses anthropologists to understand and gain insights to how customers are actually using their office products (Garvin, 1993). By using these techniques, learning organizations facilitate innovation and make it easier to achieve organizational change.
Conclusion
The changing environment of organizations creates the need for newer forms of organizing. Matrix structures are a cross between functional and product-based divisional structures. They facilitate information flow and reduce response time to customers but have challenges because each employee reports to multiple managers. Boundaryless organizations blur the boundaries between departments or the boundaries between the focal organization and others in the environment. These organizations may take the form of a modular organization, strategic alliance, or self-managing teams. Learning organizations institutionalize experimentation and benchmarking.
Discussion Questions
· Have you ever reported to more than one manager? What were the challenges of such a situation? As a manager, what could you do to help your subordinates who have other bosses besides yourself?
· What do you think are the advantages and disadvantages of being employed by a boundaryless organization?
· What can organizations do to institutionalize organizational learning? What practices and policies would aid in knowledge acquisition and retention?
Case in Point: Toyota Struggles With Organizational Structure
Toyota Motor Corporation (TYO: 7203) has often been referred to as the gold standard of the automotive industry. In the first quarter of 2007, Toyota (NYSE: TM) overtook General Motors Corporation in sales for the first time as the top automotive manufacturer in the world. Toyota reached success in part because of its exceptional reputation for quality and customer care. Despite the global recession and the tough economic times that American auto companies such as General Motors and Chrysler faced in 2009, Toyota enjoyed profits of $16.7 billion and sales growth of 6 percent that year. However, late 2009 and early 2010 witnessed Toyota’s recall of eight million vehicles due to unintended acceleration. How could this happen to a company known for quality and structured to solve problems as soon as they arise? To examine this further, you have to understand the Toyota Production System (TPS).
Labadie Toyota Building
Labadie Toyota Building by
The Toad
is licensed under
CC BY-NC 2.0
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TPS is built on the principles of “just-in-time” production. In other words, raw materials and supplies are delivered to the assembly line exactly at the time they are to be used. This system has little room for slack resources, emphasizes the importance of efficiency on the part of employees, and minimizes wasted resources. TPS gives power to the employees on the front lines. Assembly line workers are empowered to pull a cord and stop the manufacturing line when they see a problem.
However, during the 1990s, Toyota began to experience rapid growth and expansion. With this success, the organization became more defensive and protective of information. Expansion strained resources across the organization and slowed response time. Toyota’s CEO, Akio Toyoda, the grandson of its founder, has conceded, “Quite frankly, I fear the pace at which we have grown may have been too quick.”
Vehicle recalls are not new to Toyota; after defects were found in the company’s Lexus model in 1989, Toyota created teams to solve the issues quickly, and in some cases the company went to customers’ homes to collect the cars. The question on many people’s minds is, how could a company whose success was built on its reputation for quality have had such failures? All the more puzzling, the brake problems in vehicles became apparent in 2009, but only after being confronted by US transportation secretary Ray LaHood did Toyota begin issuing recalls in the United States. And during the early months of the crisis, Toyota’s top leaders were all but missing from public sight.
The organizational structure of Toyota may give us some insight into the handling of this crisis and ideas for the most effective way for Toyota to move forward. A conflict like this one can paralyze productivity, but if dealt with constructively and effectively, can present opportunities for learning and improvement. Companies such as Toyota that have a rigid corporate culture and a hierarchy of seniority are at risk of reacting to external threats slowly. People often feel reluctant to pass bad news up the chain within a family company such as Toyota. As a result of its power structure, in which power has traditionally been centralized, authority is not generally delegated within the company; all US executives are assigned a Japanese boss to mentor them, and no Toyota executive in the United States is authorized to issue a recall. Most information flow is one-way, back to Japan where decisions are made.
Will Toyota turn its recall into an opportunity for increased participation for its international manufacturers? Will decentralization and increased transparency occur? Only time will tell.
Discussion Questions
· Do you think Toyota’s organizational structure and norms are explicitly formalized in rules, or do the norms seem to be more inherent in the culture of the organization?
· What are the pros and cons of Toyota’s structure
· What elements of business would you suggest remain the same and what elements might need revising?
· What are the most important elements of Toyota’s organizational structure?
References
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Atlman, A. (2010, February 24). Congress puts Toyota (and Toyoda) in the hot seat. Time. Retrieved from http://www.time.com/time/nation/article/0,8599,1967654,00.html
Ambrose, M. L., & Cropanzano, R. S. (2000). The effect of organizational structure on perceptions of procedural fairness. Journal of Applied Psychology, 85, 294–304.
Anand, N., & Daft, R. L. (2007). What is the right organization design? Organizational Dynamics, 36(4), 329–344.
Ashkenas, R., Ulrich, D., Jick, T., & Kerr, S. (1995). The Boundaryless Organization: Breaking the Chains of Organizational Structure. San Francisco: Jossey-Bass.
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Burns, T., & Stalker, M. G. (1961). The Management of Innovation. London: Tavistock.
Charan, R. (2006, April). Home Depot’s blueprint for culture change. Harvard Business Review, 84(4), 60–70.
Chonko, L. B. (1982). The relationship of span of control to sales representatives’ experienced role conflict and role ambiguity. Academy of Management Journal, 25, 452–456.
Covin, J. G., & Slevin, D. P. (1988) The influence of organizational structure. Journal of Management Studies, 25, 217–234.
Dess, G. G., Rasheed, A. M. A., McLaughlin, K. J., & Priem, R. L. (1995). The new corporate architecture. Academy of Management Executive, 9(3), 7–18.
Deutschman, A. (2005, March). Building a better skunk works. Fast Company, 92, 68–73.
Dickson, D. (2010, February 10). Toyota’s bumps began with race for growth. Washington Times, p. 1.
Ford, R. C., & Randolph, W. A. (1992). Cross-functional structures: A review and integration of matrix organization and project management. Journal of Management, 18, 267–294.
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Joyce, W. F. (1986). Matrix organization: A social experiment. Academy of Management Journal, 29, 536–561.
Marquez, J. (2007, January 15). Big bucks at door for Depot HR leader. Workforce Management, 86(1).
Maynard, M., Tabuchi, H., Bradsher, K., & Parris, M. (2010, February 7). Toyota has pattern of slow response on safety issues. New York Times, p. 1.
Miller, D., Droge, C., & Toulouse, J. (1988). Strategic process and content as mediators between organizational context and structure. Academy of Management Journal, 31, 544–569.
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Porter, L. W., & Siegel, J. (2006). Relationships of tall and flat organization structures to the satisfactions of foreign managers. Personnel Psychology, 18, 379–392.
Rosenbloom, B. (2003). Multi-channel marketing and the retail value chain. Thexis, 3, 23–26.
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Schollhammer, H. (1982). Internal Corporate Entrepreneurship. Englewood Cliffs, NJ: Prentice-Hall.
Sherman, J. D., & Smith, H. L. (1984). The influence of organizational structure on intrinsic versus extrinsic motivation. Academy of Management Journal, 27, 877–885.
Simon, B. (2010, February 24). LaHood voices concerns over Toyota culture.
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Times. Retrieved from http://www.ft.com/cms/s/0/11708d7c-20d7-11df-b920-00144feab49a.html
Sine, W. D., Mitsuhashi, H., & Kirsch, D. A. (2006). Revisiting Burns and Stalker: Formal structure and new venture performance in emerging economic sectors. Academy of Management Journal, 49, 121–132.
Slevin, D. P. (1988). The influence of organizational structure. Journal of Management Studies, 25, 217–234.
Slevin, D. P., & Covin, J. G. (1990). Juggling entrepreneurial style and organizational structure—how to get your act together. Sloan Management Review, 31(2), 43–53.
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Werhane, P., & Moriarty, B. (2009). Moral imagination and management decision making. Business Roundtable Institute for Corporate Ethics. Retrieved from http://www.corporate-ethics.org/pdf/moral_imagination
Resource-Based Theory
One way of looking at organizations is to think of them as dynamic enterprises requiring a set of resources to accomplish their mission, goals, and objectives. One interest of resource-based theorists is in identifying those resources that serve or could serve to distinguish an organization from others with which it is competing.
Resource-Based View
, located in the Resources section below, provides an overview of resource-based theory.
Resources
Resource-Based View : Resource-Based View
· By: Alfred Lewis & Dan Kipley
· In:
Encyclopedia of New Venture Management
· Subject:Corporate Venturing
Resource Dependency Theory
When you consider your organization’s resources, it is important to think about the extent to which your organization may be dependent on others for critical resources. The article Resource Dependency Theory (Archibald, 2007, located in the Resources section, discusses the challenges associated with resource dependency as well as strategies and tactics organizations employ to mitigate dependency-related risks. For example, Starbucks uses strategic sourcing to ensure it has access to the quality coffee beans it requires to maintain its competitive position in the marketplace (Shook, Adams, Ketchen, & Craighead, 2009).
Resources
Resource Dependency Theory: Resource Dependency Theory
· By: Matthew E. Archibald
· In:
Encyclopedia of
Governance
· Edited by: Mark Bevir
· Subject:Governance
References
Shook, C. L., Adams, G. L., Ketchen Jr., D. J., & Craighead, C. W. (2009). Towards a “theoretical toolbox” for strategic sourcing. Supply Chain Management, 14(1), 3-10. doi:10.1108/13598540910927250
Characteristics of Resources
Proponents of the resource-based view (RBV) of strategic management suggest that bundles of VRIN (valuable, rare, inimitable, and nonsubstitutable) resources may provide a competitive advantage to organizations that can accumulate them (Newbert, 2007).
This claim can be difficult to comfirm, as it is often challenging to find examples of resources that meet all the criteria. This search is particularly difficult in a dynamic and volatile global marketplace where flexibility, agility, and the ability to rearrange resources are critical competencies. In addition, many of the resources that might qualify (for example, an organization’s capacity to learn and adapt) are challenging to measure.
Some scholars who have studied RBV have proposed an alternative view that endeavors to incorporate factors required when firms with VRIN resources operate in a dynamic and highly volatile market. The dynamic-capacity view (DCV), was proposed by Teece, Pisano, and Shuen (1997). It is useful for you to know that there is ongoing work to understand when and under what conditions VRIN resources may serve as a source of competitive advantage, but the essential position of DCV is that just having VRIN resources at any given point in time is not a guarantee they can be successfully leveraged.
There is, however, some empirical support for the idea that “collecting VRIN resources can improve firm performance and VRIN resources can strengthen the development of dynamic capabilities, especially dynamic learning capability” (Lin & Wu, 2014, p. 411). You can be sure scholars will continue to explore the relative usefulness of VRIN resources.
Thus, it is important to not only identify potential VRIN resources, but to also consider the circumstances that might make them useful now or in the future.
References
Lin, Y., & Wu, L. Y. (2014, March). Exploring the role of dynamic capabilities in firm performance under the resource-based view framework. Journal of Business Research, 67(3), 407-413. Retrieved from http://www.sciencedirect.com.ezproxy.umgc.edu/science/article/pii/S0148296312003645
Newbert, S. L. (2007). Value, rareness, competitive advantage, and performance: A conceptual-level empirical investigation of the resource-based view of the firm. Strategic Management Journal, 29(7), 745 -768. Retrieved from http://ezproxy.umgc.edu/login?url=http://search.ebscohost.com/login.aspx?direct=true&db=bth&AN=32491063&site=eds-live&scope=site”
Teece, D., Pisano, G., & Shuen, A. (1997, August). Dynamic capabilities and strategic management. Strategic Management Journal, 18(7), 509 -533.
Check Your Knowledge
Question 1
Applying resource-based theory, what are the four criteria associated with a sustainable competitive advantage?
For an organization to have a sustainable competitive advantage, its generic strategy needs to be grounded in an attribute that has these VRIN criteria:
· it must be valuable (to consumers)
· it must be rare (not easily obtained by competitors)
· it must be inimitable (not easily copied or imitated by competitors)
· it must be nonsubstitutable (i.e., consumers are unwilling to, or cannot, choose a substitute for the service or product)
Source: “Competitive Advantage,” 2009, para. 35.
Question 2
What are two of the challenges associated with VRIN resources?
· Resources that meet all four criteria are difficult to find.
· If found, such a resource is typically difficult to measure.
Question 3
Give an example of a VRIN resource held by an organization with which you are familiar, or by another highly successful organization. Explain your reasons for choosing this resource.
One organization that has had decades of market success is the Walt Disney Company. A major reason for this success is its expertise in animation, going back to its start in the 1930s. This important resource was ignored for many years following Walt Disney’s death, but CEO Michael Eisner recognized the value of animation and utilized it to produce a series of extremely successful movies during his tenure at Disney.
For Disney, animation has been a VRIN resource: valuable to its consumers; rare (animation expertise of this extent exists in few, if any, other organizations); inimitable (it would be extremely difficult and costly for another organization to develop a similar animation capability); and nonsubstitutable (consumers appreciate the quality of Disney’s animated movies).
Question 4
Briefly, how does the Dynamic-Capacity View (DCV) differ from the Resource-Based View (RBV)?
The Dynamic-Capacity View extends the Resource-Based View by considering the “important role of capabilities to build, integrate and reconfigure resources to cope with [a] highly volatile environment” (Lin & Wu, 2014, para. 2).
In other words, in an environment that is changing rapidly, VRIN resources alone may not be sufficient to gain a competitive advantage: an organization may also need dynamic capabilities.
Human
Resources
Among all the resources available to your organization, it is probably safe to say that people are the most complex and challenging resource to organize and manage for strategic advantage. When managed effectively, people and the work they are able to accomplish together are also most likely to serve as valuable, rare, inimitable and nonsubstitutable (VRIN) strategic resources for organizations.
Effective human resource management (HRM) will influence your organization’s ability to execute several main tasks:
· acquire the people (sometimes referred to as talent) needed to accomplish its mission, goals, and objectives
· place people where their knowledge, skills, and abilities (KSAs) can be leveraged for maximum competitive advantage
· evaluate, train, coach, mentor, and continuously develop its human resources
The article
Human Resource Management
(2007), located in the Resources section below, offers a brief overview of HRM.
A useful description of HRM for a new employee or board member should include the following details:
· a description of the organization’s current human resource assets and talents (see Human Resource Assets in the Resources section)
· your assessment of the relative importance of the organization’s current human resources for accomplishing the mission, vision, goals, and objectives
· an explanation of the extent to which the organization’s human resource talents now serve (or might serve) as a source of competitive advantage
· a very brief summary of the organization’s performance management (PM) and performance appraisal systems (see Performance Management in the Resources section)
Human Resource Assets (People and Unique Talents)
As you can imagine, this topic has been the focus of many discussions among practitioners, consultants, and scholars. If you search UMUC’s library for journal literature—something you should take a little time to do—you will find many rich and useful discussions. Aguinis and O’Boyle (2014, see Resources section below) examine and find support for an important role played by star performers in achieving and maintaining success. Another interesting example is a paper by Tung (2016, in Resources section below), a recent past-president of the Academy of Management, and a leading contributor to research on expatriates and global HRM. In this particular paper Tung addresses, among other things, the increasing attention to the global war for talent, introducing practices such as “talent poaching and acqui-hiring” (p.142), the latter being acquisitions specifically intended to capture desired talent. There is also a brief discussion of what talent management is in Galagan (2008; see Resources section).
Performance Management and
Performance Appraisal
Systems
What is a Performance Management (PM) System?
Simply put, a performance management (PM) system encompasses everything organizations do to recruit, select, place, orient, train, develop, evaluate, and retain their employees (i.e., manage human resources).You are not expected to provide detailed explanations of all these processes in your report. Given the target audience for this report, you will likely just want to include a sentence explaining what performance management is and should be, and an additional sentence or two summarizing whether and how the organization currently handles these processes.
What is a Performance Appraisal (PA) System and what is its relationship to performance management?
Performance appraisal/evaluation is best viewed as one component of an organization’s performance management system. Performance appraisal systems vary in design, purpose, and implementation. Some are quite formal and well-institutionalized and some are very informal. In start-up enterprises or small businesses, for example, the system may simply be discussions between a boss and employee about whether work is being completed as expected. In contrast, in some organizations you might find a performance appraisal system that includes all employees and incorporates feedback from multiple stakeholders (for example, a 360 degree system). Given that employees will be evaluated and receive feedback on their performance (or this should be the case) and that most supervisors and managers will need to evaluate and provide this feedback, addressing the questions below in this section of your report is important. As with the earlier sections, however, your description must be succinct.
Read Wosnick Lee (2007, see Resources section below) for an overview on performance appraisal.
Note that sometimes you will find that authors (and practitioners) equate performance evaluations/appraisals with performance management. Those who are recognized experts on this topic would take issue with such a narrow view of what performance management is or should be about.
Resources
Talent Management: What Is It, Who Owns It, and Why Should You Care
Star Performers in Twenty-First Century Organizations
New Perspectives on Human Resource Management in a Global Context
Human Resource Management
Performance Appraisal
Financial Resources
An organization’s financial situation and the system used to managage its financial resources will vary depending on the type of organization. Organizations need to acquire and manage the financial resource it needs to support its mission, vision, goals, and objectives and implement its strategy. When examining a business’s financial resources, it may be possible to draw conclusions about how well those resources and supporting systems and processes are being managed.
New managers entering an organization would need to know where and how to find information about an organization’s current and past financial situation and key information about budgets and budgeting.
Resources
Financial Statements
Finance and Financial Management
Budgets and Budgeting
Project Specifics
Your goal for this project report is
to present a high-level discussion of your organization’s financial situation and the system used to manage financial resources
. Remembering that the target audience for this report is both new employees and new board members should help you determine what to include in this two-to-three page summary. What you will be able to find and share will depend upon the type of organization you work for and your ability to access information. Be sure to talk with your professor should you have questions.
Put very simply, your report should explain how your organization acquires and manages the financial resources it needs to support its MVGOs and implement its strategy. While your target audience for this report will be interested in an assessment of the relative financial health of the organization and its future prospects for growth, your ability to include this information will vary depending upon your organization and professional situation. The same will be true for your ability to offer any conclusions about how well your financial resources and supporting systems and processes are being managed
While this may be a focus of interest and expertise for some learners, the emphasis here is on basic information any manager or potential manager might need or want to know about an organization’s finances. Every manager should know, for example, how and where to find information about an organization’s current and past financial situation. Most managers will also need to know something about budgets and budgeting. The Resources section contains some learning resources that should prove helpful as you complete this section of your report.
Technology Resources
Acquisition, use, and effective management of advanced information and computing technologies have the potential to serve as strategic differentiators in an increasingly competitive global marketplace. This principle applies across sectors, industries, organizational sizes, and markets. A report of an organization’s technology resources would endeavor to answer the following questions:
· How would you describe your organization’s capacity to manage and leverage information, computing, and other technologies to achieve its mission, vision, goals, and objectives and its strategy?
· To what extent does your organization leverage the Internet as a source of competitive advantage? This includes use for marketing, customer relations, and services.
· Does your organization use an Intranet and, if so, what evidence is there that it contributes to improved internal communications, collaboration, and performance? Are there related issues that merit special attention?
· Does your organization have a strategic technology plan? If so, what was the process used to develop it, what positions were involved, and what evidence is there that it is being used to guide decision making? Is there evidence the technology plan aligns with and supports the organization’s strategic plan and objectives?
· What evidence is there of sound technology governance and security practices within your organization?
· Is your organization behind the curve, bleeding edge/leading edge, or somewhere in between where technology use is concerned? (You may want to consult with the IT department on this question.)
Review the two articles in the Resources section below,
Technology Management
and
Management
Information
Systems
for an overview of these areas.
Resources
Management Information Systems
Technology Management
Physical
Resources
When performing resource-based analysis of an organization, resources are typically differentiated into several groups: physical, human, technological, financial, and, increasingly, information. Each category can be evaluated, quantified, and managed to effectively enhance organizational performance.
The term physical resources refers to the physical property of the organization—its property, buildings and improvements, and capital equipment used in the process of producing and selling its product or service, as well as the on-hand inventory of inputs and outputs. In other words, physical resources comprise all of the nonhuman, tangible, physical property the organization owns or has at its disposal.
Consider the following resources for a fictitious pizza chain, and how they would be categorized according to resource allocation theory:
|
Resource |
Classification |
|||
|
Restaurant & Property |
Physical | |||
|
Pizza Ovens |
||||
|
Delivery Vehicles |
||||
|
Cash |
Financial | |||
|
Bank Account |
||||
|
Staff |
Human | |||
|
Office Team |
||||
|
Recipes |
Technological |
|||
|
Database of clientele |
Information | |||
|
Website |
Informational |
|||
|
Order-taking phone systems |
Different resources contribute differently to the organization’s performance, depending on the type of goods being produced, or the service being provided. For example, what is Amazon’s most crucial asset? The physical inventory in its warehouses? No—it could be argued that it has two incredibly important assets—its cash holdings and its prime customer database. The future value of its sales to customers who happen to be Prime members far exceeds the actual value of its inventory and physical plants at any given time. Strategically, its cash holdings allow the company to do nearly anything it wants to do at any given time.
On the other hand, consider Intel and its chip plants. While the plant building the i7 processor chip cost around $4 billion to build, the knowledge of its team of research and development scientists and engineers far exceeds the value of any plant. Its human resources, in other words, are its most important resource. You’ll find that individuals who work in research and development at Intel earn outstanding salaries. Intel has assessed the value of these resources to the organization—and pays its employees accordingly.
Contribution Margin
A contribution margin framework can be useful to quanitfy the amount of each resource necessary to complete a single unit of output, the cost assigned for each unit, and therefore, the return each unit contributes to operating results.
Consider the following example, in which an organization has calculated the number of units required to sell a single unit of a particular good that brings in $500 of revenue.
|
Units Required (in hours) |
Cost Per Unit |
Extended Cost |
Margin |
| 4 | 33 |
$132.00 |
3.79 |
| 0.5 | 27 |
$13.50 |
37.03 |
|
0.001 |
30,000 |
$15.00 |
33.3 |
Notice in this calculation that, when each contribution margin is calculated, the other resources are ignored. It gives you a quick analysis of which resource is contributing the most, relative to its price and the amount needed in production. (Assume for ease of example that revenue is the right unit of analysis; other approaches may calculate using per-unit profit instead of revenue.)
As you can see, physical resources had the greatest contribution. It would be natural for this organization to try to replace its most costly resources—human resource—with capital, to take advantage of this greater contribution.
Depreciation of Physical Resources
Physical resources are subject to depreciation and replacement, as their value to organizations tend in general to decline over time with greater usage. For instance, a delivery truck used in the pizza restaurant described above wears down more every time it is used, and therefore must be replaced over time.
Human and financial resources are often managed so that their value to the organization increases over time. Little can be done to increase the value of physical resources except replacement or spending on enhancement. Property, which generally increases in value over time, may be the exception, but its value is a function of market conditions and not necessarily anything the organization does to the property.
The contribution margins calculated above do not account for depreciation or replacement. A more accurate contribution margin would take the total cost into account, including depreciation and replacement costs.
Resources
Financial Planning for Asset Management
Leadership Style and Effectiveness
Those who have studied the history of modern management have helped us identify and understand some key elements for managerial success. This resource, which presents a brief summary of management thought (see
Management Thought
[2009] in the Resources section), describes how perceptions of the roles and responsibilities of managers and what constitutes best managerial practices have evolved over time. An analysis of leadership styles should answer the following questions:
· Is there evidence of a dominant or common managerial style (see
Management Styles
[2009] in the Resources section) in your organization? If so, consider the possible causes and likely consequences for achievement of missions, goals, values, and objectives and for optimal employee performance and commitment.
· What support does your organization provide to help its managers develop the knowledge, skills, and abilities needed for effective performance?
· Are there concerns related to managerial effectiveness? If so, are there specific ideas for improvement (gleaned from research) that the organization’s leadership should consider?
· What are the likely costs and benefits associated with the ideas you might wish to recommend, and what are the likely costs of deciding not to act?
Resources
Leadership and Leadership Development
Management Thought
Management Styles
What’s New? Contemporary Approaches to Leadership
Management Control
Systems
Merchant and Van der Stede (2012) define management as “the processes of organizing resources and directing activities for the purpose of achieving organizational objectives” (p. 6), which the authors explain may be broken down to smaller elements, described in the following table.
Elements of Management
|
Management Area |
Elements |
|
Primary Management Functions |
· product or service development · operations (manufacturing products or performing services) · marketing/sales (finding buyers and making sure the products and services fulfill customer needs) · finance (raising money) |
|
Types of Resources |
· human resources (people) · accounting and financial resources (money) · production (machinery/plant) · information systems (data and information) |
|
Management Processes |
· objective setting · strategy formulation · management control systems |
Adapted from Merchant & Van der Stede (2012)
Management Control Systems
Within the management framework, management control systems (MCSs) gather and use information to evaluate how well organizational resources and functions are performing within the context of an organization’s objectives and strategies (Anthony & Govindarajan, 2007). Management controls focus on an “organization’s critical success factors, such as developing new products, keeping costs down, or growing market share, rather than aiming more generally at improving profitability in otherwise largely unspecified ways” (Merchant & Van der Stede, 2012, p. 8). They should be proactive, not reactive. They differ from strategic management, which focuses on the appropriateness of organizational goals within the context of the overall business environment. MCSs are internally focused to ensure the behavior of employees aligns with an organization’s strategic direction and its best interests.
According to Merchant and Van der Stede (2012), sources of management control problems often stem from one or more of these factors:
· lack of direction—based on a lack of understanding of the company’s objectives, strategies, and vision
· motivation problems—where individuals are driven by self-interest and have no connection to the larger organization and its goals
· personal limitations—in that specific employees underperform because they lack the knowledge or skills for the job, lack training or experience, or have reduced stamina to complete work
There are three broad categories of control:
· Results controls define expected performance goals in terms of performance targets or key actions and results (this can be at various levels within the organization). Performance is measured against targets (key performance indicators) and a system of rewards or punishments may serve to reinforce target levels. To be effective, targets must be clearly defined and communicated, and employees need to understand the consequences of not meeting targets. Results controls work best when organizations can identify and measure the results, and the employees involved know what results are desired and can influence the decision making and processes that contribute to end results. For example, common results controls include pay-for-performance plans that reward employees when company objectives are achieved. These may include merit pay plans, stock option plans, profits sharing, individual plans or bonuses, and team awards.
· Action controls involve making employee actions the focus of control (Merchant & Van der Stede, 2012). They take the form of behavioral constraints, pre-action reviews, action accountability, and redundancy. Behavioral constraints divide into physical (limiting access to physical assets) and administrative (limiting authority to perform functions, separating duties, etc.). Pre-action reviews involve requirements that employees’ action plans be reviewed and approved in advance by their managers. Action accountability controls hold employees responsible for their actions by rewarding or punishing based on the performance results in comparison to the defined objectives. Merchant and Van der Stede (2012) explain that redundancy controls involve “assigning more employees (or equipment) to a task than is strictly necessary” and that “at least having backup employees (or equipment) available also can be considered an action control because it increases the probability that a task will be satisfactorily completed” (p. 84).
· People controls involve the means employed to form an organizational culture that supports the objectives. Merchant and Van der Stede (2012) write, “Personnel/cultural controls can have distinctive advantages over results and action controls. They are usable to some extent in almost every setting; their cost is often lower than more obtrusive forms of controls; and they might produce fewer harmful side effects” (p. 95). Such control is shaped by selection and placement, training, job design, resource allocation, and the “tone at the top.” They can be supported through the use of codes of conduct, group rewards, interorganizational transfers and promotions, physical arrangements, and the environment.
There are no perfect control systems. Merchant and Van der Stede (2012) write, “Optimal control can be said to have been achieved if the control losses are expected to be smaller than the cost of implementing more controls. Because of control costs, perfect control is rarely the optimal outcome; what is optimal is control that is good enough at a reasonable cost. The benchmark therefore is adequate control rather than perfect control” (p. 13).
While placing a combination of management controls into place often provides the desired results, another method of exercising management control is avoidance, or eliminating the chance that a control problem will occur. Avoidance strategies include elimination, automation, centralization of decision making, and risk sharing. The first three are self-evident. The fourth, risk sharing, involves engaging with outside third parties to reduce or share risk. Examples include purchasing insurance or entering into joint ventures with other partners.
What goes into designing management control systems? Specifically, you need choose your controls, determine your level of tightness (loose or tight), employ a behavioral focus, provide for changes, and maintain control through effective monitoring.
Conclusion
As with many aspects of management, management control systems are influenced by the type of organization, its structure, culture, level of employment motivation, and risk environment. Managers are responsible for understanding the different types of controls and being able to implement those that are appropriate to the situation.
References
Anthony, R. N., & Govindarajan, V. (2007). Management control systems, Chicago: McGraw-Hill.
Merchant, K. A., & Van der Stede, W. A. (2012). Management control systems: Performance measurement, evaluation and incentives. Harlow, England: Financial Times/Prentice Hall.
Resources
Management Control
Leadership
Leadership—and factors impacting the effectiveness of leadership—are arguably among the most researched subjects students of business and management examine. The thirst to discover the secrets to success and best practices seems endless. The sheer volume of ideas you will discover in the literature on leadership, both scholarly and popular, can prove overwhelming.
Because of the sensitive nature of this particular area of inquiry, you should consult your professor before conducting any interviews or using any other method to collect information about leadership effectiveness. Unless specifically agreed upon between you and your professor, you should not share the results of your review and analysis with anyone in the organization you are examining.
This section of a report intended for new employees and new board members would be restricted to a simple profile of the organization’s leadership, with an emphasis on particular strengths and competencies that are or might be a source of strategic advantage. Its focus may be on the CEO, or may extend a summary to the senior leadership team.
The following points serve as a guide to completing the leadership section of a situation audit report:
· leader’s professional and educational background and current role and responsibilities
· leader’s recognized competencies
· ways in which the leader’s behaviors, decisions, and actions contribute positively to the organization’s MGVOs and to its reputation
You may need wish to conduct additional journal research to help you understand how to best describe your leader’s approaches and explain your conclusions about his or her effectiveness. If so, consult with your faculty on useful sources to help you with this task.
Resources
Leading People withing Organizations
Governance
To be effective, organizations need some means of establishing who has authority and responsibility for key decisions and associated actions. In some organizations, this is clarified in formal statements or documents. Others may not have such structured documentation. Mechanisms for oversight and review that are independent of the organization’s leadership and management are also important, especially when legal or ethical accountability to external stakeholders (including stockholders) is involved. Such organizations need a corporate governance system and structure. The article
Corporate Governance
, located in the Resources section, provides an overview of this topic.
The following questions serve as guides to analyzing an organization’s governance:
· How would you describe the current approach to governance and the structure within the organization?
· Is the governance structure formally documented? Does it offer assurance of independent and expert oversight and review of major organizational policies and decisions?
· If the organization does not have a formal governance structure, is there appropriate protection against arbitrary, capricious, or unethical behavior on the part of leaders and managers?
· Consider any recent changes in the management, leadership, and governance within your organization. Have these changes had a positive, measurable effect on the organization? If there have been no changes, are the current management, leadership, and governance effective?
· Is governance handled in such a way that it supports the organization’s mission, vision, goals, objectives, and strategy?
· Is it possible to conclude that the organization’s approach to governance is a potential or actual source of competitive advantage?
Resources
Corporate Governance
Check Your Knowledge
Question 1
What are the major duties of a corporation’s board of directors?
· to govern the corporation
· to oversee management
· to represent the interests of the organization’s shareholders
Source: “Corporate governance,” 2009, para. 1.
Question 2
The Sarbanes-Oxley Act was passed in 2002 in the wake of several major cases of corporate fraud. What are some of the important requirements this act imposes on corporate boards?
· Board members are required to certify that they have studied the organization’s financial reports.
· Board members must also certify that the information within the financial reports is accurate and not misleading.
· Board members must further certify that the financial state of the organization is accurately reflected by the data.
· The board must certify that it has conducted an analysis of the data to prove its accuracy.
· Board members must also certify that the financial report gives any information pertaining to fraud or the change of internal controls.
· Publicly held companies must immediately notify the public concerning any drastic changes to their financial state, communicating the information so that it is easy for the investors to understand.
Source: “Corporate governance,” 2009, paras. 3-6.
Question 3
In addition to their critical fiduciary responsibilities, boards are charged with many other important duties. What are two of the more challenging tasks that can confront boards of directors?
Two challenging—though infrequent—duties a board may face are firing and/or replacing a CEO, and representing shareholders’ interests in the event of a takeover attempt.
Source: “Corporate governance,” 2009, paras. 9,11.
Question 4
Boards often establish committees to oversee different areas of concern to the organization. What are three typical committee types, and briefly, what are their responsibilities?
· Audit committee: If a corporation is listed on the NYSE, the audit committee is required to consist entirely of independent directors from outside the corporation. Audit committees have the heavy burden of serving as watchdogs for the investors and the creditors. Audit committees should make sure that management, internal auditors, and external auditors understand that the committee will hold them accountable for their actions (and in some cases, inaction).
· Nominating committee: This committee typically provides oversight on issues of management succession (e.g., the CEO and board members).
· Compensation committee: This committee is generally responsible for oversight on compensation of the CEO, other corporate officers, and directors of the board.
Source: “Corporate governance,” 2009, paras. 12-16.
Question 5
SEC reforms and the enactment of Sarbanes-Oxley have brought some improvements to corporate governance, but challenges do still exist. What are a few of these?
· Infrequency of board meetings (typically only twice a year): But critics add that even if boards met more frequently, it is likely they would be hampered by not having the information necessary to allow them to be better stewards to the organization’s shareholders.
· Financial knowledge and competence of directors: It is difficult to find a pool of potential board members with sufficient financial expertise. A suggested solution is to offer higher compensation to board members (to attract former CEOs and CFOs), but the legal liability associated with being a board member may still deter potential candidates.
· Human error and possible wrongdoing: While the hope is that these situations occur only rarely, they are still possible, and can cause organizations to fail.
Source: “Corporate governance,” 2009, paras. 27-30.
SWOT Analysis
Porter’s five forces analysis examines the situation faced by the competitors in an industry. Strategic groups analysis narrows the focus by centering on subsets of these competitors whose strategies are similar. SWOT analysis takes an even narrower focus by centering on an individual firm. Specifically, SWOT analysis is a tool that considers a firm’s strengths and weaknesses along with the opportunities and threats that exist in the firm’s environment, as represented in the table below.
Executives using SWOT analysis compare these internal and external factors to generate ideas about how their firm might become more successful. In general, it is wise to focus on ideas that allow a firm to leverage its strengths, steer clear of or resolve its weaknesses, capitalize on opportunities, and protect itself against threats. For example, untapped overseas markets have presented potentially lucrative opportunities to Subway and other restaurant chains such as McDonald’s and KFC. Meanwhile, Subway’s strengths include a well-established brand name and a simple business format that can easily be adapted to other cultures. In considering the opportunities offered by overseas markets and Subway’s strengths, it is not surprising that entering and expanding in different countries has been a key element of Subway’s strategy in recent years. Indeed, Subway currently has operations in nearly 100 nations.
SWOT Analysis
|
SWOT point |
Organizational examples |
Individual examples |
|
Strengths |
Having high-levels of cash flow gives firms discretion to purchase new equipment if they wish to. |
Strong technical and language skills, as well as previous work experience, can help individuals rise above the competition. |
|
Weaknesses |
Dubious leadership and CEO scandals have plagued some corporations in recent years. |
Poor communication skills keep many job seekers from being hired into sales and supervisory positions. |
|
Opportunities |
The high cost of gasoline creates opportunities for substitute products based on alternative energy sources. |
The US economy is increasingly services based, suggesting that individuals can enjoy more opportunities in service firms. |
|
Threats |
Concerns about worldwide pollution are a threat to petroleum-based products. |
A tight job market poses challenges to new graduates. |
SWOT analysis is helpful to executives and is used within most organizations. Important cautions need to be offered about SWOT analysis, however. First, in laying out each of the four elements of SWOT, internal and external factors should not be confused with each other. It is important not to list strengths as opportunities, for example, if executives are to succeed at matching internal and external concerns during the idea generation process.
Second, opportunities should not be confused with strategic moves designed to capitalize on these opportunities. In the case of Subway, it would be a mistake to list “entering new countries” as an opportunity. Instead, untapped markets are the opportunity presented to Subway, and entering those markets is a way for Subway to exploit the opportunity. Finally, and perhaps most important, the results of a SWOT analysis should not be overemphasized. SWOT analysis is a relatively simple tool for understanding a firm’s situation. As a result, SWOT is best viewed as a brainstorming technique for generating creative ideas, not as a rigorous method for selecting strategies. Thus the ideas produced by SWOT analysis offer a starting point for executives’ efforts to craft strategies for their organization, not an ending point.
In addition to organizations, individuals can benefit from applying SWOT analysis to their personal situation. A college student who is approaching graduation, for example, could lay out her main strengths and weaknesses and the opportunities and threats presented by the environment. Suppose, for instance, that this person enjoys and is good at helping others (a strength) but also has a rather short attention span (a weakness). Meanwhile, opportunities to work at a rehabilitation center or to pursue an advanced degree are available. Our hypothetical student might be wise to pursue a job at the rehabilitation center (where her strength at helping others would be a powerful asset) rather than entering graduate school (where a lot of reading is required and her short attention span could undermine her studies).
Key Takeaway
Now that you have an understanding of how SWOT analysis can play a role in strategic planning, review the quick walkthrough of how to apply SWOT analysis in the resources section below.
Executives using SWOT analysis compare internal strengths and weaknesses with external opportunities and threats to generate ideas about how their firm might become more successful. Ideas that allow a firm to leverage its strengths, steer clear of or resolve its weaknesses, capitalize on opportunities, and protect itself against threats are particularly helpful.
Resources
Applied SWOT Analysis
Organizational Change
Table of Contents
Organizational Change
Planning and Executing Change Effectively
Building Your Change Management Skills
Organizational Change
Organizational change is the movement of an organization from one state of affairs to another. A change in the environment often requires change within the organization operating within that environment. Change in almost any aspect of a company’s operation can be met with resistance, and different cultures can have different reactions to both the change and the means to promote the change.
To better facilitate necessary changes, several steps can be taken that have been proved to lower the anxiety of employees and ease the transformation process. Often, the simple act of including employees in the change process can drastically reduce opposition to new methods. In some organizations, this level of inclusion is not possible, and instead organizations can recruit a small number of opinion leaders to promote the benefits of coming changes.
Why Do Organizations Change?
Organizational change can take many forms. It may involve a change in a company’s structure, strategy, policies, procedures, technology, or culture. The change may be planned years in advance or may be forced on an organization because of a shift in the environment. Organizational change can be radical and swiftly alter the way an organization operates, or it may be incremental and slow. In any case, regardless of the type, change involves letting go of the old ways work has been done and adjusting to new ways. Therefore, fundamentally, it is a process that involves effective people management.
Managers often find themselves faced with the need to manage organizational change effectively. Often, the planning process reveals the need for a new or improved strategy, which is then reflected in changes to tactical and operational plans. Creating a new organizational design or altering the existing design entails changes that may affect from a single employee up to the entire organization, depending on the scope of the changes. Effective decision making, a leadership task, takes into account the change-management implications of decisions, planning for the need to manage the implementation of decisions. Finally, any updates to controlling systems and processes will potentially involve changes to employees’ assigned tasks and performance assessments, which will require astute change management skills to implement.
Workplace Demographics
Organizational change is often a response to changes to the environment. For example, agencies that monitor workplace demographics such as the US Department of Labor and the Organization for Economic Cooperation and Development have reported that the average age of the US workforce will increase as the baby boom generation nears retirement age and the numbers of younger workers are insufficient to fill the gap (Lerman & Schmidt, 2006).
What does this mean for companies? Organizations may realize that as the workforce gets older, the types of benefits workers prefer may change. Work arrangements such as flexible work hours and job sharing may become more popular as employees remain in the workforce even after retirement. It is also possible that employees who are unhappy with their current work situation will choose to retire, resulting in a sudden loss of valuable knowledge and expertise in organizations. Therefore, organizations will have to devise strategies to retain these employees and plan for their retirement. Finally, a critical issue is finding ways of dealing with age-related stereotypes, which act as barriers in the retention of these employees.
Technology
Sometimes change is motivated by rapid developments in technology. Moore’s law (a prediction by Gordon Moore, cofounder of Intel) dictates that the overall complexity of computers will double every 18 months with no increase in cost. Such innocation is motivating corporations to change their technology rapidly. Sometimes technology produces such profound developments that companies struggle to adapt.
When music CDs were first introduced in the 1980s, they were substantially more appealing than the traditional LP vinyl records. Record companies were easily able to double the prices, even though producing CDs cost a fraction of what it cost to produce LPs. For decades, record-producing companies benefited from this status quo. Yet when peer-to-peer file sharing through software such as Napster and Kazaa threatened the core of their business, companies in the music industry found themselves completely unprepared for such disruptive technological changes. Their first response was to sue the users of file-sharing software. They also kept looking for a technology that would make it impossible to copy a CD or DVD, which has yet to emerge. Until Apple’s iTunes came up with a new way to sell music online, it was doubtful that consumers would ever be willing to pay for music that was otherwise available for free, albeit illegally so (Lasica, 2005).
Moore’s Law: The Fifth Paradigm
Kurzweil expanded Moore’s law from integrated circuits to earlier transistors, vacuum tubes, relays, and electromechanical computers to show that his trend holds with these technologies as well.
Moore’s Law, The Fifth Paradigm
by Ray Kurzweil is licensed under
CC-BY-1.0
.
Globalization
Globalization is another threat and opportunity for organizations, depending on their ability to adapt to it. Because of differences in national economies and standards of living from one country to another, organizations in developed countries are finding that it is often cheaper to produce goods and deliver services in less developed countries. This has led many companies to outsource (or “offshore”) their manufacturing operations to countries such as China and Mexico. In the 1990s, knowledge work was thought to be safe from outsourcing, but in the twenty-first century we are also seeing many service operations moved to places with lower wages.
For example, many companies have outsourced software development to India, with Indian companies such as Wipro and Infosys emerging as global giants. Given these changes, understanding how to manage a global workforce is a necessity. Many companies realize that outsourcing forces them to operate in an institutional environment that is radically different from what they are used to at home.
Changes in Market Conditions
Market changes may also create internal changes as companies struggle to adjust. For example, demand for air travel was reduced after the September 11, 2001, terrorist attacks. At the same time, the widespread use of the Internet to book plane travels made it possible to compare airline prices much more efficiently and easily, encouraging airlines to compete primarily based on cost. This strategy seemed to have backfired when coupled with the dramatic increases in the cost of fuel that occurred beginning in 2004. As a result, by mid-2008, airlines were cutting back on amenities that had formerly been taken for granted for decades, such as the price of a ticket including meals, beverages, and checking luggage. Some airlines, such as Delta and Northwest Airlines, merged to stay in business.
How does a change in the environment create change within an organization? Environmental change does not automatically change how business is done. Whether the organization changes or not in response to environmental challenges and threats depends on the decision makers’ reactions to what is happening in the environment.
Growth
It is natural for once-small start-up companies to grow if they become successful. An example of this growth is the evolution of the Widmer Brothers Brewing Company, which started as two brothers brewing beer in their garage, and became the 11th largest brewery in the United States. This growth happened as the popularity of their key product, Hefeweizen, grew in popularity, and the company had to expand to meet demand. In 2007, Widmer Brothers merged with Redhook Ale Brewery. Anheuser-Busch continues to have a minority stake in both beer companies. So, while 50 percent of all new small businesses fail in their first year, those that succeed often evolve into large, complex organizations over time.
Widmer Brewing Company
Founded in 1984, Widmer Brothers, merged with another company to become the 11th largest brewery in the United States.
Widmer Brewing Company headquarters
by
M. O. Stevens
is licensed under CC BY-SA 3.0.
Poor Performance
Change can also occur if a company is performing poorly and if there is a perceived threat from the environment. In fact, poorly performing companies often find it easier to change compared with successful companies. Why? High performance actually leads to overconfidence and inertia. As a result, successful companies often keep doing what made them successful in the first place.
For example, Polaroid was the number one producer of instant films and cameras in 1994. Less than a decade later, the company filed for bankruptcy, unable to adapt to the rapid advances in one-hour photo development and digital photography technologies that were sweeping the market. Successful companies that manage to change have special practices in place to keep the organization open to changes. For example, the Finnish cell phone maker Nokia finds that it is important to periodically change the perspective of key decision makers. For this purpose, they rotate heads of businesses to different posts to give them a fresh perspective. In addition to the success of a business, change in a company’s upper-level management is a motivator for change at the organization level. Research shows that long-tenured CEOs are unlikely to change their formula for success. Instead, new CEOs and new top management teams create change in a company’s culture and structure (Barnett & Carroll, 1995; Boeker, 1997; Deutschman, 2005).
Resistance to Change
Changing an organization is often essential for a company to remain competitive. Failure to change may influence the ability of a company to survive. Yet employees do not always welcome changes in methods. According to a 2007 survey conducted by the Society for Human Resource Management (SHRM), employee resistance to change is one of the top reasons change efforts fail. In fact, reactions to organizational change may range from resistance to compliance to enthusiastic support of the change, with the latter being the exception rather than the norm (“Change Management,” 2007; Huy, 1999).
Reactions to Change
Reactions to change take many forms:
· Active resistance is the most negative reaction to a proposed change attempt. Those who engage in active resistance may sabotage the change effort and be outspoken objectors to the new procedures.
· Passive resistance involves being disturbed by changes without necessarily voicing these opinions. Instead, passive resisters may dislike the change quietly, feel stressed and unhappy, and even look for a new job without necessarily bringing their concerns to the attention of decision makers.
· Compliance involves going along with proposed changes with little enthusiasm.
· Enthusiastic support involves defending the new way and actually encouraging others to give support to the change effort as well.
To be successful, any change attempt will need to overcome resistance on the part of employees to avoid a loss of time and energy as well as an inability on the part of the organization to adapt to the changes in the environment and make its operations more efficient. Research shows that when people react negatively to organizational change, they experience negative emotions, use sick time more often, and are more likely to voluntarily leave the company (Fugate, Kinicki, & Prussia, 2008). These negative effects can be present even when the proposed change clearly offers benefits and advantages over the status quo.
The following is a dramatic example of how resistance to change may prevent improvements to the status quo. Have you ever wondered why the keyboards we use are shaped the way they are? The QWERTY keyboard, named after the first six letters in the top row, was actually engineered to slow us down. When the typewriter was first invented in the nineteenth century, the first prototypes of the keyboard would jam if the keys right next to each other were hit at the same time. Therefore, it was important for manufacturers to slow typists down. They achieved this objective by putting the most commonly used letters to the left side and scattering the most frequently used letters all over the keyboard. Later, the issue of letters being stuck was resolved. In fact, an alternative to the QWERTY developed in the 1930s by educational psychologist August Dvorak provides a much more efficient design and allows individuals to double traditional typing speeds. Yet the Dvorak keyboard never gained wide acceptance as many people resisted the change. Teachers and typists resisted because they would lose their specialized knowledge. Manufacturers resisted due to costs inherent in making the switch and the initial inefficiencies in the learning curve (Diamond, 2005). In short, the best idea does not necessarily win, and changing people requires understanding why they resist.
Dvorak keyboard is a more efficient alternative to keyboard design. However, due to resistance from typists, teachers, manufacturers, and salespeople, a switch never occurred.
Sony laptop with Dvorak keyboard layout
by
John Blackbourne
is licensed under
CC BY-NC 2.0
.
Why Do People Resist Change?
Disrupted Habits
People often resist change for the simple reason that change disrupts our habits. When you hop into your car for your morning commute, do you think about how you are driving? Most of the time probably not, because driving generally becomes an automated activity after a while. You may sometimes even realize that you have reached your destination without noticing the roads you used or having consciously thought about any of your body movements. Now imagine you drive for a living and even though you are used to driving an automatic car, you are forced to use a stick shift. You can most likely figure out how to drive a stick, but it will take time, and until you figure it out, you cannot drive on autopilot. This loss of a familiar habit can make you feel clumsy; you may even feel that your competence as a driver is threatened. For this simple reason, people are sometimes surprisingly outspoken when confronted with simple changes such as updating to a newer version of a particular software or a change in their voicemail system.
Personality
Some people are more resistant to change than others. Research shows that people who have a positive self-concept are better at coping with change, probably because those who have high self-esteem may feel that whatever the changes are, they are likely to adjust to it well and be successful in the new system. People with a more positive self-concept and those who are more optimistic may also view change as an opportunity to shine as opposed to a threat. Finally, risk tolerance is another predictor of how resistant someone will be to stress. For people who are risk avoidant, the possibility of a change in technology or structure may be more threatening (Judge et al., 2000; Wanberg & Banas, 2000).
Feelings of Uncertainty
Change inevitably brings feelings of uncertainty. You have just heard that your company is merging with another. Such change is often turbulent, and it is often unclear what is going to happen to each individual. Some positions may be eliminated. Some people may see a change in their job duties. Things may get better—or they may get worse. The feeling that the future is unclear is enough to create stress for people because it leads to a sense of lost control (Ashford, Lee, & Bobko, 1989; Fugate, Kinicki, & Prussia, 2008).
Fear of Failure
People also resist change when they feel that their performance may be affected under the new system. People who are experts in their jobs may be less than welcoming of change because they may be unsure whether their success would last under the new system. Studies show that people who feel that they can perform well under the new system are more likely to be committed to the proposed change, while those who have lower confidence in their ability to perform after changes are less committed (Herold, Fedor, & Caldwell, 2007).
Personal Impact of Change
It would be too simplistic to argue that people resist all change, regardless of its form. In fact, people tend to be more welcoming of change that is favorable to them on a personal level (such as giving them more power over others or providing bigger and nicer offices). Research also shows that commitment to change is highest when proposed changes affect the work unit with a low impact on how individual jobs are performed (Fedor, Caldwell & Herold, 2006).
Prevalence of Change
Any change effort should be considered within the context of all the other changes that are introduced in a company. Does the company have a history of making short-lived changes? If the company structure went from functional to product-based to geographic to matrix within the past five years and the top management is in the process of going back to a functional structure again, a certain level of resistance is to be expected because employees are likely to be fatigued as a result of the constant changes. Moreover, the lack of a history of successful changes may cause people to feel skeptical toward the newly planned changes. Therefore, considering the history of changes in the company is important to understanding why people resist. Another question is, how big is the planned change? (Labianca, Gray, & Brass, 2000; Rafferty & Griffin, 2006).
Perceived Loss of Power
One other reason people may resist change is that change may affect their power and influence in the organization. Imagine that your company moved to a more team-based structure, turning supervisors into team leaders. In the old structure, supervisors were in charge of hiring and firing all those reporting to them. Under the new system, this power is given to the team. Instead of monitoring the progress the team is making toward goals, the job of a team leader is to provide support and mentoring to the team in general and ensure that the team has access to all resources to be effective. Given the loss in prestige and status in the new structure, some supervisors may resist the proposed changes even if it is better for the organization to operate around teams.
In summary, there are many reasons individuals resist change, which may prevent an organization from making important changes.
Is All Resistance Bad?
Resistance to change may be a positive force in some instances. In fact, resistance to change is a valuable feedback tool that should not be ignored. Why are people resisting the proposed changes? Do they believe that the new system will not work? If so, why not? By listening to people and incorporating their suggestions into the change effort, it is possible to make a more effective change. Some of a company’s most committed employees may be the most vocal opponents of a change effort. They may fear that the organization they feel such a strong attachment to is being threatened by the planned change effort and the change will ultimately hurt the company. In contrast, people who have less loyalty to the organization may comply with the proposed changes simply because they do not care enough about the fate of the company to oppose the changes. As a result, when dealing with those who resist change, it is important to avoid blaming them for a lack of loyalty (Ford, Ford, & D’Amelio, 2008).
Key Takeaway
Organizations change in response to changes in the environment and in response to the way decision makers interpret these changes. When it comes to organizational change, one of the biggest obstacles is resistance to change. People resist change because change disrupts habits, conflicts with certain personality types, causes a fear of failure, can have potentially negative effects, can result in a potential for loss of power, and, when done too frequently, can exhaust employees.
Planning and Executing Change Effectively
How do you plan, organize, and execute change effectively? Some types of change, such as mergers, often come with job losses. In these situations, it is important to remain fair and ethical while laying off otherwise exceptional employees. Once change has occurred, it is vital to take any steps necessary to reinforce the new system. Employees can often require continued support well after an organizational change.
One of the most useful frameworks in this area is the three-stage model of planned change developed in the 1950s by psychologist Kurt Lewin (Lewin, 1951). This model assumes that change will encounter resistance. Therefore, executing change without prior preparation is likely to lead to failure. Instead, organizations should start with unfreezing, or making sure that organizational members are ready for and receptive to change. This is followed by change, or executing the planned changes. Finally, refreezing involves ensuring that change becomes permanent and the new habits, rules, or procedures become the norm.
Lewin’s Three-Stage Process of Change
Unfreezing Before Change
Many change efforts fail because people are insufficiently prepared for change. When employees are not prepared, they are more likely to resist the change effort and less likely to function effectively under the new system. What can organizations do before change to prepare employees? There are a number of things that are important at this stage.
Communicate a Plan for Change
Do people know what the change entails, or are they hearing about the planned changes through the grapevine or office gossip? When employees know what is going to happen, when, and why, they may feel more comfortable. Research shows that those who have more complete information about upcoming changes are more committed to a change effort (Wanberg & Banas, 2000). Moreover, in successful change efforts, the leader not only communicates a plan but also an overall vision for the change (Herold, et al., 2008). When this vision is exciting and paints a picture of a future that employees would be proud to be a part of, people are likely to be more committed to change.
Ensuring that top management communicates with employees about the upcoming changes also has symbolic value (Armenakis et al., 1993). When top management and the company CEO discuss the importance of the changes in meetings, employees are provided with a reason to trust that this change is a strategic initiative. For example, while changing the employee performance appraisal system, the CEO of Kimberly Clark made sure to mention the new system in all meetings with employees, indicating that the change was supported by the CEO.
Develop a Sense of Urgency
People are more likely to accept change if they feel that there is a need for it. If employees feel their company is doing well, the perceived need for change will be smaller. Those who plan the change will need to make the case that there is an external or internal threat to the organization’s competitiveness, reputation, or sometimes even its survival, and that failure to act will have undesirable consequences. For example, Lou Gerstner, the former CEO of IBM, executed a successful transformation of the company in the early 1990s. In his biography Elephants Can Dance, Gerstner highlights how he won cooperation, stating, “Our greatest ally in shaking loose the past was IBM’s eminent collapse. Rather than go with the usual impulse to put on a happy face, I decided to keep the crisis front and center. I didn’t want to lose the sense of urgency” (Gerstner, 2002; Kotter, 1996).
Build a Coalition
To convince people that change is needed, the change leader does not necessarily have to convince every person individually. In fact, people’s opinions toward change are affected by opinion leaders or those people who have a strong influence over the behaviors and attitudes of others (Burkhardt, 1994; Kotter, 1995). Instead of trying to get everyone on board at the same time, it may be more useful to convince and prepare the opinion leaders. Understanding one’s own social networks as well as the networks of others in the organization can help managers identify opinion leaders. Once these individuals agree that the proposed change is needed and will be useful, they will become helpful allies in ensuring that the rest of the organization is ready for change (Armenakis et al., 1993). For example, when Paul Pressler became the CEO of Gap Inc. in 2002, he initiated a culture change effort in the hope of creating a sense of identity among the company’s many brands, such as Banana Republic, Old Navy, and Gap. For this purpose, employees were segmented instead of trying to reach out to all employees at the same time. Gap Inc. started by training the two thousand senior managers in leadership summits, who in turn were instrumental in ensuring the cooperation of the remaining 150,000 employees of the company (Nash, 2005).
Provide Support
Employees should feel that their needs are not ignored. Therefore, management may prepare employees for change by providing emotional and instrumental support. Emotional support may be in the form of frequently discussing the changes, encouraging employees to voice their concerns, and simply expressing confidence in employees’ ability to perform effectively under the new system. Instrumental support may be in the form of providing a training program to employees so that they know how to function under the new system. Effective leadership and motivation skills can assist managers to provide support to employees.
Allow Employees to Participate
Studies show that employees who participate in planning change efforts tend to have more positive opinions about the change. They will have the opportunity to voice their concerns and they can shape the change effort so that their concerns are addressed. They will be more knowledgeable about the reasons for change, alternatives to the proposed changes, and why the chosen alternative was better than the others. Finally, they will feel a sense of ownership of the planned change and are more likely to be on board (Wanberg & Banas, 2000). Participation may be more useful if it starts at earlier stages, preferably while the problem is still being diagnosed. For example, assume that a company suspects there are problems with manufacturing quality. One way of convincing employees that there is a problem that needs to be solved would be to ask them to take customer calls about product quality. Once employees experience the problem firsthand, they will be more motivated to solve the problem.
Executing Change
The second stage of Lewin’s three-stage change model is executing change. At this stage, the organization implements the planned changes on technology, structure, culture, or procedures. The specifics of how change should be executed will depend on the type of change. However, there are three tips that may facilitate the success of a change effort:
· Continue to provide support—As the change is underway, employees may experience high amounts of stress. They may make mistakes more often or experience uncertainty about their new responsibilities or job descriptions. Management has an important role in helping employees cope with this stress by displaying support, patience, and continuing to provide support to employees even after the change is complete.
· Create small wins—During a change effort, if the organization can create a history of small wins, change acceptance will be more likely (Kotter, 1996; Germann, 2006). If the change is large in scope, and the payoff is a long time away, employees may not realize change is occurring during the transformation period. However, if people see changes, improvements, and successes along the way, they will be inspired and motivated to continue the change effort. For this reason, breaking up the proposed change into phases may be a good idea because it creates smaller targets. Small wins are also important for planners of change to make the point that their idea is on the right track. Early success gives change planners more credibility while early failures may be a setback (Hamel, 2000).
· Eliminate obstacles—When the change effort is in place, many obstacles may crop up along the way. There may be key people who publicly support the change effort while silently undermining the planned changes. There may be obstacles rooted in a company’s structure, existing processes, or culture. It is the management’s job to identify, understand, and remove these obstacles (Kotter, 1995). Ideally, these obstacles would have been eliminated before implementing the change, but sometimes unexpected roadblocks emerge as change is underway.
Refreezing
After the change is implemented, the long-term success of a change effort depends on the extent to which the change becomes part of the company’s culture. If the change has been successful, the revised ways of thinking, behaving, and performing should become routine. To evaluate and reinforce (“refreeze”) the change, there are three main tasks for management:
· Publicize success—To make change permanent, the organization may benefit from sharing the results of the change effort with employees. What was gained from the implemented changes? How much money did the company save? How much did the company’s reputation improve? What was the reduction in accidents after new procedures were put in place? Sharing concrete results with employees increases their confidence that the implemented change was a right decision.
· Reward change adoption—To ensure that change becomes permanent, organizations may benefit from rewarding those who embrace the change effort (an aspect of the controlling function). The rewards do not necessarily have to be financial. The simple act of recognizing those who are giving support to the change effort in front of their peers may encourage others to get on board. When the new behaviors employees are expected to demonstrate (such as using a new computer program, filling out a new form, or simply greeting customers once they enter the store) are made part of an organization’s reward system, those behaviors are more likely to be taken seriously and repeated, making the change effort successful (Gale, 2003).
· Embrace continuous change—While Lewin’s three-stage model offers many useful insights into the process of implementing change, it views each organizational change as an episode with a beginning, middle, and end. In contrast with this episodic change assumption, some management experts in the 1990s began to propose that change is—or ought to be—a continuous process.
The learning organization is an example of a company embracing continuous change. By setting up a dynamic feedback loop, learning can become a regular part of daily operations. If an employee implements a new method or technology that seems to be successful, a learning organization is in a good position to adopt it. By constantly being aware of how employee actions and outcomes affect others as well as overall company productivity, the inevitable small changes throughout organizations can be rapidly absorbed and tailored for daily operations. When an organization understands that change does indeed occur constantly, it will be in a better position to make use of good changes and intervene if a change seems detrimental.
Key Takeaway
Effective change effort can be conceptualized as a three-step process in which employees are first prepared for change, then change is implemented, and finally the new behavioral patterns become permanent. According to emerging contemporary views, it can also be seen as a continuous process that affirms the organic, ever-evolving nature of an organization.
Building Your Change Management Skills
Overcoming Resistance to Your Proposals
You feel that a change is needed. You have a great idea. But people around you do not seem convinced. They are resisting your great idea. The following tips can help you make change happen (McGoon, 1995; Michelman, 2007; Stanley, 2002):
· Listen to naysayers—You may think that your idea is great, but listening to those who resist may give you valuable ideas about why it may not work and how to design it more effectively.
· Avoid revolutionary changes—If you are trying to change dramatically the way things are done, you will find that resistance is greater. If your proposal involves incrementally making things better, you may have better luck.
· Involve those around you in planning the change—Instead of providing the solutions, make them part of the solution. If they admit that there is a problem and participate in planning a way out, you would have to do less convincing when it is time to implement the change.
· Assess your credibility—When trying to persuade people to change their ways, it helps if you have a history of suggesting implementable changes. Otherwise, you may be ignored or met with suspicion. This means you need to establish trust and a history of keeping promises over time before you propose a major change.
· Present data to your audience—Be prepared to defend the technical aspects of your ideas and provide evidence that your proposal is likely to work.
· Appeal to your audience’s ideals—Frame your proposal around the big picture. Are you going to create happier clients? Is this going to lead to a better reputation for the company? Identify the long-term goals you are hoping to accomplish that people would be proud to be a part of.
· Understand the reasons for resistance—Is your audience resisting because they fear change? Does the change you propose mean more work for them? Does it affect them in a negative way? Understanding the consequences of your proposal for the parties involved may help you tailor your pitch to your audience.
Key Takeaway
There are several steps you can take to help you overcome resistance to change. Many of them share the common theme of respecting those who are resistant so you can understand and learn from their concerns.
References
Armenakis, A. A., Harris, S. G., & Mossholder, K. W. (1993). Creating readiness for organizational change. Human Relations, 46, 681–703.
Ashford, S. J., Lee, C. L., & Bobko, P. (1989). Content, causes, and consequences of job insecurity: A theory-based measure and substantive test. Academy of Management Journal, 32, 803–829.
Barnett, W. P., & Carroll, G. R. (1995). Modeling internal organizational change. Annual Review of Sociology, 21, 217–236.
Boeker, W. (1997). Strategic change: The influence of managerial characteristics and organizational growth. Academy of Management Journal, 40, 152–170.
Burkhardt, M. E. (1994). Social interaction effects following a technological change: A longitudinal investigation. Academy of Management Journal, 37, 869–898.
Change management: The HR strategic imperative as a business partner. (December 2007). HR Magazine, 52(12).
Deutschman, A. (2005, March). Building a better skunk works. Fast Company, 92, 68–73.
Diamond, J. (2005). Guns, germs, and steel: The fates of human societies. New York: W. W. Norton.
Fedor, D. M., Caldwell, S., & Herold, D. M. (2006). The effects of organizational changes on employee commitment: A multilevel investigation. Personnel Psychology, 59, 1–29.
Ford, J. D., Ford, L. W., & D’Amelio, A. (2008). Resistance to change: The rest of the story. Academy of Management Review, 33, 362–377.
Fugate, M., Kinicki, A. J., & Prussia, G. E. (2008). Employee coping with organizational change: An examination of alternative theoretical perspectives and models. Personnel Psychology, 61, 1–36.
Gale, S. F. (2003). Incentives and the art of changing behavior. Workforce Management, 82(11), 48–54.
Germann, K. (2006). Legitimizing a new role: Small wins and microprocesses of change. Academy of Management Journal, 49, 977–998.
Gerstner, L. V. (2002). Who says elephants can’t dance? Inside IBM’s historic turnaround. New York: HarperCollins.
Hamel, G. (2000, July/August). Waking up IBM. Harvard Business Review, 78(4), 137–146.
Herold, D. M., Fedor, D. B., & Caldwell, S. (2007). Beyond change management: A multilevel investigation of contextual and personal influences on employees’ commitment to change. Journal of Applied Psychology, 92, 942–951.
Herold, D. M., Fedor D. B., Caldwell, S., & Liu, Y. (2008). The effects of transformational and change leadership on employees’ commitment to a change: A multilevel study. Journal of Applied Psychology, 93, 346–357.
Huy, Q. N. (1999). Emotional capability, emotional intelligence, and radical change. Academy of Management Review, 24, 325–345.
Judge, T. A., Thoresen, C. J., Pucik, V., & Welbourne, T. M. (1999). Managerial coping with organizational change. Journal of Applied Psychology, 84, 107–122.
Kotter, J. P. (1995, March–April). Leading change: Why transformations fail. Harvard Business Review, 73(2), 59–67.
Kotter, J. P. (1996). Leading change. Boston: Harvard Business School Press; Reay, T., Golden-Biddle, K., &.
Labianca, G., Gray, B., & Brass D. J. (2000). A grounded model of organizational schema change during empowerment. Organization Science, 11, 235–257
Lasica, J. D. (2005). Darknet: Hollywood’s war against the digital generation. Hoboken, NJ: Wiley.
Lerman, R. I., & Schmidt, S. R. (2006). Trends and challenges for work in the 21st century. Retrieved from http://www.dol.gov/oasam/programs/history/herman/reports/futurework/conference/trends/trendsI.htm.
Lewin K. (1951). Field theory in social science. New York: Harper & Row.
McGoon, C. (March 1995). Secrets of building influence. Communication World, 12(3), 16.
Michelman, P. (July 2007). Overcoming resistance to change. Harvard Management Update, 12(7), 3–4.
Nash, J. A. (Nov/Dec 2005). Comprehensive campaign helps Gap employees embrace cultural change. Communication World, 22(6).
Rafferty, A. E., & Griffin. M. A. (2006). Perceptions of organizational change: A stress and coping perspective. Journal of Applied Psychology, 91, 1154–1162.
Stanley, T. L. (January 2002). Change: A common-sense approach. Supervision, 63(1), 7–10.
Wanberg, C. R., & Banas, J. T. (2000). Predictors and outcomes of openness to changes in a reorganizing workplace. Journal of Applied Psychology, 85, 132–142.
Learning Organizations
Organizations that systematically measure their performance against sound metrics and then take concrete actions to make improvements may qualify as learning organizations. A commitment to continuous assessment and improvement results in changes by logically partnering the topics of learning and change. Learning organizations may examine the following questions:
· Has your organization identified a set of organization-level metrics for the purposes of evaluating learning?
· Do the metrics align with and support the organization’s missions, goals, values, and objectives (MGVOs)?
· To what extent are the metrics being used to review performance and to make needed changes?
· Does your organization commit the resources and leadership attention required to create a sustainable learning organization?
Organizations and the people within them vary considerably in their ability to decide upon, implement, and manage change. While some assume people are inevitably resistant to change and are therefore responsible for organizational change failures, those who have studied this topic and associated issues warn that several factors are likely to blame.
It is often suggested that resistance to change is inevitable and perhaps even an innate human reaction. Scholars like Dent and Powley (2002), however, have examined this idea, encouraging managers to question their “mental models” and assumptions. As we know, there can be welcome changes: for example, a promotion that involves new responsibilities, a change in technology that will make work easier, or opportunities to acquire new knowledge and skills.
On the other hand, there are changes that may not be welcome: a reorganization intended to achieve “efficiencies” (with an almost certain reduction in workforce), or a change in reporting lines that gives you a new boss with whom you do not have a good relationship. Sometimes people worry about change for good reason. The main point here is that it is not a good idea to assume people will automatically resist change until you have thought about the situation and have a sound understanding about why this is likely to be their response.
When analyzing an organization’s’ capacity to change, you may ask yourself the following questions:
· What is your organization’s experience with implementing significant changes over the past five years?
· How would you describe your organization’s approach to change?
· What lessons should your organization’s leaders and managers take from past change experiences to help ensure success for the future?
References
Dent, E. B., & Powley, E. H. (2002). Employees actually embrace change: The chimera of resistance. Journal of Applied Management and Entrepreneurship,7(2), 56-73. Retrieved from http://ezproxy.umgc.edu/login?url=http://search.proquest.com.ezproxy.umgc.edu/docview/203924073?accountid=14580
Resources
Learning Organization
Building a Learning Organization
Situation Audit Template
Your situation audit report should include the following elements:
· cover page—not included in page limit
· executive summary—1 page; not included in page limit
· introduction—1 page
· fact sheet—1 page; see Step 2
· mission, vision, values and goals—1 page; see Step 3
· stragegy and objectives—1 page; see Step 4
· strategy types and competitive advantage—2 to 3 pages; see Step 5
· organizational size and structure—2 to 3 pages; see Step 6
· critical resources—2 to 3 pages; see Step 7
· leadership, governance, and management—2 to 3 pages; see Step 8
· strengths and weaknesses—1 to 2 pages; see Step 9
· learning and change—1 to 2 pages; see Step 10
· conclusions and recommendations—1 page; see Step 11
· references—not included in page limit
· addenda—if needed, is not included in page limit
· submit—see Step 12
Note: The Situation Audit Report is expected to be 18 to 22 pages, excluding the cover page, executive summary, and references. The page ranges listed above are guidelines. The student can decide how many pages to allocate to a given topic so long as the report does not exceed the maximum number of pages allowed. However, where the suggested page ranges are longer, the intent is to highlight the areas of the report deemed to require more analysis. These particular areas of the report go beyond a statement of organizational facts. They require significant academic readings and a grasp of relevant concepts, which are expected to be integrated into the student’s analysis. Please carefully read the Student Expectations section in Step 1, Organize Your Work.
In developing the report, students should follow the exact order of the template using the same headings to separate sections of the report. Each step is to be included in the final submission. APA format must be followed throughout.