ICAP
Study
Text
P
Business management and
behavioural studies
The Institute of
Chartered Accountants
of Pakistan
First edition published by
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The Institute of Chartered Accountants of Pakistan
Certificate in Accounting and Finance
Business management and behavioural studies
C
Contents
Page
Syllabus objective and learning outcomes
v
Chapter
1
Management concepts
1
2
The business environment
27
3
Organizational structure
75
4
Managing change
105
5
Culture
121
6
Employee behaviour
133
7
Motivation
151
8
Leadership
175
9
Team management
197
10
Negotiation skills and conflict resolution
215
11
Management information systems
229
Index
© Emile Woolf International
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The Institute of Chartered Accountants of Pakistan
Business management and behavioral studies
© Emile Woolf International
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The Institute of Chartered Accountants of Pakistan
Certificate in Accounting and Finance
Business management and behavioural studies
S
Syllabus objective
and learning outcomes
CERTIFICATE IN ACCOUNTING AND FINANCE
BUSINESS MANAGEMENT AND BEHAVIOURAL STUDIES
Objective
To equip candidates with the fundamentals of management and behaviuoral studies.
Learning Outcome
On the successful completion of this paper candidates will be able to:
1
Demonstrate an understanding of the nature of management concepts and
approaches
2
Show familiarity with the structure of business organizations, their culture and the
change process
3
Demonstrate an understanding of human behavior
4
Demonstrate an understanding of the concepts of motivation
5
Show familiarity with the nature and kinds of leadership
6
Show familiarity with the nature and importance of negotiation and conflict
resolution
7
Demonstrate a basic understanding of IT based management information systems
© Emile Woolf International
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The Institute of Chartered Accountants of Pakistan
Business management and behavioral studies
Grid
Weighting
Management concepts
25
Organizational process
20
Individual behavior and motivation
20
Leadership, negotiation and conflicts
20
Management information system
15
Total
Syllabus
Ref
A
Contents
Level
100
Learning Outcome
Management concepts
1
Meaning
1
LO 1.1.1 Define the term Management,
its nature and purpose
LO 1.1.2 State the difference between
Managers and Leaders using examples
LO 1.1.3 Describe the classification of
management roles by Henry Mintzberg
2
Functions
1
LO 1.2.1 Illustrate management model
and explain the functions of
management
LO 1.2.2 Describe the roles and skills
of management
3
Classical approach
2
LO 1.3.1 Describe the principles of
Scientific management by Fredrick
Taylor
LO 1.3.2 Explain the key principles of
management by Fayol and Urwick
LO 1.3.3 Discuss the criticism on
scientific management and classical
approach to management
LO 1.3.4 List the characteristics of
bureaucratic organizations and discuss
criticism on this form of management
4
Behavioral approach
2
LO 1.4.1 Discuss the Hawthorne
experiments on human relation
approach, their significance and
implications.
LO 1.4.2 Discuss critically the
relevance of these experiments for
management and organizational
behaviour.
LO 1.4.3 Discuss Theory X and Theory
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Syllabus and learning outcomes
Syllabus
Ref
Contents
Level
Learning Outcome
Y including their implication and
differences
B
5
Management science
approach
2
LO 1.5.1 Explain the effects of
operations research in business
sciences
6
External factors –
Competitors, suppliers,
labour, customers
2
LO 1.6.1 Describe the direct and
indirect interactive forces which may
affect the organizational environment
7
General environment Political, legal, technological,
economic, social
2
LO 1.7.1 Explain how the external
forces affect the organizational
environment using examples.
2
LO 2.1.1 Explain the meaning and
nature of organizational structure.
Organizational process
1
Organizational structure principles of organization,
different ways of structuring
organization
LO 2.1.2 Explain the importance of
good structure and consequences of a
deficient structure.
LO 2.1.3 Describe how the elements of
organizational structure can be
combined to create mechanistic and
organic structures
LO 2.1.4 Describe the advantages and
disadvantages of mechanistic and
organic structure of organization
2
Organizational change nature of change process,
resistance to change
2
LO 2.2.1 Identify the external forces
creating change on the part of
organizations
LO 2.2.2 Describe process of
organizational change
LO 2.2.3 Explain the forms of reactions
to change
3
C
Organizational culture concept, dysfunctional
aspect of culture
2
LO 2.3.1 Describe organizational
culture using examples
LO 2.3.2 Discuss using examples the
different levels of organizational culture
Individual behavior and motivation
1
Perception
2
LO 3.1.1 Explain perception and
perception process
LO 3.1.2 Discuss using examples the
difference between sensation and
perception
LO 3.1.3 Discuss using examples the
internal and external factors that affect
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Business management and behavioral studies
Syllabus
Ref
Contents
Level
Learning Outcome
perceptual selectivity
LO 3.1.4 Describe the characteristics of
Perceiver and Perceived
LO 3.1.5 Analyse the perceptual
problems/distortions in dealing with
other people like stereotyping and Halo
effect etc.
2
Attitude
2
LO 3.2.1 Define attitude and its
components with reference to culture of
an organization
LO 3.2.2 Discuss the differences
between cognitively based attitudes
and affectively based attitudes
LO 3.2.3 Describe the difference
between implicit and explicit attitudes
LO 3.2.4 Discuss cross-cultural
differences in the bases for attitudes
LO 3.2.5 Explain the relationship
between attitude and behaviour
3
Job satisfaction and stress
2
LO 3.3.1 Explain using examples the
meaning of job satisfaction.
LO 3.3.2 Identify the outcomes of job
satisfaction and ways to enhance
satisfaction
LO 3.3.3 Describe stress and identify
the causes of job stress
LO 3.3.4 Explain using examples the
general categories of stressors that can
affect job
LO 3.3.5 Identify consequences of
stress and strategies in order to cope
up with stress
4
Maslow need hierarchy
Model
2
LO 3.4.1 Describe using examples
motivation
LO 3.4.2 Explain Maslow’s need
hierarchy theory
LO 3.4.3 Explain strengths and
problems in applications of Maslow’s
theory
5
Herzberg’s Two-factor
Theory
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LO 3.5.1 Explain Herzberg’s two factors
of motivation and major criticism
thereon
The Institute of Chartered Accountants of Pakistan
Syllabus and learning outcomes
Syllabus
Ref
6
Contents
McClelland’s theory of
needs
Level
2
Learning Outcome
LO 3.6.1 Explain the three motives by
McClelland.
LO 3.6.2 State the difference between
intrinsic and extrinsic motives
7
Goal setting
2
LO 3.7.1 List the major dimensions of
goal setting theory
LO 3.7.2 Explain why and how goals
contribute to self-motivation
LO 3.7.3 Describe how to set effective
goals and the problems sometimes
created by goals
8
Management by objective
2
LO 3.8.1 Explain the basic steps of the
overall performance system of MBO.
9
Self-efficacy
2
LO 3.9.1 Define the term self-efficacy
LO 3.9.2 Understand high self-efficacy
and low self-efficacy
10
Reinforcement
2
LO 3.10.1 Describe law of effect using
simple examples
LO 3.10.2 Describe reinforcement as
used in behavioural management
LO 3.10.3 Describe positive and
negative reinforcers using examples
D
11
Equity/organizational justice
2
LO 3.11.1 Explain organizational justice
and three components of the same,
namely, distributive, procedural and
interactional
12
Expectancy
2
LO 3.12.1 Describe using simple
examples the Expectancy theory and its
three elements, namely, expectancy,
instrumentality and valence
Leadership, negotiation and conflicts
1
Type of leadership
2
LO 4.1.1 Discuss different leadership
styles, namely, free-rein, engaging,
participative, task oriented and
autocratic
2
Theories of leadership
2
LO 4.2.1 Discuss using simple
examples different theories of
leadership, namely, trait theories, Blake
and Mouton theory, situational and
contingency theories
3
Roles, activities, skills of
leaders
2
LO 4.3.1 Discuss leadership roles and
activities
LO 4.3.2 Identify Skills needed for
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Business management and behavioral studies
Syllabus
Ref
Contents
Level
Learning Outcome
effective leadership
4
Group Dynamics and
teamwork - types of groups,
group formation, group
structure, individual in
groups, team work
2
LO 4.4.1 List differences between
groups and teams
LO 4.4.2 Explain and illustrate balance
theory of group formation
LO 4.4.3 Identify and describe stages
of group development
LO 4.4.4 List down the factors that
increase and decrease group
cohesiveness
LO 4.4.5 Explain the ways to make
teams more effective
5
Negotiation skills
2
LO 4.5.1 Explain various stages of the
negotiation process
LO 4.5.2 List five skills of effective
negotiator
LO 4.5.3 Explain the low risk
techniques of negotiation
LO 4.5.4 Explain the high risk
techniques of negotiation
6
Conflict resolution
2
LO 4.6.1 Discuss the conflict resolution
process
LO 4.6.2 Explain Intra-individual conflict
with model of frustration
LO 4.6.3 List some of the physical,
psychological and behavioural
problems occur due to conflict
E
Management information systems
1
General system concepts of
information technology
1
LO 5.1.1 Demonstrate basic
understanding of computer hardware
i.e. input, output, storage of information
and networking
LO 5.1.2 Understand the concepts of
information technology and information
systems.
LO 5.1.3 Understand the role and types
of information systems in business
2
IT-based transaction
processing systems
1
LO 5.2.1 Understand data entry, batch
processing, online processing and real
time -online processing
3
IT-based financial reporting
1
LO 5.3.1 Understand IT based financial
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Syllabus and learning outcomes
Syllabus
Ref
Contents
Level
systems
Learning Outcome
reporting system
4
IT-based order processing
and inventory control
systems
1
LO 5.4.1 Understand IT based order
processing and inventory control
systems
5
IT-based personnel systems
1
LO 5.5.1 Understand IT based
personnel systems
6
Integrated IT systems
1
LO 5.6.1 Briefly describe integrated
systems, their advantages and
disadvantages
LO 5.6.2 Understand main feature of
Enterprise Resource Planning
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Business management and behavioral studies
© Emile Woolf International
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The Institute of Chartered Accountants of Pakistan
CHAPTER
Certificate in Accounting and Finance
Business management and behavioural studies
1
Management concepts
Contents
1 Functions: leadership, management and supervision
2 Classical theories of management
3 Other theories of management
4 Management skills
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Business management and behavioural studies
INTRODUCTION
Learning outcomes
The overall objective of the syllabus is to equip candidates with the fundamentals of
management and behavioural studies.
Management Concepts
LO 1
On the successful completion of this paper, candidates will be able to
demonstrate an understanding of the nature of management concepts
and approaches
LO 1.1.1
Define the term Management, its nature and purpose
LO 1.1.2
State the difference between Managers and Leaders using examples
LO 1.1.3
Describe the classification of management roles by Henry Mintzberg
LO 1.2.1
Illustrate management model and explain the functions of management
LO 1.2.2
Describe the roles and skills of management
LO 1.3.1
Describe the principles of scientific management by Fredrick Taylor
LO 1.3.2
Explain the key principles of management by Fayol and Urwick
LO 1.3.3
Discuss the criticism on scientific management and classical approach to
management
LO 1.3.4
List the characteristics of bureaucratic organizations and discuss criticism on
this form of management
LO 1.4.1
Discuss the Hawthorne experiments on human relation approach, their
significance and implications.
LO 1.4.2
Discuss critically the relevance of these experiments for management and
organizational behaviour.
LO 1.4.3
Discuss Theory X and Theory Y including their implication and differences
LO 1.5.1
Explain the effects of operations research in business sciences
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Chapter 1: Management concepts
1
FUNCTIONS: LEADERSHIP, MANAGEMENT AND SUPERVISION
Section overview

Definition of leadership

Definition of management

Definition of supervision
An organisation consists of many individuals, who should be working towards common
goals or objectives. Individuals are given direction and co-ordinated by their managers
and leaders. This chapter looks at the role of the leader, manager and supervisor, and
how these roles differ.
1.1 Definition of leadership
It is often assumed that ‘leadership’ and ‘management’ mean the same thing. In
business organisations, individuals are put into positions of formal authority, and
in that position they are expected to provide leadership to subordinates or team
members. It is certainly the case that in formal business organisations, managers
are expected to provide leadership. However, leadership and management are
different, and not all managers are good leaders.
Leadership means giving a lead to others. A leader gives guidance and direction,
and other (‘followers’) follow the lead that they are given.
It might be tempting to think of a leader as someone who tells other people what
to do, but there are different ways of leading, and ‘telling’ is just one of them.
Followers look to their leaders for direction and guidance. Leaders also influence
others, and can inspire them and motivate them.
1.2 Definition of management
Management is about planning, controlling, putting appropriate organisation
structures in place (organising), as well as communicating and co-ordinating. The
roles of management can be listed as follows:

set objectives

plan for the achievement of those objectives

organise resources for the achievement of planning objectives (including
organising employees)

establish controls for activities and operations

co-ordinate activities

establish effective communication system both inside and outside the
organisation

monitor actual performance

take corrective action where necessary

review actual achievements and establish new planning objectives.
Giving leadership to employees is an element of management. Leadership is not
the same as management, but it is an aspect or feature of management.
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Planning, organising, co-ordinating and communicating all require leadership,
because they involve giving guidance and direction to employees.
Several writers have analysed in detail the difference between leadership and
management. The ideas of some of these writers are explained more fully later in
this chapter.
1.3 Definition of supervision
Supervision means ‘looking over’ someone else. It is management by overseeing
the performance or activities of an individual or group of individuals, and making
sure that the work of the group or individuals is performed properly.
Supervision is also called ‘front line management’ and ‘supervisory
management’. It is the lowest level of management in an organisation structure.
The main function of supervisors is to provide administrative management.
However, in addition to performing an administrative task, supervisors might also
be expected to:

develop staff, possibly by ‘empowering’ them and encouraging them to take
on responsibility, and

help to train them (through ‘on-the-job-training).
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Chapter 1: Management concepts
2
CLASSICAL THEORIES OF MANAGEMENT
Section overview

Scientific and classical theories of management

F W Taylor (1856 – 1915) and scientific management

Henri Fayol (1841 – 1925) and principles of management

Principles of organisations – Lyndall Urwick

Weber (1864 – 1920) and bureaucracy

Elton Mayo (1880 – 1949) and the human relations school

Classical and human relations theories of management: a summary
2.1 Scientific and classical theories of management
Early theories of management were concerned with:

the roles of the manager and

how managers might perform their roles better and more effectively.
These theories focused mainly on the management of work (rather than the
management of people at work). ‘Classical’ theories of organisation and
management are associated with theorists such as:

Taylor and the scientific school of management

Fayol, and

Weber.
2.2 F W Taylor (1856 – 1915) and scientific management
Frederick Taylor was a US engineer who is considered the founder of ‘scientific
management’. Scientific management is concerned with applying scientific
techniques of analysis and experimentation to improve the efficiency of work.
Taylor studied the relationship between people and the tasks that they perform.
His approach was to analyse the tasks that individuals perform at work, and
break them down into smaller units of work. Each small unit of work was then
analysed to find ways in which they could be performed with the greatest
efficiency (in the shortest time). Experimentation was used to find ways of
improving efficiency for each small unit of work, and Taylor measured the time
that it took to carry out each small task.
Taylor is considered the originator of ‘time and motion study’. Scientific
management resulted in:

dividing larger tasks into much smaller units,

employing individuals to specialise in each small unit of work, and therefore

increasing efficiency through the division of work and specialisation.
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Business management and behavioural studies
Taylor is probably best known for the experiments he carried out into shovelling
coal at the Bethlehem Steel Works in the US. Taylor succeeded in improving
productivity through:

analysing the tasks involved in shovelling coal

experimenting with different types of shovel (for example, different sizes of
shovel and shovels with different lengths of handle) and the amount of coal
that should be shovelled in a single action, and

introducing work specialisation within shovelling operations.
The four underlying principles of scientific management
Taylor suggested that there should be four underlying principles in scientific
management.

There should be a science of work, based on the analysis of work methods
and work times, with a view to finding the most efficient way of carrying out
tasks. A fair level of performance or efficiency can be identified. Workers
should be rewarded through higher pay if they succeed in performing more
efficiently than the expected or standard level.

Workers should be selected carefully. They should have the skills and
abilities that are well-suited to the work. They should also be trained in how
to do the work efficiently.

The scientifically-selected and trained workers and the science of work
should be brought together for the best results and greatest efficiency.

There should be an equal division of work between the workers and
management, and workers and managers should operate closely together.
(This was not the normal practice at the time, in the US in the late 1800s.)
The management should take over all the work from the workers for which
they are more capable.
Criticisms of scientific management
Scientific management is still associated with work study and time and motion
study. It has been strongly criticised because it results in dull, repetitive and
monotonous work. Tasks are reduced to such small units, such as tasks on a
large production line in a factory, that they demoralise the workers who do the
jobs. There is a risk that when employees are doing dull, repetitive work, their
efficiency will be low because they are not at all interested in what they are doing.
However, some of the principles of scientific management are valid, and continue
to be applied. In particular, the scientific study of work can help to improve the
organisation of work procedures and methods.
2.3 Henri Fayol (1841 – 1925) and principles of management
The ideas of Henri Fayol are probably close to the ideas that many individuals
hold about management and the functions of management. Fayol argued that
managers are given formal authority within an organisation structure and they are
responsible (to their superiors) for the effective use of their authority.
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Chapter 1: Management concepts
Fayol suggested that there are five main tasks of management:

to plan (and look ahead)

to organise

to command: today, the word ‘command’ should probably be replaced by
‘provide leadership’

to co-ordinate, and

to control (by monitoring performance and inspecting output).
He believed that there are principles of good management that apply to all types
of organisation, and that these principles should therefore be applied
consistently. The principles are:

Division of Work – When employees are specialized, output can increase
because they become increasingly skilled and efficient.

Authority – Managers must have the authority to give orders, but they
must also keep in mind that with authority comes responsibility.

Discipline – Discipline must be upheld in organizations, but methods for
doing so can vary.

Unity of Command – Employees should have only one direct supervisor.

Unity of Direction – Teams with the same objective should be working
under the direction of one manager, using one plan. This will ensure that
action is properly coordinated.

Subordination of Individual Interests to the General Interest – The
interests of one employee should not be allowed to become more important
than those of the group. This includes managers.

Remuneration – Employee satisfaction depends on fair remuneration for
everyone. This includes financial and non-financial compensation.

Centralization – This principle refers to how close employees are to the
decision-making process. It is important to aim for an appropriate balance.

Scalar Chain – Employees should be aware of where they stand in the
organization's hierarchy, or chain of command.

Order – The workplace facilities must be clean, tidy and safe for
employees. Everything should have its place.

Equity – Managers should be fair to staff at all times, both maintaining
discipline as necessary and acting with kindness where appropriate.

Stability of Tenure of Personnel – Managers should strive to minimize
employee turnover. Personnel planning should be a priority.

Initiative – Employees should be given the necessary level of freedom to
create and carry out plans.

Esprit de Corps – Organizations should strive to promote team spirit and
unity
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2.4 Principles of organisations – Lyndall Urwick
According to Urwick an organisation is built on ten principles:

Objective - Every organisation and every part of the organisation must be
an expression of the purpose of the undertaking concerned, or it is
meaningless and therefore redundant.

Specialisation - The activities of every member of any organised group
should be confined, as far as possible, to the performance of a single
function.

Co-ordination - The purpose of organising per se, as distinguished from
the purpose of the undertaking, is to facilitate co-ordination and thus unity
of effort.

Authority - In every organised group the supreme authority must rest
somewhere. There should be a clear line of authority to every individual in
the group

Responsibility - The responsibility of the superior for the acts of the
subordinate is absolute.

Definition - The content of each position, both the duties involved, the
authority and responsibility contemplated and the relationships with other
positions should be clearly defined in writing and published to all
concerned.

Correspondence - In every position, the responsibility and the authority
should correspond.

Span of control - No person should supervise more than five, or at most,
six direct subordinates whose work interlocks.

Balance - It is essential that the various units of an organisation should be
kept in balance.

Continuity - Re-organisation is a continuous process: in every undertaking
specific provision should be made for it
2.5 Weber (1864 – 1920) and bureaucracy
Max Weber was a German sociologist, who studied the growth in the number,
size and power of large bureaucratic organisations. He suggested that
bureaucracy provides an organisation structure in which human activity is
‘rationalised’ and co-ordinated.
He argued that an ‘ideal’ bureaucracy has the following characteristics.

There should be a hierarchy of authority, from top management down to
workers at the bottom. Offices (management positions) should be ranked in
hierarchical order, with information flowing up the chain of command and
instructions and directions passing down the chain.

An ideal bureaucracy should operate in an impersonal and impartial way.
There should be a clear statement of duties, responsibilities, standardised
procedures and expected behaviour.

There should be written rules of conduct.

There should be promotion of individuals within the organisation, based on
their achievement.

There should be division of labour and specialisation of work.
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Chapter 1: Management concepts

The ideal bureaucracy will achieve efficiency in operations.
Weber was also interested in authority, and how men and women claim authority
over others, so that others will do what they ask. He defined authority as ‘getting
things done by giving orders, and having those orders accepted as justified and
legitimate.’ (He made a distinction between authority and power. Power is getting
things done by using force or the threat of force or punishments.)
He identified three types of legitimate authority.

Traditional. Weber suggested that authority based on tradition pre-dates
modern society. Traditional authority is associated with the hereditary
power of royal families and chieftains and the ‘head of the household’, with
leadership passing from father to son when the father dies.

Rational-legal. This form of authority is associated with bureaucracies.
Authority is rational, because it is used to achieve clear goals with
maximum efficiency. It is legal, because it is based on an impartial system
of rules and procedures, and is exercised through the management position
that the individual in authority occupies.

Charismatic. Authority is based on charisma when the individual has
special personal qualities that inspire others to do what the individual asks.
Weber argued that authority based on charisma depends on the individual
for its existence, and so is inherently unstable and short-lived.
Weber believed that bureaucracies would continue to grow in number and size,
because they provide a rational organisation for co-ordinating human activities,
based on a hierarchy of authority. He recognised, however, that large
bureaucracies lead to the ‘depersonalisation’ of work.
Bureaucracy is often condemned because of ‘red tape’, ‘pen-pushing’ and ‘souldestroying work’. However, in spite of the criticisms, many large organisations
today are bureaucracies. Government organisations in particular are usually
bureaucratic, because bureaucracy operates with clear and impartial rules and
procedures. Weber’s comments on the ‘ideal’ bureaucracy may therefore remain
valid, even today.
Rosemary Stewart on bureaucracy
Rosemary Stewart is a modern (UK) writer on management theory. She has
summarised the four main features of bureaucracy as follows:

Specialisation. There is specialisation of work, but this applies to the job,
not the individual who does the job. This means that there is continuity.
When one person leaves the job, the job continues, and another person fills
the same position.

Hierarchy of authority. There is a distinction between ‘management’ and
‘workers’. Within management, there is a hierarchy with clearly-defined
levels of authority and ‘ranks’ of managers.

A system of rules. The rules of a bureaucracy provide impersonal and
efficient rules and procedures. Individuals within a bureaucracy must know
what the rules are to do their job successfully.

Impersonal. In a bureaucracy, the exercise of authority and the system of
privileges and rewards are based on a clear set of rules.
Stewart also suggested reasons for the growth of bureaucracy.
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
The growing size of organisations. Large organisations need some
bureaucratic structure to function efficiently.

Greater complexity of work. Complexity makes it necessary to have
specialisation of tasks within an organisation. Job-holders often need to be
‘experts’ in their work to deal with the complex issues involved.

Scientific management. A scientific approach to management is widely
used. This approach supports a rational way of organising work and having
formal procedures for getting work done.

The demand for equality of treatment. Citizens expect to be treated
equally by organisations. Bureaucracies provide impartiality and should
ensure equal treatment for all.
2.6 Elton Mayo (1880 – 1949) and the human relations school
Elton Mayo is regarded as the founder of the human relations movement of
management theory. Between 1927 and 1932, he was involved in a set of
experiments on productivity at the Hawthorne Works in Illinois (USA). The
Hawthorne works were a production site of Western Electric, a manufacturer of
telephone equipment.
The original aim of the experiments was a scientific management study into the
effect on productivity of changes in working conditions, such as lighting, rest
periods during the day, the length of the working day and pay incentives. Six
individual workers were selected to take part in the experiments, and their
conditions of working were varied in various ways, to see how the changes would
affect their productivity. The results of the experiments were unexpected. Even
when the working conditions for the six workers were changed back to ‘normal’
(for example, when they were given shorter rest breaks and longer working
hours), their productivity continued to rise. Mayo tried to explain why productivity
continued to rise when working conditions were made worse.
Mayo suggested that the reason for improving productivity among the workers
could be explained by:

the motivation and commitment of the individuals in the experiment, and

the relationship between the employees and management.
Productivity had improved, he argued, because the six workers had become a
team, who developed social relationships with each other as well as a work
relationship. The team responded positively, because the workers felt that they
were contributing freely to the experiments, without any coercion from
management.
Mayo developed several arguments, all related to the effect of positive motivation
on productivity.

Work has a social value for workers. Mayo disagreed with the view of F W
Taylor, that workers are motivated only by self-interest. The ‘informal
organisation’ is important in affecting workers’ attitudes.

The productivity of workers is affected by their self-esteem. In the
Hawthorne experiments, the self-esteem of the six individuals increased
because they had been selected to do the experiments.

Work satisfaction lies in recognition, security and a sense of belonging,
rather than money rewards.
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
Motivation (and productivity) is affected by the relationship between
management and workers. Managers need to communicate with workers.
When there is no communication, conflicts are inevitable, and workers
resent the focus of management on cutting costs and improving efficiency.
Management must therefore develop and apply ‘people skills’ in order to
motivate their workers.
Mayo concluded that a lack of attention to human relationships was a major
weakness in earlier theories of management. Managers should become more
involved with their workers, and earn the respect of the workers. The result would
be improved motivation amongst workers and higher productivity.
It is worth considering that although the ideas of Mayo might seem ‘obvious’
today, he was the first management theorist to draw attention to the social
aspects of working and the effects of motivation on performance.
2.7 Classical and human relations theories of management: a summary
The early writers on management theory suggested that there is a set of
concepts and rules that apply universally to all managers and management
tasks. Scientific management was based on the belief that certain principles
should be applied to the study of work and work methods, in order to improve
efficiency. Fayol argued that all managers have a similar role in organisations, no
matter what the type or size of organisation, and there are principles of good
management that should be applied in every organisation. Weber identified the
characteristics of an ideal bureaucracy. Mayo identified the significance of human
relations, and argued that it applies to all individuals at work.
Modern writers on management theory have questioned whether ‘universal rules’
of good management do exist. Various ideas have been put forward that
challenge ‘classical theories’.
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3
OTHER THEORIES OF MANAGEMENT
Section overview

Peter Drucker (1909 – 2005)

Rosabeth Moss Kanter

Henry Mintzberg

William Ouchi: Theory Z

McGregor: Theory X and Theory Y

Management science approach – Operations Research (OR)

Differences between classical and modern theories of management
There are many writers on management theory, and there is no single ‘modern theory’
of management. The ideas of some well-known writers are described here.
3.1 Peter Drucker (1909 – 2005)
Peter Drucker was a leading writer on management theory for many years until
his death in 2005, and he wrote on a wide range of subjects.
He suggested that there are five areas or categories of management
responsibility:

Setting objectives. Managers set objectives for the organisation, and
decide on targets for the achievement of those objectives, which they then
communicate to other people in the organisation.

Organising work. Managers organise the work that is done, by dividing it
into activities and jobs. They integrate the jobs into a formal organisation
structure and select and appoint people to do the jobs.

Motivating and communicating. Managers need to motivate their
employees. They must also communicate with their employees so that they
can do their work.

Measuring. Managers measure performance, perhaps by comparing it
against a target or yardstick (benchmark). They analyse and assess
performance, and communicate their findings, both to their superiors and
their subordinates.

Developing people. Managers need to develop their employees and also
themselves. Drucker wrote that the manager ‘brings out what is in their
employees or he stifles them. He strengthens their integrity or he corrupts
them.’
Drucker disagreed with the views of Fayol that general principles of management
apply to managers in all types of organisation. He argued that managing a
commercial business is different from managing other types of organisation,
because the business manager has a key responsibility for the economic
performance of the business. Managers perform well and justify their existence
and their authority only if they produce the economic results (for example, profits)
that are expected.
Drucker therefore suggested that there are three aspects to the responsibilities of
managers in business:
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
Managing the business. Business managers are responsible for matters
such as innovation and marketing. Drucker was one of the first
management theorists to argue for ‘putting the customer first’ – a basic
concept on which modern ideas of marketing are based.

Managing managers. Managers need to be managed. One way of doing
this is to give them targets for achievement and monitoring their
performance. Drucker was the first theorist to use the term ‘management by
objectives’.

Managing workers and their work. Managers need to set objectives for
their team and divide their work into manageable activities. Managers also
need to motivate staff and communicate with their team as well as measure
and review their performance. Managers are also responsible for
developing their people.
3.2 Rosabeth Moss Kanter
Kanter has written widely on management topics, but is probably best known for
her work on the inefficiencies of modern bureaucracy, and what organisations
need to do to succeed in the modern business environment.
She argued that over time, traditional bureaucratic organisations had become
unacceptably slow. A long hierarchical chain of command meant that information
passed slowly through the organisation, and decisions took a long time to make.
The world of business had changed, economic circumstances were different,
competition had increased, the pace of change was much faster and new
technology (particularly developments in computerisation and communications
technology) had made the ‘old ways of doing things’ within a bureaucratic
organisation very inefficient.
In her book Teaching Elephants to Dance (1989) she argued that today’s
‘corporate elephants’ need to learn to dance as nimbly and speedily as mice if
they are to survive in an increasingly competitive and rapidly changing world:
‘If the main game of business is indeed like Alice in Wonderland croquet, then
running it requires faster action, more creative manoeuvring, more flexibility and
closer partnerships with employees and customers than was typical in the
corporate bureaucracy. It requires more agile, livelier management that pursues
opportunity without being bogged down by cumbersome structures or weighty
procedures that impede action. Corporate giants, in short, must learn to dance.’
Kanter argued that the re-birth and success of business organisations will
depend on:

innovation (developing new products, services and operating methods)

entrepreneurship (taking business risks)

participative management (encouraging all employees to participate in
making decisions about work).
Kanter has argued in favour of ‘empowerment’, which means giving more
authority and power to the individual worker, instead of relying on managers to
tell their workers what to do. Empowerment is needed to get the best out of
individuals at work.
She has also argued in favour of ‘flatter’ organisation structures, and getting rid of
the hierarchies of management and long chains of command that characterise
large bureaucracies. (When workers are empowered and given more authority to
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make decisions for themselves, the need for supervision by management is
reduced. Empowerment and flatter organisation structures are therefore
consistent with each other.)
3.3 Henry Mintzberg
Henry Mintzberg is another modern management theorist who has written on a
wide range of topics. He is particularly well-known for research that he carried out
into what managers actually do. According to classical theorists such as Fayol,
the role of managers is to plan, organise, command, co-ordinate and control.
Mintzberg suggested that reality is different. His research into the activities of
managers made the following discoveries:

A lot of management work is disjointed. Planning, for example, is done on a
day-to-day basis, when time permits between more urgent or immediate
tasks.

Managers spend some of their time on routine duties of a ceremonial
nature, such as meeting with important visitors.

Managers prefer informal verbal communication to formal written
communications, such as reports and briefing notes. Communicating
informally by word of mouth is much faster and more effective than
communication through the formal information system.

Management activities and decisions are based largely on judgement and
intuition. General principles of management are not relevant to
management practice. In practice, managers do many of their tasks quickly
and superficially.
Mintzberg suggested that managers perform three main roles, which can be
further analysed into 10 different functions. Together, these ten roles provide an
integrated picture of what managers do.
Mintzberg: managerial roles
Interpersonal
Informational
Decision-making
Figurehead
Monitor
Initiator or improver, and changer
Liaison
Disseminator
Disturbance handler
Leader
Spokesman
Resource allocator
Negotiator

Interpersonal role. Managers spend much of their time performing
interpersonal roles:

As a figurehead. Managers often perform a ceremonial role,
representing the organisation at events and as a ‘public face’ of the
organisation. Managers also represent their organisation in its
dealings with other organisations. Other people might refuse to deal
with anyone except the manager, because of the manager’s formal
position and status.

As a leader. Managers also deal with relations between individuals
inside the organisation, providing leadership (hiring, firing, training,
motivating and so on).

Liaison. Managers of groups within an organisation act as a link or
bridge with other groups. For example, different departments often
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communicate with each other through their managers. Managers
therefore fulfil a role of obtaining information from other sources and
other groups.


Information role. Managers also have an information role.

Monitor. Managers build and use ‘intelligence-gathering’ systems
and monitor the information they receive. They gather information
from formal and informal sources, and develop an extensive
knowledge of the organisation as a result.

Disseminator. Managers disseminate information, acting as a
channel of information within the group and with others.

Spokesman. Managers act as a spokesperson for the group, in a
‘public relations’ capacity.
Decision-making role. Managers make decisions.

Initiator of change or improvements. They have an entrepreneurial
role, and take initiatives.

Disturbance handler. They have a role in resolving conflicts and
disputes, and dealing with other similar unexpected problems.

Resource allocator. They decide how resources should be used, for
example what the available money should be spent on and how
employees should use their time (what work they should do).

Negotiator. They negotiate with others, and reach decisions through
joint agreement.
Mintzberg and organisation structure
Mintzberg also challenged the view that the bureaucratic organisation structure is
the ideal form of organisation in all circumstances. He suggested that there are
five elements or ‘building blocks’ in an organisation, and the way that the
organisation operates depends on which of these elements is dominant.

Strategic apex. This is the top management in the organisation.
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
Operating core. This represents the basic work (basic operations) of the
organisation, and the individuals who carry out this work.

Middle line. These are the managers and the management structure
between the strategic apex and the operating core.

Support staff. These are the staff who provide support for the operating
core, such as secretarial staff, cleaning staff, repair and maintenance staff,
and so on.

Technostructure. These are staff without direct line management
responsibilities, but who provide technical support to the organisation. They
include accountants and IT specialists.
Mintzberg argued that the way in which an organisation functions depends on
which of these five groups has the greatest influence.

When the strategic apex is powerful, the organisation is entrepreneurial.
The leaders give the organisation its sense of direction and take most of
the decisions.

When the technostructure is dominant, the organisation often has the
characteristics of a bureaucracy, with organising, planning and controlling
prominent activities. The technical experts have a strong influence over the
way the organisation is managed. The organisation continually seeks
greater efficiency.

When the organisation is divisionalised and local managers are given
extensive authority to run their own division in the way that they consider
best, the middle line is dominant.

Some organisations are dominated by their operating core, where the basic
‘workers’ are highly-skilled and seek to achieve proficiency in the work that
they do. Examples might be schools, universities and hospitals, where the
teachers and doctors can have an exceptionally strong influence.

Mintzberg identified a type of organisation that he called an ‘adhocracy’.
This is an organisation with a complex and disordered structure, making
extensive use of teamwork and project-based work. This type of
organisation will be found in a complex and dynamic business environment,
where innovation is essential for success. These organisations might
establish working relationships with external consultancies and experts.
The ‘support staff’ element can therefore be very important.
3.4 William Ouchi: Theory Z
William Ouchi made a study of Japanese companies and compared them with
companies in the US. His aim was to identify the reasons why Japanese
companies performed better than US companies, and in particular why Japanese
companies produced better-quality products than their US competitors and
achieved much better productivity.
His study of Japanese companies found that in Japan, managers have a high
level of trust in their workers, and assume that workers have a strong loyalty
towards their company and are interested in team working. Companies in turn
show loyalty to their employees, who have employment for life; however,
promotion and career progression is slow. Decision-making in Japanese
companies is also ‘collective’, with workers participating in decision-making and
management trying to achieve universal agreement and acceptance before
decisions are taken.
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Ouchi was not the first management theorist to suggest that companies in other
countries could learn from the success of Japanese companies. However, his
work is notable because he suggested that the most efficient type of organisation
for the US might be one that combined features of ‘typical’ US and Japanese
companies.
He called his recommended approach to management ‘Theory Z’, and he put
forward his ideas in a book Theory Z: How American management can meet the
Japanese challenge (1981).
The essential features of Theory Z, and how Theory Z compares with typical US
and Japanese management practice, is set out below.
Typical American
company
Typical Japanese
company
Theory Z
Short-term employment
Lifetime employment
Long-term employment:
not necessarily for life,
but much longer than
the current average in
the US
Decision-making by
individual managers with
the authority to decide
Collective (or
‘consensual’) decision
making
Collective (or
‘consensual’) decision
making
Individual responsibility
Collective responsibility
Individual responsibility
(Notice that here, Ouchi
favours the American
model over the
Japanese model)
Rapid promotion. Quick
career progression
Slow evaluation of
performance and slow
promotion. Take time to
learn the business
Slow evaluation of
performance and slow
promotion
Formal control
mechanisms and control
measures
Implicit (informal) control
mechanisms
Implicit(informal) control,
but with explicit (formal)
control measures
Specialised career path
for employees
Non-specialised career
path
Moderately specialised
career path
Concern for the
employee as an
employee
Wider concern for the
employee as a person
Wider concern for the
employee as a person,
including concern for the
family of the employee
3.5 McGregor: Theory X and Theory Y
Douglas McGregor (in The Human Side of Enterprise, 1960) suggested that there
are two different approaches to managing people. Each approach is based on a
different view of whether individuals can be motivated at work. McGregor called
the two management approaches Theory X and Theory Y.
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Theory X
The Theory X approach to management is an authoritarian style. The manager
instructs his employees and tells them what to do. The Theory X approach is
based on the following views about people at work:

The average person dislikes work and will avoid having to do any if at all
possible.

Individuals must therefore be forced to work towards the organisation’s
objectives, with the threat of punishment for not working properly.

The average person prefers to be directed, wants to avoid responsibility,
has no ambition and wants security more than anything else.
Theory Y
The Theory Y approach to management is a participative management style, in
which the manager encourages his employees to participate in decision-making.
The Theory X approach is based on the following views about people at work:

Putting effort into work is as natural as play.

Individuals will apply self-direction and self-control to work towards the
objectives of the organisation, without the need for constant supervision or
the threat of punishments.

The strength of an individual’s commitment to the organisation’s objectives
is related to the rewards associated with achieving those objectives.

Individuals usually accept and then seek responsibility.

At work, the intellectual potential of the average person is only partly
utilised. Individuals have much more potential that could be utilised.
The implications of McGregor’s theory
The Theory Y approach to management is consistent with a participative
approach to decision-making, where the manager gives all the relevant
information to his employees and encourages them to contribute to solving
problems and deciding what should be done.
McGregor suggested that a Theory Y approach is not always possible, or
advisable.

Theory Y is difficult to put into practice in a factory environment.

There will be some situations when the manager must exercise his
authority, because this is the only way of getting results. (For example, a
manager must decide what to do when his subordinates cannot agree and
are arguing amongst themselves.)
However, McGregor argued that Theory Y can often be used to manage
managers and professionals. When it is possible to get the commitment of
employees to the objectives of the organisation, it is better to explain problems
fully to them. The employees will exert self-direction and self-control to do better
work and achieve better results than if they are told what to do by an
authoritarian manager.
For a Theory Y approach to management to work, employees must be positively
motivated to work and emotionally mature, and the work must be sufficiently
responsible to allow them some flexibility (some choice in how they set about the
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work). In these circumstances, a Theory Y approach will lead to much better
results for the organisation than a Theory X management style.
3.6 Management science approach – Operations Research (OR)
Operations research
Operations research (also referred to as operational research) is a type of
decision-making and problem-solving methodology that uses analytical
techniques (which are generally scientifically and mathematically based) to help
ultimately make better decisions. Operations research techniques include:

Network analysis – This involves identifying the different components of a
project, how long each component will take to complete, the earliest and
latest start and finish times for each component and the order in which
components can be completed. One key objective of network analysis is to
identify the critical path – the series of components which sequentially
represent the short potential duration of the project.
Network analysis can be used as a foundation for planning resources in a
cost-effective manner and identifying where bottlenecks and slack (periods
of extra time where the delay in completing a component would not impact
the overall completion time of the project) exist.

Game theory – This involves studying mathematical models of conflict and
cooperation to help make strategic decisions. Rules are specified which
represent the various choices of action available and help determine what
the potential and likely outcomes of various courses of action will be.
A number of different game theory styles exist including:

Zero-sum games – this is where one person’s gain is another’s loss –
frequently used by military strategists

Many-person (or non-zero-sum) games – these are used to study
economic behaviour where the objective is that for the greater good it
pays for parties to cooperate – e.g. in a bargaining situation.

Queuing theory – This describes using mathematical methods for
analysing and predicting the delays and congestion of waiting and queuing.
The objective is to identify ways to improve the process to make it quicker –
for example improving traffic flow, processing shipping orders more
efficiently, reducing the average time per call in a service department or call
centre and improving flow through shops, factories and hospitals.

Simulation – Simulation involves building a model that represents a real
system then conducting experiments on the model. This allows the
researcher to better understand the behaviour and evaluate different
strategies for operating the system.
The researcher can adjust input parameters to test differing hypotheses
(sometimes called ‘what-if’ scenarios) and predict future behaviour prior to
making an informed strategic decision.
Simulation is now one of the most widely used operational research
techniques which first became popular in the 1940’s when ‘Monte Carlo’
simulation was used to simulate atomic bomb raids (Monte Carlo was the
code name). It is now found almost everywhere including:

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

manufacturing – e.g. materials handling

Government – e.g. traffic control

Business – e.g. cash flow analysis
Mathematical logic – Mathematical logic is integral to most of the other
techniques described here. It is used to reflect the relationships between
the various components, variables and parameters within something that is
being modelled.
The logic is constructed so as to include an ‘objective function’ with which
different solutions can be evaluated and constraints tested that restricts
feasible values.

Mathematical optimization – In broad terms, mathematical optimization is
a technique used in management science, mathematics and computer
science to select the optical solution from a set of available alternatives.
The solution is derived by either maximizing (e.g. profit) or minimizing (e.g.
cost) a real function by systematically selecting input values from within a
feasible range.

Mathematical modelling – Mathematical modelling is a way of describing
a system using mathematical concepts and language. Defining a system
using mathematical modelling allows the researcher to better understand
the content and effect of the different components and make predictions
about behaviour.
The holistic approach adopted includes three steps:

Step 1: Develop a set of potential solutions to a problem. Note that this may
include many iterations of solution

Step 2: Analyse the alternatives derived in step 1 to identify a much smaller
sub-set of most likely workable solutions

Step 3: Apply simulated implementation to the alternatives derived in step 2
to identify and refine the best solution. If possible this should be tested out
in ‘real-world’ situations with psychology and management science
techniques playing an important role.
Due to its bias towards computational and statistical techniques, operations
research has strong ties to computer science and analytical science.
OR in practice
In practice, operations research is used by management to either:

maximise something (e.g. profit, yield, utilisation or performance); or

minimise something (e.g. loss, cost or risk).
Some other real-world examples of applying OR in practice are:

critical path analysis for project planning

routing (e.g. for transport or people)

supply chain management

scheduling

determining optimal prices
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By its nature, OR requires skilled labour which often involves the employment of
specialists. This can of course be costly so is normally seen either as an internal
department within a larger company or accessed via an outsourced operations
research bureaux.
Example: Operational Research
Prior to opening the new terminal 5 at London Heathrow airport a large number of
people were used to simulate passenger traffic for a forecast busy day. The
simulation involved testing check-in queues, visa processing, immigration control
and the baggage system
Management were able to analyse the operations including waiting times,
customer satisfaction, incidences of backlog and lost baggage in order to modify
the operations prior to the new terminal opening to the public.
Subsequently, when the new terminal 5 opened to the public all significant
operational issues were avoided.
3.7 Differences between classical and modern theories of management
Classical theories of management attempted to identify general rules of
management and organisation that should apply to all types of organisation.
Modern theories of management have successfully challenged many of the ideas
in classical management theory such as:

The classical view focused on improving efficiency without considering the
human element. For example, when Taylor’s concepts are applied the effort
of workers initially increases in intensity. However, this persistent intensity
can lead to a reduction in morale, erosion in goodwill and ultimately conflict
between labour and management.

Taylor and his scientific management concepts are often criticized for
treating humans in the workplace as machines or clones rather than
individuals. This lead to significant revolt in the mid-19th to mid-20th
centuries and an overall strengthening of unions, a trait which has
somewhat reversed in modern times.

Classical management theories become complex and difficult to apply in
larger organizations as the volume of employees expands and with it the
variety of personalities and motivations. The increased diversity of
personnel arguably better responds as a whole to more modern
approaches compared to the ‘one-size-fits-all’ classical approach.

Classical theories were developed at times of highly labour-intensive
industries and factories primarily in the manufacturing industry. This was a
period when classical theories were perhaps more suited and output
metrics could better be measured using classical techniques. Conversely,
modern business has transitioned to a much greater service orientation
where the personal touch, individualism and client service all play a much
greater role and modern human relations approaches are arguably better
suited.
However some aspects of classical management theory are still valid – for
example, a scientific management approach to improvements in efficiency has
some validity, and the ideas of Mayo have been substantially developed and
extended by more modern writers.
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Modern theories include the view that the most suitable approach to
management varies according to circumstances, and what is best in one situation
is not necessarily the best in another. Each organisation, and each management
problem, should therefore be considered according to the circumstances. This
approach to management is called ‘contingency theory’ – meaning that the best
solution will depend on the situation.
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4
MANAGEMENT SKILLS
Section overview

Time management

Stress management

Innovation and creativity

Communication

Information gathering

Negotiation

Coaching and mentoring

Leadership
Whilst earlier sections in this chapter introduced management concepts and the
context within which managers manage, we conclude the chapter by looking at some
key skills that management need in order to operate as effective managers.
4.1 Time management
Managers need to be able to manage time in order to ensure their and their
teams’ deadlines are achieved.
Barriers to effective time management include:

Procrastination (thinking about things too long without making a decision)

Ineffective delegation

Mismanaging paperwork and official documentation

Attending or organising unnecessary meetings

Failing to set priorities.
Effective time management techniques include:

Identify objectives, label tasks then prioritize:

Key tasks - urgent

Key tasks – not urgent

Not required but would like to have

Not required

Monitor the plan and take remedial action when slippage is identified

Set daily, medium-term and long-term plans

Delegate

Make appointments with oneself – time for thinking and reviewing

Us check-lists

Control interruptions

Switch phones to ‘call-divert’ and social networks or online
communication programmes to ‘unavailable’

Adopt ‘surgery hours’ – open-door time
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
Have regular meetings with clients and colleagues to prevent
‘surprises’ occurring
4.2 Stress management
Managers need to understand the symptoms of stress and try to prevent them
from arising both personally and within their team. If stress does occur it must be
managed.
Stress management is addressed in chapter 6.
4.3 Innovation and creativity
Innovation and creativity manifests in a number of ways, for example:

To identify solutions quickly and flexibly during a negotiation

To identify new ideas for products and services

To identify new markets
Sources for innovation and creativity include:

The manager’s own experience

Team brainstorming

Building mind-maps (visual note taking)

Delegating design and innovation to a specialist
4.4 Communication
The purpose of communication is to:

support management

co-ordinate plans

communicate goals, plans and structures

generate ideas

gather and provide information

manage relationships
Managers need to be able to communicate in all directions including horizontally
(with peers i.e. other similar grade managers), vertically (upwards to report to
more senior managers, and downwards to instruct or brief subordinates) and
diagonally (outside their reporting line e.g. to get help from other teams with
innovation and problem solving).
Communication was more fully addressed in the Business Communication
module.
4.5 Information gathering
Managers need information in order to perform their roles. Information arises
from a number of sources including:

Listening – useful for:

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Chapter 1: Management concepts




Getting feedback

Investigating issues or problems and to understand stakeholder
interests

Fostering positive working and stakeholder relationships
Observation

To understand processes, their interaction and effectiveness

To identify benefits and disadvantages of processes
Interviews

For example job candidates, staff, suppliers, customers

The key steps of effective interviewing include:

Plan the agenda

Prepare and identify objectives

Open the interview – clarify objectives and form first
impressions

Conduct the interview (involves listening as well as asking
appropriate questions)

Close – summarise action points and next steps plus thank the
candidate for their attendance
Questionnaires

Examples include attitude surveys (good, average, bad etc.) and
market research

The advantages of questionnaires are that they are re-usable, can be
written to avoid bias and provide statistical analysis

Disadvantages can include low response rates and restricted
responses (that don’t provide the information sought)

Managers must avoid using leading questions, closed questions and
must respect data protection laws
4.6 Negotiation
Negotiation is a skill that managers need to frequently adopt for example when
agreeing prices with suppliers or gaining buy-in from subordinates to accept
delegated work.
Negotiation is addressed in chapter 10.
4.7 Coaching and mentoring
Human resource activities such as appraisals, feedback and training planning
should be used to identify what needs to change. Coaching (short term) and
mentoring (long term) are management skills that are then used to help
implement those changes.

Coaching – short term practice aimed at improving a specific skill or
knowledge. The process includes:

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

Plan and execute a systematic learning and development programme
involving self-study, formal training courses and on-the-job training

Identify opportunities for broadening trainees’ knowledge and
experience

Account for trainees’ strengths and limitations

Exchange feedback and identify areas for further development
Mentoring

Mentoring involves establishing a long-term relationship with a
‘trusted advisor’ who is normally not part of someone’s reporting line.

This provides the mentee with a kind of career sponsorship, exposure
to a network of contacts, direction and perhaps technical advice as
well as a respected ‘listening post’.

The long-term objectives of mentoring include developing as a
person, career planning and reaching one’s potential

A mentor is often described in many ways such as old wise man,
teacher, counsellor, role model, supporter and encourager

Other psychosocial benefits to both parties include acceptance,
belonging, friendship and the existence of a role model

The techniques adopted by a manager in making the mentoring role
effective include:

actively managing the relationship e.g. making the occasional
unsolicited call to the mentee

encouraging and nurturing the mentee

interacting with mutual respect

responding to the mentee’s needs
4.8 Leadership
Effective leadership within an organisation involves:

guiding and directing others to achieve the goals of the organisation

making the best use of the knowledge, skills and talent of others in the
organisation

developing the knowledge, skills and talent of others in the organisation.
Effective leadership therefore increases the effectiveness of the organisation, by
getting the best out of employees to achieve the aims and objectives of the
organisation.
Leadership is addressed in chapter 8.
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CHAPTER
Certificate in Accounting and Finance
The business environment
2
The business environment
Contents
1 The nature of environmental influences
2 Political and legal factors affecting business
3 Macro-economic factors
4 Micro-economic factors
5 Social and demographic factors
6 Technological factors
7 Ecological factors
8 Competitive factors
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INTRODUCTION
Learning outcomes
The overall objective of the syllabus is to equip candidates with the fundamentals of
management and behavioural studies.
Management Concepts
LO 1
On the successful completion of this paper, candidates will be able to
demonstrate an understanding of the nature of management concepts
and approaches
LO 1.6.1
Describe the direct and indirect interactive forces which may affect the
organizational environment
LO 1.7.1
Explain how the external forces affect the organizational environment using
examples.
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Chapter 2: The business environment
1
THE NATURE OF ENVIRONMENTAL INFLUENCES
Section overview

The environment of an organisation

The consequences of environmental change: threats and opportunities

Understanding environmental factors
1.1 The environment of an organisation
The environment of an organisation is a term that describes anything outside an
organisation that affects what it does or how it acts. There are many influences
on an organisation that come from pressures and changes in its environment.
These environmental influences differ according to the circumstances of the
organisation.
To provide a logical structure for analysing environmental influences and their
effect on an organisation, it is often helpful to categorise these factors into
different types.
One method of analysing environmental factors is to group them into four
categories:

P – Political and legal factors

E – Economic factors

S – Social, cultural and demographic influences

T – Technological factors.
This method of analysing environmental factors is called PEST analysis.
(Concerns have grown over the last 20 years over the impact of industry on the
physical environment, for example in terms of carbon footprint and use of
resources. In modern analyses it is more common to use PESTEL analysis with
“Environmental (Ecological)” being added and “Legal” given its own heading).
A second method of analysing the environment within which a firm operates is
Michael Porter’s 5 forces model. This is covered later in this chapter. This model
identifies a firm’s industry as being a key aspect of its environment and attempts
to take into account factors that influence attractiveness of different industries.
1.2 The consequences of environmental change: threats and opportunities
Environmental factors can have a significant effect on a business organisation,
and can affect its activities and profitability. Changes in the environment might
affect the planning and other decision-making of a business organisation.
Management should monitor developments in the business environment, and
should consider how the organisation should respond to changes and
developments.
Environmental scan
PEST analysis involves considering all the environmental influences on the
organisation, recognising which are the most significant, and deciding how the
organisation should respond to these changes or developments. These
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influences can change over time. Understanding the environment should be an
on-going activity.
This type of analysis is sometimes called an environmental scan.
When making an analysis of the business environment for an organisation, the
initial task is to identify factors in the environment that create threats or
opportunities.

Threats. These are factors in the environment that might prevent the
organisation from achieving its business objectives.

Opportunities. These are developments that provide opportunities for the
organisation, so that it can achieve its objectives more successfully.
Measures should be considered for reducing or removing significant threats.
1.3 Understanding environmental factors
You need to be aware of the influence of environmental factors on the activities
of business organisations and how their decisions and actions can be affected by
changes in the environment that provide threats or opportunities.
Environmental scanning is often associated with strategic planning and strategic
information, although some awareness of the business environment is needed at
all levels within an organisation.
This chapter describes some of the environmental influences on business
organisations. You should understand, however, that it is impossible to provide a
comprehensive description of environmental factors. They differ between
organisations and according to circumstances.
Your understanding of the business environment can be improved by paying
attention to news about political and legal developments, economic conditions,
social changes and technological developments, and their potential effect on
businesses.
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Chapter 2: The business environment
2
POLITICAL AND LEGAL FACTORS
Section overview

The scope of political and legal influence on business

Sources of legal authority

Employment law

Health and safety law

Data protection law

Competition law

Consumer protection

Responding to political and legal developments
2.1 The scope of political and legal influence on business
Politics and the law have an extensive influence in business affairs, and political
decisions and changes in the law can affect just about any aspect of business
activities. Multinational companies have the additional problem that because they
operate in many different countries, their activities may be affected by political
conditions and legislation in each of the different countries.
Here are just a few examples of political and legal factors that might affect
business.

Nationalisation of industry and privatisation. In some countries, industry
is nationalised and owned wholly or partly by the state (the government).
Occasionally, after a change of government, an incoming government
decide to nationalise a business and take ownership of existing commercial
business into ownership by the state. In other cases, a government might
introduce a policy of de-nationalising an industry (‘privatising the industry’)
and transferring ownership of state-owned businesses to commercial
companies.

Transport and infrastructure. Businesses rely on the transport system to
move their goods (and employees), and the quality of the road transport
system depends on the infrastructure of roads. Although the transport
system might be operated by commercial companies, most of the road
network and possibly also the rail network are state-owned. Government
policy on transport and building roads or rail networks can have an
important effect on business activity.

Education. In most countries the government is responsible for most of the
education system. Education policy affects the quality and skills of
individuals who make up the workforce of business organisations.

Environmental policy. Business organisations might be affected by
changes in the environmental policy of a government, such as policy to
reduce levels of pollution in the air, water or land.

Taxation and subsidies. Governments use taxation to raise income. They
might also use taxation to influence behaviour, such as increasing tax on
fuel in order to encourage a reduction in fuel consumption and increasing
tax on the disposal of waste in order to encourage the recycling of waste.
Governments sometimes encourage particular activities by offering
subsidies, such as subsidies towards the cost of particular skills training.
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Here are some illustrative examples of how business can be affected by
government policy and the law.
Example:
In 2007, oil companies operating in the Orinoco region of Venezuela were
required by the government to hand over majority ownership in their businesses
to the state (the government).
Example:
In 2007, a large shipment of corn to Europe from the United States was found to
include genetically-modified corn. Although this was legal in the US, it was illegal
in the European Union. The shipment had to be returned to the US.
2.2 Sources of legal authority
Business organisations need to recognise the different sources of legal authority
that have the power to introduce changes in the law. The sources of legal
authority vary between countries, but usually include the following:

Supranational bodies

National government

Regional or local government that exercises some powers either because it
has some independence from the national government or because some
powers have been delegated to the regional government by the national
government.
Supranational bodies
A supranational body has responsibility or oversight of more than one country. A
supranational body in some cases has the power to impose decisions on a
national government. To have the ability to impose its rules, a supranational body
needs the formal support of national governments.

In the European Union, the member countries accept that legal measures
introduced by the European Council must be introduced into the national
laws of each member country. (European Directives approved by the
European Council must be incorporated in the national laws of each
member country.) A supranational body such as the European Commission
also has the power to impose certain decisions, including decisions relating
to various business matters such as takeovers and monopolies.

In accounting, the International Accounting Standards Board is able to
impose standard rules for financial reporting on companies in every country
whose governments have agreed that these international accounting
standards should be applied.

Some supranational bodies attempt to influence activities in many countries
but do not have the right to enforce their wishes. Examples are the United
Nations and the World Bank.
2.3 Employment law
Each country has employment laws. The purpose of employment law is mainly to
provide protection to employees, against unfair treatment or exploitation by
employers. Business organisations, as employers, are directly affected by
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employment laws. They need to be aware of the employment law in each country
in which they operate, and understand the consequences of breaking the law or
failing to comply with regulations.
Here are some of the aspects of employment law.

Minimum wage. A country might have a minimum wage, which is the
minimum hourly rate of pay that may be paid to any employee.

Working conditions. A variety of laws and regulations might specify
minimum acceptable working conditions, such as maximum hours of work
per week or month. There might also be laws relating to a maximum
retirement age and the employment of children. Working conditions are
also covered by health and safety law.

Unfair dismissal. Employment law might give employees certain rights
against unfair dismissal by an employer. An employee who is dismissed
from work might bring a legal claim for unfair dismissal. The employer must
then demonstrate that although the employee has been dismissed, the
dismissal was not for a reason or under circumstances that the law would
consider ‘unfair’. When an employer is found guilty of unfair dismissal, it
might be required to reemploy the individual who has been dismissed or
(more likely) pay him or her substantial compensation.

Redundancy. In some countries, dismissal of employees on the grounds of
redundancy is not unfair dismissal, provided that discrimination is not
shown in the selection of which individual employees should be made
redundant. However, a country’s laws may require an employer to consider
transferring an employee to another job before deciding that redundancy is
unavoidable. Failure to consider transferring employees to other work
would mean that the dismissals for redundancy are unfair.

Discrimination. Some countries have extensive laws against
discrimination, including discrimination at work. For example, employers
might be held legally liable for showing discrimination against various
categories of employee (or customer) and also for discrimination shown by
employees against colleagues. There are laws against discrimination on
the grounds of physical disability, gender, race, religion, sexual orientation
and age.
Changes in any aspect of these employment laws could have significant
implications for business organisations, especially those where labour costs are a
significant proportion of total costs.
2.4 Health and safety law
Health and safety law provides rules and regulations about minimum health and
safety requirements that employers must provide in their place of business and
for their employees. Standards of health and safety law vary substantially
between countries, although in countries with well-developed economies, health
and safety standards are usually high.
Laws vary between different countries, and you should try to become aware of
how the law applies in your own country. It is also important to recognise that
health and safety regulations can impose significant requirements on employers,
and the legal consequences of failure to comply with the regulations could be
serious for the company or the directors, managers or employees responsible.
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In some countries, employers are required by law to provide a safe workplace for
their employees. A safe workplace is one where employees are not exposed to
unreasonable physical dangers or unreasonable risks to health. In some
countries, this also means a place of work where employees are not subjected to
discrimination or bullying. Risks to health and safety should be reviewed
regularly, by means of formal risk assessments.
In addition to general laws about health and safety at work, there should also be
detailed regulations specifying the minimum health and safety standards in
particular types of industry or business, or particular types of business premises.
For example, there should be specific minimum fire regulations for all buildings in
which employees work. There should also be minimum health and safety
regulations in particular industries, such as transport, food processing, building
and construction and chemical processing.
There might also be voluntary health and safety codes that the government
encourages but does not enforce as a legal requirement.
In a company, the board of directors has the ultimate responsibility for health and
safety at work. Specialist health and safety officers might be employed by the
company.
2.5 Data protection law
Some countries have fairly strict data protection laws. The purpose of data
protection law is to protect individuals with regard to personal data about them
that is held and used by other persons. Data protection legislation is designed to
protect the private individual against others collecting, holding and using
information about them without their permission. (The legislation does not apply
to companies, however. On the contrary, it is generally argued that more
information, rather than less, should be available about many companies.)
It might be considered illegal, for example, that any organisation should be able
to:

gather and hold personal data about individuals without a justifiable reason,
and

make use of that personal data without the individual’s permission.
Someone holding and using personal data about individuals should also be under
a legal obligation to:

make sure that the personal data is accurate, and

ensure the security of the data, so that it is not made available to or
accessed by any other person who does not have any right to have it.
Data protection laws apply to any person holding personal data about individuals.
This includes business organisations, which hold personal data about employees
and (often) customers.
What is personal data?
Legal definitions of personal data vary but typically personal data means any
data about a living private individual, where the individual can be identified
from the data. Normally this means that the personal data held about an
individual should include his or her name, although this might not be essential.
Law typically also makes a distinction between ordinary personal data about an
individual (such as name and address) and sensitive personal data. Additional
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Chapter 2: The business environment
legal requirements apply to holding and using sensitive personal data, such as
details of a person’s ethnic origin, political opinions, religion, trade union
membership, physical and mental health.
In many countries, anyone holding personal data about individuals must register
this fact with a government department, and provide details of the type of
information they hold and the reasons why it is used.
Note also that data protection legislation applies only to particular categories of
information that are regulated by the legislation. There is no legislative protection
for non-regulated data. For example, information about an individual’s consumer
preferences is not regulated data. An individual might tell a market research
group that he prefers black cars to blue cars, and prefers chocolate to potato
chips. This type of information is outside the data protection legislation.
Legal restrictions on obtaining and using data
Organisations that hold and use personal data about individuals are required to
comply with regulations relating to how the data is gathered, stored, kept secure
from unauthorised access and used.
Failure to comply with the regulations could expose an organisation to legal
action by the individual concerned and/or the authorities.
Principles of data protection and security
The main principles of data protection and security include:

Personal data must be obtained and processed fairly and lawfully.
Often this means that the individual must have given his consent for
personal data about him to be held and used. Sometimes, it is lawful to
hold and use personal data for specific reasons, for example in connection
with performance of a legal contract (including a contract for the purchase
and supply of goods or services) or to comply with the requirements of
employment law on employers.

Personal data should be obtained only for one or more specified
reasons. It is illegal to obtain and store personal data without having a
specific purpose for which the data will be used.

Personal data gathered and stored about individuals should be
accurate, relevant and not excessive. An organisation could be legally
liable for holding or using personal information about an individual that is
not accurate.

Data should not be held for longer than is necessary for its purpose.
When personal data no longer has a use, it should be destroyed.

Personal data should be processed in accordance with certain
specific rights of individuals. For example an individual has a right to
object to the use of personal data being used for direct marketing by a
business organisation, and has the right to ask an organisation to stop
sending him direct marketing materials (such as brochures or e-mail
marketing messages). In addition, any individual should have the right to
access and check personal data that is held about him.

Personal data that is held about individuals should be kept secure.
Unauthorised access to this data should be prevented (as far as is
reasonably possible).
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
Personal data cross border transfer guidelines. Personal data should
not be transferred to any country where the standards of data protection
are not as strict (or stricter).
Business organisations in countries where strict data protection laws apply
should keep data processing systems under review, to ensure that:

the rules about gathering, holding and using personal data continue to be
applied, and that the regulations are not being broken, and

personal data is kept secure from authorised access.
This task can be much more difficult than it might seem, given that the law
applies to personal data held unofficially as well as in formal data processing
systems. For example it includes personal data about individuals in e-mails or email attachments. To apply the data protection laws properly, it is therefore
necessary to educate all employees in the requirements of the law and try to
ensure that all employees comply with legal requirements.
2.6 Competition law
Some countries have laws to encourage fair competition in markets and avoid
anti-competitive practices.
Monopolies
There might be a law to prevent a company from acquiring monopoly control over
a market. A ‘monopoly’ of a market is theoretically 100% control of a market,
where only one entity supplies a product or service to the entire market. In
practice, ‘monopoly’ is usually defined as a significant influence, such as control
of over 30% of the market.
When a company has a monopoly of a market, it might engage in unfair business
practices, such as charging higher prices than they would be able to charge in a
more competitive market. The serious risk of anti-competitive behaviour from
monopolies is the main reason for laws restricting them.
When a company grows to the point where it becomes a monopoly, a
government organisation might carry out an investigation, with a view to deciding
whether measures should be taken to protect the public.
Similarly, when two companies propose a merger that would create a new
monopoly, a government organisation might investigate the proposed merger
with a view to recommending whether it should be allowed to happen, and if so
whether any conditions should be placed on the merger in order to protect the
public.
Anti-collusion regulations
Collusion occurs when two or more business entities secretly agree to do
something for their mutual benefit that is against the public interest. Typically it is
a secret agreement to raise prices, and avoid competition on process. In many
countries, collusion is a criminal offence.
Price controls
In some countries, the government might impose price controls on certain key
products or services, such as the price of essential services to consumers –
water, electricity or gas. Official bodies might be established to monitor the
activities of ‘utility companies’ (providers of water, sewage, electricity and gas
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Chapter 2: The business environment
services) and might have powers to restrict their activities. Official approval might
also be required for any increase in prices.
2.7 Consumer protection
Most countries have legislation in place that aims to protect consumers of goods
and services. These measures include contract law and sale of goods legislation.
Contract law
A contract is a legally binding agreement between two ‘parties’. When a contract
is made, each party is obliged to carry out his part of the agreement. If one party
fails to do what was agreed in the contract, the ‘injured party’ can take legal
action for breach of contract.
This is important in consumer protection as each party knows their respective
rights and obligations and what might happen if they do not satisfy their
responsibilities.
The detail of contract law will vary in different jurisdictions but usually there are
three key elements of a simple legal contract:

offer and acceptance

an intention to create a legal relationship (a binding contract)

consideration (what each party gives the other in the contract)
A general legal principle is that the parties to a contract are free to enter into an
agreement without the interference of the law, and to decide the terms of the
contract between themselves. This is known as the concept of freedom of
contract.
There are however some specific areas where this freedom of contract may not
apply:

Employment contracts are usually governed largely by employment
legislation.

‘Standard form contracts’ are contracts where the terms are stated to the
consumer on a take it or leave it basis. The consumer does not have an
opportunity to negotiate terms. Contracts between consumers and large
commercial organisations are nearly always of this kind, such as contracts
for the domestic supply of water, electricity and gas.
Sale of goods legislation
Such legislation usually specifies that in contracts for the purchase of goods (or
services) there are certain terms in the contract that a consumer may rely on. For
example:

Title – The buyer is entitled to assume that the seller of goods actually
owns them (i.e. has title to them).

Description of goods – The buyer is entitled to assume that any good they
purchase correspond to a seller’s description of those goods.

Quality – All goods supplied in the course of a business must be of
satisfactory quality. This means that they must be satisfactory for the
purpose intended. If a person buys a washing machine that does not work
the seller must repair it, replace it or pay a refund to the customer.
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2.8 Responding to political and legal developments
Business organisations need to recognise the significant political and legal
factors that affect their business, and they have to decide how these factors
should affect what they do. They should be alert to:

changes or potential changes in each of these factors, and

changes in the significance of each factor, including the growing
importance of factors that were previously relatively unimportant.
Lobby groups
Large companies often use lobby groups to represent their interests by
communicating with politicians and government officials. A lobby group is a group
of individuals or a specialist firm that actively represents the interests of a
company with politicians, government bodies and government officials.
In some countries, companies use specialist firms to represent their interests by
speaking to politicians and government officials.
Lobby groups can help companies to argue either for or against proposed
changes in the law, and to get politicians and government officials to understand
the interests of the companies they represent.
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3
MACRO-ECONOMIC FACTORS
Section overview

Macroeconomics and macroeconomic policy

Measuring activity in the national economy

The economic cycle

Impact of inflation

Impact of unemployment

Impact of economic stagnation

International payments and international payments disequilibrium

National economic policies

International economic policies

The impact of economic policy measures
3.1 Macroeconomics and macroeconomic policy
Economics is the study of the choices made by societies and by individuals and
firms. Individuals and societies make use of limited economic resources (’scarce
resources’) to satisfy needs and wants. The subject of economics might be split
into:

Macroeconomics; and

Microeconomics
Macroeconomics
Macroeconomics is the study of whole economies rather than individual buyers,
sellers and firms. It is the study of the total economy or aggregate economy. It is
concerned with issues such as employment and the level of unemployment, the
amount of economic wealth that is created (measured by national income) and
economic growth, and the rate of inflation.
It is more usual to study macroeconomics at a national or a regional level, but
macroeconomics can also be studied at a global level.
Microeconomics
Microeconomics is concerned with the study of economic choices by individuals
and firms, and how individual economic decisions are driven by prices, costs and
‘satisfaction’.
There are links between macroeconomics and microeconomics. For example, if
the level of unemployment in a national economy is very high, this will affect the
availability of additional labour for individual firms within the economy.
Economic policy
A government develops a macroeconomic policy. The aim of government
economic policy is normally concerned with objectives such as achieving
economic growth, full employment, stable prices and a sustainable balance of
payments.
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Developments in the national economy, and government policy to influence the
state of the national economy, can have an important effect on businesses and
individuals (who are often referred to in economics as ‘households’).
3.2 Measuring activity in the national economy
‘National income’, ‘gross national product’ and ‘gross domestic product’ are all
measures of total economic activity during a given time period, usually one year,
for a particular country (or region). At this stage in your studies, you need not be
concerned about the technical differences in how each is measured.
There are three broad approaches to the measurement of total economic activity
during a given time period:

Expenditure approach. One way of measuring economic activity is to
calculate the total amount of spending there has been in the economy. This
includes spending on consumption by individuals and firms, spending on
capital investment and government spending.

Income approach. Another way of measuring economic activity is to
calculate the total income that has been earned by everyone in the
economy during the period, such as income earned by individuals and
profits earned by companies.

Output approach. A third approach to measuring economic activity is to
measure the value of output by all industries and other economic activity.
This includes service industries as well as agricultural, mining, construction
and manufacturing industries.
We do not need to go into the detail of how national income or gross national
product is calculated using each of these approaches. In practice, the three
approaches produce different ‘answers’ because of the problems of government
statisticians in collecting complete and accurate data. In principle, however, the
three approaches to calculating national income should all produce the same
figure.
The expenditure approach to calculating economic activity
The expenditure approach to the calculation of national income or gross national
product can be presented as a fairly short equation. This equation provides some
insight into how a national economy can grow, and key factors that affect
economic growth.
Economic activity = C + I + G + (X – M)
where:
C = the amount of consumption on goods and services
I = the amount spent on investment in long-term assets
G = the amount of government spending
X = the amount of exports of goods and services
M = the amount of imports of goods and services
(X – M) is the difference between exports and imports of goods and services, and
this is sometimes referred to as the balance of payments.
Economic activity in this formula is sometimes called total demand or aggregate
demand (AD) in the economy.
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Government economic policy aims
The main aim of government economic policy is usually to increase economic
wealth and achieve something close to full employment. If economic growth and
full employment are achieved, the wealth of the country as a whole will increase,
and everyone benefits. A government economic policy aim is therefore to
increase aggregate demand in the economy, and achieve a steady annual
growth in national income.
Economic activity, and so economic wealth, is increased as a result of an
increase in any of the items in the equation above. AD is increased by any
increase in consumer spending, investment, government spending or increase in
the balance of payments (X – M). However, the issue is not so simple, because
increases in any item in this equation might lead to a reduction in other items. For
example:

An increase in government spending G provides an increase in national
income, but if the extra government spending comes from higher taxation,
and the higher taxation leads to falls in consumption C and investment I,
the end result might not be beneficial.

Similarly an increase in consumption will provide an increase in national
income, but the extra money spent on consumption might be diverted from
spending on investment (so I will fall), or the goods might be purchased
from other countries (so M will increase) or might be goods that would
otherwise have been exported (so X will fall).
A link between national income growth and inflation
Another problem is that there are limits to the annual rate of increase in national
income that can be achieved. A country should be able to increase the total
output from its economic activities, but does not have the resources to grow in
‘real terms’ above a certain rate.
For example, national income can be increased by getting more unemployed
people into work, because these individuals will then become productive and will
create economic wealth. However, reducing unemployment by 1%, say, is
unlikely to increase national income by more than 1%. National income can also
be increased by introducing more new technology into business: however, the
introduction of new technology takes time, and will only help to improve national
income gradually.
When total spending in the economy increases at a faster rate than the economy
can grow in real terms, the inevitable result is price inflation. For example, if
national income (as measured by total expenditure in the economy) grows by 8%
but the ‘real’ economy – for example actual output of goods and services –
increases by just 2%, the difference of 6% must be inflation – higher prices rather
than higher output.
3.3 The economic cycle
The economic cycle is a term used to describe how, in general, the national
income of a country increases or fall from one year to the next.

When national income increases from one year to the next, there is
economic growth.

When national income falls from one year to the next, there is economic
recession (or in extreme cases, economic decline).
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An economic cycle consists of several years of economic growth, with national
income each year being higher than in the previous year, following by economic
recession, which is a period of years during which national income is falling.
Government economic policy usually tries to achieve continued economic growth,
but if recession becomes unavoidable, policy is then aimed at making the
recession as short and as minor as possible.
3.4 Impact of inflation
Inflation is the increase in price levels over time. The rate of inflation is measured
using one or more price indexes or cost indexes, such as a consumer prices
index or a retail prices index or an index of wages costs.
Businesses are affected by inflation, because inflation means that they have to
pay more for resources, such as materials and labour. They will try to pass on
their extra costs to their customers, by raising the prices of their own goods and
services. Individuals have to pay higher prices for goods and services, so they
need more money to pay for them. If they are in work, they might demand higher
wages and salaries.
The ‘inflationary spiral’ can go on indefinitely, with increases in materials and
wages pushing up prices of finished goods, which in turn leads to higher wages
and materials costs.
It is also recognised that the rate of inflation is affected by inflationary
expectations. This is the rate of inflation that businesses and individuals expect
in the future. Inflationary expectations affect demands for wage rises, and
decisions by businesses to raise their prices.
Implications of high inflation and inflationary expectations for the national economy
Inflation also has implications for the national economy and economic growth.

Increases in national income are the result of two factors:

an increase in the ‘real’ quantity of goods and services produced and
the ‘real’ spending on goods and services, and

increases due to higher prices and costs.

It is possible for measured national income to increase when the real
economy is in recession. For example, suppose that measured national
income increases from one year to the next by 3% but inflation during the
year was 5%. This indicates that the ‘real’ economy has gone into
recession, and is 2% lower.

Experience has shown that when the rate of inflation is high, and
inflationary expectations are high, the ‘real’ economy is likely to stagnate or
go into recession.
A government might therefore take the view that some inflation is unavoidable
(although in some countries there has been deflation – a fall in retail prices).
However, the rate of inflation and inflationary expectations should be kept under
control, to give the ‘real economy’ an opportunity to grow.
Implications of inflation for the distribution of wealth
However, although some inflation might be unavoidable, it has unfortunate social
and economic implications, because it results in a shift of economic wealth.
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
In a time of inflation debts such as bank loans fall in real value over time.
Borrowers gain from the falling real value of debt. At the same time, lenders
and savers lose because the value of their loan or savings falls. For
example, an individual with cash savings might be earning 3% after tax
when inflation is 5%: if so he is losing 2% in real terms each year. The
effect of inflation is therefore to shift wealth from savers and lenders to
borrowers.

Another effect of inflation is to reduce the real value of households on fixed
incomes or incomes that rise by less than the rate of inflation each year,
such as many pensioners. The rich might get richer (because their income
is often protected against inflation, for example by salary rises) whilst the
poor get poorer.
3.5 Impact of unemployment
When there are many people who are unwillingly out of work, this means that
there are not enough jobs for the people who want them. Business organisations
(‘firms’) could take on more labour if they wanted to, but they choose not to.
When there is economic recession and demand for goods and services is falling,
many firms will make some employees redundant because their profits are falling
and some aspects of their business are no longer profitable.
High levels of unemployment are unwelcome in an economy because:

individuals who want jobs cannot get them (and high unemployment is
damaging to society and the welfare of the people)

economic growth is less than it could be: if the unemployed individuals
could be given work, output in the economy would increase and there
would be economic growth.
A very low level of unemployment might also be unwelcome because:

firms that want to take on more labour might struggle to find suitable
people, and

the shortage of labour might push up the cost of wages and salaries.
An additional problem is that although the level of unemployment might be high,
there could be a shortage of skilled labour. As the technological complexity of
industry increases, the demand for low-skilled jobs might fall even as the demand
for skilled labour rises. A shortage of skilled labour can only be overcome
through:

better standards of education

more training

if necessary, moving jobs to other countries where there is a better supply
of skilled labour.
Types of unemployment
Unemployment can be analysed into categories. These are some categories that
might be used for analysis.

Transitional unemployment. This happens when an employee has left
one job in order to start at another. If there is a gap of time between leaving
one job and starting the next, this is transitional unemployment. For
example, a teacher might leave a job at one school in order to start at
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another school in three months’ time. During the three month gap, unless
one of the schools pays him, he is transitionally unemployed.

Frictional unemployment. This is short-term unemployment when
individuals are dismissed from their work, for example because they have
been made redundant or because they did not like the job they were doing.
It might take them a little time to find a new job. Until they do, they are
unemployed. However, the unemployment should not last long.

Structural unemployment. This is unemployment that arises because of a
significant change in the structure of the economy, and in particular decline
and collapse of industries that used to be major employers. For example,
there might be structural unemployment because the mining industry used
to employ many people, but is now in decline. When an industry goes into
decline and large numbers of people are made unemployed, the
consequences can be very serious. Finding new jobs in other industries for
all the unemployed workers can take a very long time. There might be a
demand for labour in other industries and other parts of the country, but the
unemployed people available for work are of the wrong type, and have the
wrong skills, or are in the wrong part of the country and do not want to
move their home.

Technological unemployment. This occurs when technological changes
mean that some types of workers are no longer needed, so that large
numbers are made redundant. The new technology replaces manual
labour. This can happen when manufacturing processes are automated.
Technological unemployment can add to structural unemployment.

Regional unemployment. This is unemployment in a particular region of
the country. Levels of unemployment can vary from one region to another,
especially when there is no mobility of labour and individuals are reluctant
to move to other regions to find work.

Seasonal unemployment. This is unemployment, often within a particular
industry, because the demand by firms for labour is higher at some times of
the year than at the other. For example, the demand for agricultural labour
might be very seasonal, and there might be high levels of unemployment in
the industry in the low-season periods.

Cyclical unemployment. When the national economy is growing, demand
for labour increases and unemployment should fall. When the economic
cycle goes into recession, the demand for labour falls and unemployment
increases. Governments try to deal with cyclical unemployment by
managing the economy and trying to achieve real economic growth.
3.6 Impact of economic stagnation
Economic stagnation occurs when national income is not increasing, but
economic activity is at a much lower level than it could be. Economic growth
should be possible, but is not happening.
A feature of economic stagnation is underused economic resources, such as land
and capital equipment. Unemployment is high and there is little or no new capital
investment. Companies do not want to invest large amounts of money, because
they see no way of making a satisfactory return.
When a country or region of the world suffers from economic stagnation when
other countries are enjoying economic growth, it is becoming poorer relative to
those other countries. Households may therefore live in relative poverty, and
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many individuals might look for ways of migrating to other countries where
economic wealth is greater.
Depressed countries of the world that suffer from economic stagnation often
need help from wealthier countries to develop their national economies.
Worldwide economic recession: protectionism
When the rate of economic growth in the world as a whole is falling, individual
countries might still try to increase their own national income. However, if the
world economy is not growing, any increase in a national economy has got to be
at the expense of other national economies.
This can create a risk of ‘trade wars’ and ‘protectionism’. Protectionism takes the
form of government measures to discourage or prohibit imports of foreign goods.
In many countries, some industries are protected against foreign competition by
government measures against imports, such as:

the imposition of high import taxes on goods coming into the country

setting quota limits on the amount of goods that can be imported

putting a ban on imports of some types of goods.
Attempts to promote ‘free trade’ internationally are promoted by the World Trade
Organisation (WTO).
3.7 International payments and international payments disequilibrium
International payments
International payments are the flows of money between different countries. The
main elements of international payments are:

payments arising from international trade in goods and services (which
might be referred to as the ‘balance of trade’ or ‘balance of payments’), and

movements of capital between countries.
For every country:
Surplus or deficit on trade in goods and services = Net outflow or inflow of capital
For example, if a country has a surplus of $10 billion on its foreign trade in goods
and services; it also transfers $10 billion in capital flows to other countries.
Similarly a country with a deficit of $25 billion on its trade in exports and imports
receives net transfers of $25 billion in capital.
International payments and foreign currencies
Payments between different countries (unless they are in the same currency
area, such as the Eurozone in Europe) give rise to an exchange of currencies.
Here are just two examples.

A Pakistani company buys goods from a US supplier and agrees to pay in
US dollars. There is an international payment in dollars from the Pakistani
buyer to the US supplier. To make the payment, the Pakistani buyer has to
arrange with a bank to buy US dollars in exchange for Pak Rupee in order
to make the payment. The trade in goods leads to a transaction in Pak
Rupee/US dollar.
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
A German investor decides to invest capital in the US. There are different
ways of investing. One is to buy shares in US companies or US
government bonds (‘Treasuries’). To make these investments, the German
investor has to pay for them in US dollars. To obtain the dollars to make the
purchase, he has to sell some Euros. The international investment
therefore leads to a transaction in Euros/US dollars.
International payments disequilibrium
In an ideal world economy, each country would achieve equality between the
value of its exports and the value of its imports. When this happens, there is also
equality between inflows and outflows of capital. In practice, however, this ideal
state is never achieved:

There are always some countries that have a surplus on their balance of
payments between their exports in goods and services and their imports.

There are always some countries that are net recipients of international
capital, and some who transfer capital to other countries.
Disequilibrium in international payments occurs when these imbalances between
balance of trade and international capital flows become excessive. This is the
current situation at the time of writing, with regard to the United States and China
in particular.

The United States has a very large balance of payments deficit in its trade
in goods and services. It imports far more than it exports. This huge deficit
is financed by capital investments in the US dollar by other countries,
particularly China.

China has a very large surplus in its balance of trade in goods and
services, exporting far more than it imports. This huge surplus is invested in
other countries, particularly the US. Investments in the US include
purchases of US government debt (Treasury bonds).
A serious concern is that such a large disequilibrium in international payments
cannot continue indefinitely. There will presumably come a time when people and
governments in other countries will decide to stop investing in US dollar capital
assets. If the capital flows into the US fall, the US will have to cut its balance of
payments deficit in goods and services. If the US stops importing goods and
services from other countries, this could have a devastating effect on the
economies of exporting countries and on world trade generally.
Foreign exchange rates and international payments disequilibrium
In theory disequilibrium in international payments could be rectified by a change
in foreign exchange rates, and a fall in the exchange value of the currency of
countries that have a deficit in their balance of payments in goods and services.
If there is a fall in the value of the exchange rate, a currency becomes cheaper
relative to other currencies.

Exports from the country therefore become relatively cheaper and buyers in
other countries will buy more of them.

Imports from other countries become relatively more expensive. Domestic
buyers will therefore buy fewer imported goods (and might switch to buying
more domestically-produced goods).

If exports go up and imports fall, the balance of payments position in goods
and services will improve.
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However, a very substantial change in foreign currency exchange rates is
needed to rectify a very large disequilibrium in international payments.
Example:
There is considerable concern about the international payments disequilibrium
affecting the US and China in particular. The probability of a substantial fall in the
value of the dollar is quite high, but the consequences would be hugely damaging
for international trade and the world economy.
However, the value of the dollar is sustained by the willingness of foreign
investors to buy dollar assets, and maintain the international payments
disequilibrium.
A fall in the value of the dollar would also damage the wealth of foreign investors
in the dollar. For example, suppose that a German investor buys US assets
costing $100 million when the exchange rate between the dollar and the euro is
€1 = US$1. The investment would cost €100 million and would be worth $100
million.
Now suppose that there is a sharp fall in the value of the dollar, so that €1 =
US$2, and there is no change in the dollar value of the investment. To the
German investor the investment is still worth US$100 million but if he cashed it
in and exchanged the dollars back into euros, he would receive only €50 million.
He would have lost €50 million. The loss to the German investor would be a
capital gain to the US.
3.8 National economic policies
A national government has responsibility for economic policy, and the aims of a
country’s economic policy are usually economic growth and possibly also full
employment. Economic growth is usually given priority, because a reduction in
unemployment should follow on from economic growth.
Economic growth should be ‘real growth’. Some inflation is probably unavoidable
in order to achieve economic growth, but real growth is achieved if the increase
in national income each year exceeds the rate of inflation. Although a
government has an ultimate economic objective – sustainable growth and full
employment – it needs to establish intermediate economic targets. In other
words, in order to achieve economic growth it might be necessary to achieve
some other economic targets first, such as:

a low rate of inflation: with high inflation there is a risk of economic
recession and also a fall in the exchange rate for the country’s currency

a stable exchange rate (or a target exchange rate against major world
currencies such as the US dollar or euro).
Fiscal policy
Fiscal policy is government policy on taxation, spending and government
borrowing. Government spending is a part of national income, but in order to
spend a government must raise the money in tax, and borrow any excess of
spending over tax revenue.
A government might also try to encourage investment by the private sector
(companies). It can try to do this by offering special tax incentives or subsidies
(cash payments) to encourage private sector investment in state investments,
such as the state transport system, and state schools and hospitals.
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Monetary policy
Government uses monetary policy as well as fiscal policy. Monetary policy
involves trying to establish monetary conditions that will be favourable to
economic growth.
In the US, Eurozone, UK and Pakistan, monetary policy is similar. The
government seeks to encourage long-term economic growth by keeping the rate
of inflation within limits. The rate of inflation is managed through control over
interest rates.
The effect of managing interest rates
In the US, Eurozone, UK and Pakistan the management of interest rates is the
responsibility of the central bank. The central bank is able to control short-term
interest rates (on the dollar, euro, sterling, or PKR respectively) and can raise or
lower interest rates as it considers appropriate.
If the central bank is concerned about rising inflation, it can raise short-term
interest rates. When the central bank raises its own interest rates, other
commercial banks do the same to their interest rates.
There is then a transmission mechanism that slowly works through the national
economy. The effects are by no means immediate, and a change in interest rates
could take months, if not two years or more, to have an eventual effect. In
principle, however, higher short-term interest rates will mean that borrowers have
to pay more interest to borrow.
Higher short-term interest rates could eventually lead to higher long term
investment rates, and the market value of investments in shares and bonds might
fall. Higher borrowing costs might make some individuals and companies less
willing to borrow. If individuals are borrowing less and everyone feels less
wealthy, spending on consumption will also fall (both domestically-produced
goods and imports). All these changes might take some of the inflationary
pressures out of the economy.
Example:
When a government is satisfied that inflation is under control, but is dissatisfied
with the slow rate of economic growth, it might consider several measures to
boost the economy in order to increase national income and reduce
unemployment.

It might use fiscal measures. It could borrow money and spend the money it
has measured in order to invest in economic activity, such as new capital
projects (a new railway line or a new runway at the country’s main airport).
Higher government spending in order to increase economic activity is
sometimes referred to as ‘Keynesian economics’ after the famous 20th
Century economist John Maynard Keynes.

It might use monetary measures. If it manages the economy through
interest rates, it would reduce short-term interest rates. In time, this would
work through the economy (by means of the transmission mechanism).
Eventually, there might be more consumption spending and investment in
capital projects.
Economic policies to achieve social or environmental objectives
It is worth remembering that governments sometimes use economic policies to
achieve political, social or economic objectives.
For example, the countries of the United Nations might agree to a trade embargo
with a specific country, in order to persuade that country to change its policies.
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An example is the UN trade embargo against Iran from 2006, which was intended
to persuade Iran to abandon its nuclear power development programme.
Governments might also try to discourage unhealthy behaviour through taxation,
for example by imposing high levels of taxation on tobacco (smoking).
Example:
In 2007, the US government tried to persuade the World Trade Organisation to
issue a ban on subsidies for deep sea fishing. The purpose of such a ban would be
to make deep sea fishing less profitable, and so help to preserve the world’s
stocks of deep sea fish.
3.9 International economic policies
Wealthy economic nations recognise the need to help poorer countries to
develop their economies and efforts are made (with varying degrees of success)
to provide help. Much help is provided through supranational organisations such
as the World Bank (however, international aid is provided in a variety of ways).
When a supranational organisation develops a policy for providing economic aid
to developing countries, the main policy targets are often as follows:

Investment in infrastructure, such as roads and railways and investment in
the development of systems of telecommunication and for supplying energy
and water (dam construction, irrigation systems and so on).

Investment in education and health, to improve standards of the national
labour force.

Capital investment in particular industries. This could involve investment in
the development of major industries or in providing economic support to
small producers, such as small farmers. If there is investment in economic
infrastructure, and improvements in labour skills, multinational companies
might become interested in increasing their investment in the countries
concerned.
3.10 The impact of economic policy measures
Macroeconomic policies of government, and changes in the condition of the
national and world economies, affect businesses and individuals directly.
As you should imagine, firms and individuals will react to economic changes
according to the circumstances and the nature of the change.
Example:
The government raises tax on income from 20% to 25%. How would you expect
individuals or households to react?
Answer
Higher taxation means less after-tax earnings for spending. Individuals must
either reduce their consumption or borrow more. In practice, at least for the short
term, they might do both.
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Example:
The government increases interest rates from 4% to 5%. How would you expect
companies to react?
Answer
Companies are only affected if they borrow money at a variable rate of interest
from their bank, with a bank loan or overdraft.
After a large increase in interest rates, they might try to borrow less (but reducing
borrowings might take some time). They might try to pass on some of the higher
costs to customers by raising the prices of their products or services. Or they
might try to cut some costs, such as reducing labour costs by making some
employees redundant.
Example:
A company believes strongly that the national economy will grow strongly in the
next few years, and that profits in its own industry and markets will grow. What
do you think the company should do?
Answer
The company should review its strategic position, and consider increasing its
investment in the industry.
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4
MICRO-ECONOMIC FACTORS
Section overview

Introduction

Demand and supply

Cost

Income of customers

Other factors influencing price

Price elasticity of demand

Elastic and inelastic demand

Elasticity and price setting
If you have studied economics, you should be familiar with the content of this section of
the chapter, and can move on immediately to the next section.
4.1 Introduction
Microeconomics is concerned with the behaviour of individuals within an
economy. This refers to people and firms who are both buyers and sellers.
Microeconomics is a branch of economics that studies the behaviour of how the
individual modern household and firms make decisions to allocate limited
resources. It is an attempt to explain and understand what drives buying and
selling decisions. Microeconomics examines how these decisions and behaviour
affect the supply and demand for goods and services, which determines prices,
and how prices, in turn, determine the quantity supplied and quantity demanded
of goods and services.
Microeconomics also deals with the effects of national economic policies (such
as changing taxation levels) on these aspects of the economy.
Macroeconomic theory is often based on basic assumptions about micro-level
behaviour
4.2 Demand and supply
According to basic microeconomic analysis, the sales price for a product in a
market is determined by demand and supply.

Demand is the volume of sales demand that will exist for the product at any
given price. As a normal rule, sales demand will be higher when the price is
lower. If the price rises, total sales demand will fall. If the price falls, sales
demand will rise.

Supply is the quantity of the product (or service) that suppliers are willing to
sell at any given sales price. Higher prices will attract more suppliers into
the market and encourage existing suppliers to produce more. Lower prices
will deter some suppliers, and might drive some out of business if the price
fall results in losses.
A simple graph of supply and demand is shown below. In this diagram, the
equilibrium price level is the sales price that would become established in the
market if the factors that affect supply or demand did not change. Here the price
would be PKRP and the total sales demand for the product would be Q units.
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Price
Supply
(lower at lower prces)
P
Sales demand
(higher at lower prices)
Quantity
Q
Occasionally, sales demand for a product might rise to such a high level that
producers in the market are unable to meet the demand in full. Until production
capacity can be increased, this situation could result in very large price rises and
very high profit margins for producers.
An example of demand exceeding supply capacity has been the market for oil on
occasions in the past. Oil suppliers are unable to alter their output volumes
quickly, so a large increase in demand for oil can result in very large price
increases, at least in the short term.
Monopoly pricing
Supply and demand in the diagram above is for the market as a whole, and
within the market there might be many different suppliers competing with each
other to win business.
A similar situation applies to companies that are dominant in their particular
market, and supply most of the goods or services sold in the market. In these
‘monopoly markets’, the individual company has a downward-sloping demand
curve, which means that:

as a monopoly supplier to the market, it is in a position to set prices for the
market, but

if it raises the prices of its products, the demand for its products will fall.
Pricing in a competitive market
In contrast to a monopoly market, companies that sell their products in a highly
competitive market will decide their selling prices by comparing them with those
of competitors.
In order to compete effectively, companies might use short-term pricing tactics
such as price reductions, volume purchase discounts, better credit terms and so
on.
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4.3 Cost
In the long run, the sales price must exceed the average cost of sales of the
product that a business entity sells. If cost is higher than selling price, the
business will make a loss and cannot survive in the long term. Cost is therefore a
major determinant of price.
Costs are influenced by factors such as:

suppliers’ prices for raw materials and components

price inflation

exchange rate movements

other elements of cost, such as wage rates and general expenses

quality: it usually costs more to produce an item to a higher quality
standard.
A company may have to decide where it wants to position its product in the
market in terms of quality. Premium pricing (higher-than-average prices) prices
can be used for higher quality products, but customers may prefer lower quality,
lower priced products. A clear understanding of the link between quality and cost
will be needed to help management determine the optimum price/quality mix.
If a company is able to reduce its costs, it should be in a position if it wishes to
reduce its sales prices and compete more aggressively (on price) for a bigger
share of the market.
4.4 Income of customers
Another microeconomic factor influencing sales demand in any market is the
level of income of customers and potential customers for the product.
As the income of customers rises, they are more likely to want to buy more of the
product. When demand is growing because income levels are rising, there is a
tendency for prices to rise.

In an economy as a whole, rising income occurs when the national
economy is growing, and prices will rise. (The authorities might try to
prevent excessive inflation, but prices will nevertheless increase.)

When income in an economy is falling, there is an economic recession, and
there might even be some price falls.
4.5 Other factors influencing price
There are other influences on pricing decisions and the general level of selling
prices in a market.

The price of ‘substitute goods’. Substitute goods are goods that customers
could buy as an alternative. Companies might set the price for their product
in the knowledge that customers could switch to an alternative product if
they think that the price is too high. For example, if the price of butter is too
high, more customers might switch to margarine or other types of ‘spread’.

The price of ‘complementary goods’. Complementary goods are items that
customers will have to buy in addition to complement the product.

Consumer tastes and fashion. High prices might be obtained for ‘fashion
goods’.
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
Advertising and marketing. Sales demand can be affected by sales and
marketing activities, including public relations activity. Strong consumer
interest in a product or service could allow a company to set a higher price.
In addition to general factors influencing price, such as supply and demand,
competition and cost, companies will use one or more different pricing strategies
to decide the sales prices for their products or services.
4.6 Price elasticity of demand
The price elasticity of demand (PED) is a measurement of the change in sales
demand that would occur for a given change in the selling price.
Within a market as a whole, there is an inverse relationship between selling price
and sales demand. At higher prices, total sales demand for a product will be
lower. For individual companies in a monopoly position in their market (or niche
of the market) the same rule applies: if prices are raised, demand will fall.
The price elasticity of demand (PED) is measured as:
The change in quantity demanded as a percentage of original demand
The change in sales price as a percentage of the original price
Price elasticity of demand has a negative value, because demand rises (positive)
if the price falls (negative), and demand falls if the price rises.
Example:
The following estimates have been made of total sales demand for product X:

An increase in the price from PKR9 to PKR10 will result in a fall in daily
demand from 2,000 to 1,600 units

A fall in the price from PKR5 to PKR4 will result in a rise in daily demand
from 8,000 to 9,000 units.
Required
Calculate the price elasticity of demand for product X at a price of:
(a)
PKR9
(b)
PKR5
Answer
(a)
If the price is increased from PKR9 to PKR10
The change in quantity demanded as a percentage of original demand
= - 400/2,000 = - 0.20 or - 20%.
The change in price as a percentage of the original price = PKR1/PKR9 = +
0.111 or + 11.1%.
PED = - 0.20/ + 0.111 = - 1.8.
(b)
If price is reduced from PKR5 to PKR4
The change in quantity demanded as a percentage of original demand
= + 1,000/8,000 = + 0.125 or + 12.5%.
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The change in price as a percentage of the original price = - PKR1/PKR5 = 0.20.
PED = + 0.125/- 0.20 = - 0.625.
4.7 Elastic and inelastic demand
Sales demand for a product could be either elastic or inelastic in response to
changes in sales price.

Demand is elastic if its value is above 1. (More accurately, demand is
elastic if its elasticity is a figure larger than – 1.)

Demand is inelastic if its value is less than 1. (More accurately, demand is
inelastic if its elasticity is a figure below – 1, between 0 and – 1.)
The significance of elasticity
Price elasticity of demand affects the amount by which total sales revenue from a
product will change when there is a change in the sales price.
If demand is highly elastic (greater than 1, ignoring the minus sign):

increasing the sales price will lead to a fall in total sales revenue, due to a
large fall in sales demand, and

a reduction in the sales price will result in an increase in total sales
revenue, due to the large rise in sales demand.
Profit might increase or decrease when the sales price is changed, depending on
changes in total costs as well as the change in total revenue.
If demand is inelastic (less than 1, ignoring the minus sign):

increasing the sales price will result in an increase in total sales revenue
from the product, because the fall in sales volume is fairly small, and

reducing the sales price will result in lower total sales revenue, because the
increase in sales demand will not be enough to offset the effect on revenue
of the fall in price.
A product does not necessarily have high or low price elasticity of demand at all
price levels. The same product might have a high price elasticity of demand at
some sales prices and low price elasticity at other prices.
4.8 Elasticity and setting prices
An understanding of the price elasticity of demand for products can help
managers to make pricing decisions.
Inelastic demand
If demand is inelastic, raising selling prices will have a small effect on demand
and will result in higher sales revenue. There will be a small reduction in the
number of units sold so total costs will fall. Higher revenue and lower total costs
mean higher profits. If management believe that sales demand for their product is
price-inelastic, they might therefore consider raising the sales price.
Note that governments will often raise revenue by taxing goods for which there is
an inelastic demand. Such goods include cigarettes and fuel. Cigarettes are
addictive and fuel is a necessary for everyday life. In each case an increase in
price through additional taxation should not result in a fall in demand.
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If demand is inelastic, reducing the sale price will lead to lower total sales
revenue. Sales demand will increase, and so the costs of sales are also likely to
increase. Profits are therefore likely to fall.
Elastic demand
If demand is elastic, an increase in the sales price will lead to a fall in total sales
revenue. Sales demand will also fall. If managers are thinking about an increase
in the sales price, they will have to consider whether the fall in total costs (due to
the lower volume of sales) will exceed the fall in total revenue.
If demand is elastic, reducing the sales price will increase total sales revenue
from the product, but total sales volume will increase. The effect, as with raising
sales prices for a product with high price elasticity of demand, could be either
higher or lower total profits. There is a risk that if one company reduces its sales
prices and elasticity of demand is high, this could lead to a ‘price war’ in which all
competitors reduce their prices too. At the end of a price war, all sellers are likely
to be worse off.
Companies might try to reduce the price elasticity of demand for their products by
using non-price methods, such as improving product quality, improving service
and the use of advertising and sales promotions.
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5
SOCIAL AND DEMOGRAPHIC FACTORS
Section overview

The nature of social and demographic factors in the environment

Ageing population and other demographic changes

Government policy for demographic change
5.1 The nature of social and demographic factors in the environment
Social factors in the environment refer to changes in habits, tastes, values and
preferences. In the short term social attitudes and habits are also affected by
fashion.
Demography is concerned with a specific aspect of society – the size, spread
and distribution of society.
Business organisations need to respond to changes in society, including
demographic changes. If they do not, they will continue to offer products and
services that are increasingly less relevant to the needs of customers.
The marketing concept in business requires that all successful businesses must
keep up to date with and aware of social and demographic change, and respond
accordingly.
Example: Social and demographic factors
Here are just a few examples of social and demographic changes;

A very high proportion of the population expect to travel to other countries
regularly, at least once a year for their summer holiday.

Large numbers of individuals are concerned about health and weight.
Interest in fitness, healthy eating and diets has increased.

The average age at which children leave their parental home has increased.
Many children are staying on at home until they are 25 or 30 years old – a
much higher number than in the past.

There has been an increase in the number of ‘single–parent families’

There has been a large number of people entering the country as migrants
and a large number emigrating to live in other countries.
5.2 Ageing population and other demographic changes
Ageing population
For some Western countries, especially countries of Western Europe, there is an
ageing indigenous population. The birth rate is historically low, and the number of
new babies per woman of child-bearing age has fallen.
At the same time, average life expectancy has been increasing. More people are
living until an older age than in the past.
As a consequence, there is an ageing population, which means that a larger
proportion of the population than in the past will be of an older age – say past
normal retirement age.
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Governments are aware that the consequence of this demographic change is
that in the future, there might be a relatively small working population and a
relatively large number of people in retirement. The ‘few’ in work might be
expected to support the ‘many’ in retirement, for example by paying taxation to
fund state hospital services and many thousands of retired civil servants.
The ageing population of countries such as the UK, Italy and France has been
referred to as a ‘demographic time bomb’. The view is that the younger
generation might refuse to accept the economic burdens that government might
try to impose on it.
Other demographic patterns
Other countries have other demographic problems.

Some countries suffer from very high rates of mortality, particularly due to
disease. In these countries the population on average is very young and
there are very few older people.

Some countries have high rates of child birth but low rates of economic
growth. In these countries, large numbers of people might try to migrate to
other countries with a wealthier economy.
5.3 Government policy for demographic change
A government might try to develop a policy for social and demographic change.
For example, in a country with an ageing population, the government might
consider the following measures.

Permitting immigration of people from other countries, possibly under a
controlled immigration scheme, in order to increase the size of the
population at working age.

Increasing the average age at which individuals may retire with entitlement
to a state pension.

Encouraging individuals to work beyond their normal retirement age.

Providing some form of subsidy or tax-incentive to individuals/couples who
have children.
Business organisations are affected by social and demographic change, and by
government policy. As a population changes, in age or ethnic origin, the needs
and wants of consumers will change. Businesses must respond to those
changes.
In addition, the nature of the workforce – its age distribution, availability and skills
– will also change. Issues such as education and training take on importance for
ageing employees as well as young employees, if companies intend to employ
them beyond their normal retirement age.
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6
TECHNOLOGICAL FACTORS
Section overview

The impact of technological change on working methods

The impact of technological change on products and services

The impact of technological change on organisation structure and strategy
6.1 The impact of technological change on working methods
Over the years, machines have replaced man for mechanical tasks. Computers
have replaced man for many mental tasks and intellectual jobs. The impact of
computers on business organisations can be summarised as:

Computers have replaced man for many data processing and information
analysis tasks

Humans have been used for the ‘higher level’ intellectual tasks and skills
tasks that computers have not been able to perform

Computers are taking over from humans even some high level intellectual
and analytical tasks.
6.2 The impact of technological change on products and services
The point should be fairly obvious, but you should also remember that
technological change has a huge impact on the nature of products and services
that businesses offer to customers.
Companies need to maintain technological developments in the design and
manufacture of products, and in the provision of services, in order to remain
competitive.
Example:
A current example has been the competition between manufacturers of
televisions, such as Sony and Toshiba, to achieve a technological lead in the
development of televisions with the latest ‘flat screen’ technology.
6.3 The impact of technological change on organisation structure and strategy
Technological change has also had an effect for many businesses on their
organisation and strategy. Computerisation, communications technology and
other aspects of technological change have led to major developments in
business such as:

downsizing

de-layering

outsourcing.
To some extent, these developments in business organisation are inter-related.
Downsizing
Downsizing means the reduction in size of a business organisation. It does not
(necessarily) mean that the business organisation is selling fewer goods or
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services. It means that its business activities are conducted by a smaller number
of people.
Technological change makes downsizing possible, because tasks that were
performed previously by humans can now be performed by machine or computer.
De-layering
‘De-layering’ means removing one or more levels of management in the
organisation structure. It could mean removing all layers of middle management
entirely, leaving just senior managers and front-line managers and supervisors.
De-layering is made possible by high-quality communications, provided that
senior management can delegate sufficient authority to junior managers, and
expect junior managers to meet their responsibilities.
When an organisation goes through a de-layering, middle managers are made
redundant, and there is consequently some downsizing.
Outsourcing
Outsourcing means arranging for other business organisations to perform some
administrative tasks, or management tasks, instead of having to employ
individuals to do the task internally, as part of the organisation’s own activities.
For example, the following tasks might be outsourced.

A company might arrange for an external accountancy firm to take over the
administration of the payroll, and administer wages and salaries for the
company’s workforce.

A company might arrange for an external building services company to take
over responsibility for cleaning and security in all its buildings.

A company that produces motor cars might outsource the manufacture of
most (or even all) of the component parts, so that its only ‘in-house tasks’
are product design, assembly, testing and marketing.

Many companies outsource their IT requirements to specialist IT firms.

Some companies outsource most of their office administration tasks, such
as record keeping and word processing.
The reason why outsourcing is now popular in many countries is that it can take
advantage of specialisations. The conceptual argument in favour of outsourcing
is as follows:

A business succeeds in its competitive markets because it is more
successful at doing some things better than its competitors. A successful
business has some core competences that enable it to succeed and do
better than rivals.

A business also has to do other tasks that support its main activities, such
as office administration, IT support, building and facilities administration
and payroll. It does not have any particular skills in these activities, and
there are other companies that can do these tasks just as well, and in some
cases much better.

When a business performs all these noncore activities itself, this diverts
management attention away from the core competences. Management
should focus on its strengths, not the routine and ordinary.
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
It should therefore outsource ‘noncore’ activities and concentrate on its
core activities, to make sure that it maintains or improves its competitive
advantage over rivals.
Outsourcing is made much easier by high-quality telecommunications and
computer systems, because data and information can flow easily between a
business and the other organisations to which it has outsourced activities.
Virtual company
Taken to an extreme form, a business organisation can outsource almost all its
activities, leaving just one or two individuals at the centre managing the business.
A virtual organisation is an organisation that has no physical hub or centre of
operations. Instead, it is a network of individuals linked by computer and
telecommunications network (such as the internet). The individuals need not be
employees of the business: they might be part-time workers or self-employed
individuals.
Each individual in the virtual company or virtual organisation might work from
home. Data and information is transferred between them, and each performs
particular tasks – with no office, no substantial assets and few (if any) full-time
employees.
The virtual company has been made possible by developments in IT technology.
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7
ECOLOGICAL FACTORS
Section overview

Impact of business on the physical environment

Ways in which businesses might limit impact on the environment

Benefits of economic sustainability to a range of stakeholders
7.1 Impact of business on the physical environment
Environmental issues have become increasingly important to businesses. There
has been a growth in awareness of the environmental impact of business
organisations. Society at large holds firms responsible for the environmental
impacts of their operations.
The precise nature of the environmental impacts of a firm varies from industry to
industry but might be grouped into the following areas:

Use of resources

Carbon footprint – The level of CO2 emissions of a business.

Pollution
Use of resources: Non-renewable
Supplies of non-renewable resource are limited. Such resources are being used
up.
Extraction of non-renewable resources often has a negative impact on the local
natural environment.
Property development can use up land which was previously countryside.
Use of resources: Renewable
The use of some renewable resources is at such a rate that the systems which
generate them cannot keep up with demand. (e.g. over fishing has depleted fish
stocks).
Demand for some renewable resource has led diversion of land from what could
have been agricultural use to industrial use. (e.g. growth of crops for bio-fuels)
Increase of demand for some raw material has led to deforestation of ancient
forests to convert the land to use for growing crops that industry needs (e.g. palm
oil). This might lead to impact on biodiversity as natural habitats are reduced.
Carbon footprint
Global warming is a major concern. There is wide acceptance in the scientific
community that this is a result of human activity through the release of
greenhouse gasses (of which CO2 is the most important). A carbon footprint is
the amount of CO2 generated by an activity or a business. Anything that
consumes energy will have a carbon footprint. Businesses use energy in:

Manufacturing

Transport

Heating and lighting
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Pollution
As well as producing CO2 emissions businesses engage in activities which result
in further pollution. This includes obvious things like chemical waste but also one
or two that are not so obvious:

Noise – to the detriment of local residents

Heat – many industrial processes have to be cooled and this results in heat
being transferred into the local environment.

Packaging.
7.2 Ways in which businesses might limit impact on the environment.
Many large companies are actively committed to reducing their environmental
impact. Possible methods include:

improved energy efficiency;

investment in renewable energies;

sourcing goods locally so as to reduce transport costs;

investment in IT to make inventory control more effective – this should lead
to less waste;

investment in more efficient production technologies to reduce waste;

reducing packaging.
7.3 Benefits of economic sustainability to a range of stakeholders
A sustainable business is any organization that participates in environmentally
friendly or green activities to ensure that all processes, products, and
manufacturing activities adequately address current environmental concerns
while maintaining a profit. A sustainable business meets the needs of the present
world without compromising the ability of the future generations to meet their own
needs
In general, business is described as green if it:

incorporates principles of sustainability into each of its business decisions;

supplies environmentally friendly products in place of non-green products;

is greener than traditional competition;

has made an enduring commitment to environmental principles in its
business operations.
Benefits to stakeholders
A business that takes sustainability seriously will enhance its chances of being
able to continue its business at current or enhanced levels. Such a business will
be looked on favourably by customers and this might lead to increased sales and
profits.

Shareholders and employees will benefit from the continued success of the
business.

Suppliers benefit through the establishment of long term, ethical trading
agreements.
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
Governments benefit as the action of the company will help the government
meet its environmental obligations under treaties and provide tax revenue.

Society benefits through the provision of continued employment and
environmental improvements
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Chapter 2: The business environment
8
COMPETITIVE FACTORS
Section overview

SWOT analysis

Competitive strategy

Achieving competitiveness: adding value

Value chain analysis

The Five Forces model
8.1 SWOT analysis
Environmental analysis uses techniques such as PEST analysis and Porter’s
Five Forces (see later) to identify opportunities and threats to an organisation.
In addition, a position analysis of factors inside the organisation can be used to
identify strengths and weaknesses in the resources and systems of the
organisation. Strengths or weaknesses may relate for example, to particular skills
or to the product range of the business.
Strengths and weaknesses are concerned with the internal capabilities and core
competencies of an entity. Threats and opportunities are concerned with factors
and developments in the environment.
Environmental threats and opportunities recognised in an environmental scan,
and internal strengths and weaknesses recognised in a position analysis (or
resource analysis) are brought together to carry out a strategic analysis of
strengths, weaknesses, opportunities and threats, which is called SWOT
analysis.
SWOT analysis is a technique (or ‘model’) for identifying key factors that might
affect business strategy. It is a simple but useful technique for analysing strategic
position.
SWOT analysis is an analysis of strengths, weaknesses, opportunities and
threats.

Strengths are internal strengths that come from the resources of the entity.

Weaknesses are internal weaknesses in the resources of the entity.

Opportunities are factors in the external environment that might be
exploited, to the entity’s strategic advantage.

Threats are factors in the external environment that create an adverse risk
for the entity’s future prospects.
A SWOT analysis might be presented as four lists, in a cruciform chart, as
follows. Illustrative items have been inserted, for a small company producing
pharmaceuticals.
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Strengths
Weaknesses
Extensive research knowledge
Slow progress with research projects
Highly-skilled scientists in the
workforce
Poor record of converting research
projects into new product
development
High investment in advanced
equipment
Recent increase in labour turnover
Patents on six products
High profit margins
Opportunities
Threats
Strong growth in total market demand
Recent merger of two major
competitors
New scientific discoveries have not
yet been fully exploited
Risk of stricter regulation of new
products
SWOT analysis is a means to allow a company to understand its competitive
position. A company’s competitive position refers to its ability to generate returns
in comparison to those generated by its competitors. This is a necessary step in
the development of competitive advantage.
8.2 Competitive strategy
The following section is based on the ideas of Professor Michael Porter’s which
he expounded in the 1980’s.
Competitive strategy should be executed to relate a company to its environment.
The key aspect of a firm’s environment is the industry or industries in which it
competes.
The returns that a company is able to generate are subject to two fundamental
influences:

Industry attractiveness – Not all industries offer equal opportunities for
sustained profitability

Competitive position within the industry – Positioning determines whether a
firm’s profitability is above or below the industry average.
A firm may earn high rates of return even though the industry structure is
unfavourable and the average profitability of the industry is modest by having a
strong position in the industry.
Competitive advantage is an advantage that a firm has over its competitors which
allows it to generate greater returns than they can. Competitive advantage is
achieved by offering consumers greater value, either by means of lower prices or
by providing greater benefits and service that justify higher prices
There are many different approaches to achieving a superior return on
investment but at the broadest level there are three generic strategic approaches
which can be used:

Cost leadership

Product differentiation

Focus
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Cost leadership
A company that is a cost leader in an industry is able to make and sell its goods
at a lower cost than its competitors. This means that if it sells at the same price
as its competitors it will make a higher profit. Alternatively, it could sell at a lower
price than its competitors and increase market share.
Product differentiation
A firm might compete by trying to give its products features that its competitors’
products do not have. If these features are valued by consumers the product can
be sold at a higher price. Products might be differentiated with actual
enhancements or by marketing for example active advertising campaigns. Actual
enhancements might be copied by competitors.
Focus
This relates to whether the producer targets a mass market or a small part of a
market (market niche). The Ford Motor Company sells to the mass market. Aston
Martin sells to the top end of the market. Both Ford and Aston Martin sell cars but
they do not compete with each other. A person thinking about buying a ford focus
would not see an Aston Martin Lagonda as an alternative product.
8.3 Achieving competitiveness: adding value
Value relates to the benefits that a customer obtains from a product or service.
Customers are willing to pay money to buy goods or services because of the
benefits that they expect to receive from them. The price they are willing to pay
puts a value on those benefits.
Business entities make profits by creating added value.
Example:
Company X buys a quantity of leather for PKR1,000 and converts this into leather
belts, which it sells for PKR10,000.
Consumers could have bought the leather themselves for PKR1,000. They must
believe that what Company X has done to the leather is worth paying an extra
PKR9,000 for.
Company X has created value of PKR9,000.
In a competitive market, the most successful business entities are those that are
most successful in creating value. The only reason why a customer should be
willing to pay a higher price than the lowest price in the market is that he sees
additional value in the higher-priced product, and is willing to pay more to obtain
the value.
There are different ways of adding value.

One way of adding value is to alter a product design, and include features
that might meet the needs of a particular type of customer better than
products that are currently in the market. A product might be designed with
added features.

Value can be added by making it easier for the customer to buy a product,
for example by providing a website where customers can make purchases.
Bookstores can add value to the books they sell by providing sales outlets
at places where customers often want to buy books, such as airport
terminals.
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
Value can be added by promoting a brand name. Successful branding might
give customers a sense of buying products or services with a better quality.

Value can be added by delivering a service or product more quickly. For
example, a private hospital might add value by offering treatment to
patients more quickly than other hospitals in the region.

Value can also come from providing a reliable service, so that customers
know that they will receive the service on time, at the promised time, to a
good standard of performance.
The concept of the value chain
A value chain is a series of activities, each of which adds value. The total value
added by the entity is the sum of the value created by each stage along the
chain. Johnson and Scholes have defined the value chain as: ‘the activities within
and around an organisation which together create a product or service.’
8.4 Value chain analysis
A technique used by Michael Porter who pointed out that within a business entity:

there is a primary value chain, and

there are support activities (also called secondary value chain activities).
Primary value chain
Porter identified the chain of activities in the primary value chain as follows.
This value chain applies to manufacturing and retailing companies, but can be
adapted for companies that sell services rather than products.
Most value is usually created in the primary value chain.

Inbound logistics. These are the activities concerned with receiving and
handling purchased materials and components, and storing them until
needed. In a manufacturing company, inbound logistics therefore include
activities such as materials handling, transport from suppliers, inventory
management and inventory control.

Operations. These are the activities concerned with converting the
purchased materials into an item that customers will buy. In a
manufacturing company, operations might include machining, assembly,
packing, testing and equipment maintenance.

Outbound logistics. These are activities concerned with the storage of
finished goods before sale, and the distribution and delivery of goods (or
services) to the customers. For services, outbound logistics relate to the
delivery of a service at the customer’s own premises.

Marketing and sales. These are the activities associated with the ‘4Ps’ of
marketing, namely; product, place, price, and promotion.

Service. These are all the activities that occur after the point of sale, such
as installation, warranties, repairs and maintenance, and providing training
to the employees of customers. An important aspect of service is often the
work of customer call centres or customer service centres.
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The nature of the activities in the value chain varies from one industry to another,
and there are also differences between the value chain of manufacturers,
retailers and other service industries. However, the concept of the primary value
chain is valid for all types of business entity.
Value is added by all the activities on the primary value chain. Customers might
be willing to pay more for a product or a service if it is delivered to them in a more
convenient way. For example, customers might be willing to pay more for
household shopping items if the items are delivered to their home, so that they do
not have to go out to a supermarket or a store to get them.
Secondary value chain activities: support activities
In addition to the primary value chain activities, there are also secondary
activities or support activities. Porter identified these as:

Purchasing. These are activities concerned with buying the resources for
the entity – materials, plant, equipment and other assets. Successful buying
often means lower purchase costs, or achieving a secure source of supply
for key materials or components.

Technology development. These are activities related to any
development in the technological systems of the entity, such as product
design (research and development) and IT systems. Technology
development is an important activity for innovation. ‘Technology’ also
includes acquired knowledge: in this sense all activities have some
technology content, even if this is just acquired knowledge.

Human resources management. These are the activities concerned with
recruiting, training, developing and rewarding people in the organisation.

Corporate infrastructure. This relates to the organisation structure and its
management systems, including planning and finance management, quality
management and information systems management.
Support activities are often seen as necessary ‘overheads’ to support the primary
value chain, but value can also be created by support activities. For example:

Purchasing can add value by identifying a cheaper source of materials or
equipment.

Technology development can add value to operations with the introduction
of a new IT system.

Human resources management can add value by improving the skills of
employees through training.

Corporate infrastructure can help to create value by providing a better
management information system that helps management to make better
decisions.
8.5 The Five Forces model
A well-known business model for understanding the nature of competition in an
industry, and the strength of the competition in an industry, has been provided by
Michael Porter (in The Competitive Environment). This model for analysing
competitiveness in an industry or market is called the Five Forces model,
because Porter is identified five factors (‘five forces’) that determine
competitiveness.
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These are:

threats from potential entrants

threats from substitute products or services

the bargaining power of suppliers

the bargaining power of customers

competitive rivalry within the industry or market.
When competition in an industry or market is strong, firms must supply their
products or services at a competitive price, and cannot charge excessive prices
and make ‘supernormal’ profits.
When any of the five forces are strong, it is difficult for a business entity to obtain
a dominant position in its market, and profitability for businesses in the industry or
market will therefore be low.
Threat from potential entrants
Competition in a market is affected by the threat of new business entities coming
into the market and adding to the competition. When new entrants are able to
come into the market without much difficulty, prices of products in the market will
be low. If prices went up and company profit margins improved, new firms would
be tempted to come into the market in order to benefit themselves from the
higher profits. The new competition would force down prices and profit margins.
Because of this threat, firms that are already in the market keep their prices and
profits low, and competition in the market is strong.
Competitive forces are reduced when it is difficult for new entrants to break into
the market – in other words, when the ‘barriers to entry’ are high. A number of
factors might help to create high barriers to entry:

Economies of scale. Economies of scale are reductions in average costs
that are achieved by producing and selling an item in larger quantities. In
an industry where economies of scale are large, and the biggest firms can
achieve substantially lower costs than smaller producers, it is much more
difficult for a new firm to enter the market. This is because it will not be big
enough at first to achieve the economies of scale, and its average costs will
therefore be higher than those of the existing large-scale producers. There
are many examples of industries where the major companies have
achieved a dominant market position through the size of their operations so
that they can make their products cheaply and sell them at a low price.
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
Capital investment requirements. If a new entrant to the market would
have to make a large capital investment in assets such as factory premises
and equipment, this will act as a barrier to entry, and deter firms from
entering the market. This is because they would lose a substantial amount
of money if their new business venture failed and they might not want this
‘investment risk’.

Access to distribution channels. In some markets, there are only a
limited number of distribution outlets or distribution channels. If a new
entrant will have difficulty in gaining access to any of these distribution
channels, the barriers to entry will be high.

Know-how. It be time-consuming and expensive for a new entrant to a
market to acquire the ‘know-how’ and experience to be successful.

Switching costs. Switching costs are the costs that a buyer has to incur in
switching from one supplier to a new supplier. In some industries, switching
costs might be high. For example, the costs for a company of switching
from one audit firm to another might be quite high, and deter a company
from wanting to change its auditors. When switching costs are high, it can
be difficult for new entrants to break into a market.

Government regulation. Regulations within an industry, or the granting of
rights, can make it difficult for new entrants to break into a market. For
example, it might be necessary to obtain a licence to operate, or to become
registered in order to operate within an industry. Companies that already
operate within an industry might have the benefit of patent rights that
prevent new competitors from ‘copying’ the products that they make.
Threat from substitute products
Competition within a market or industry will be higher when customers can switch
fairly easily to buying alternative products (substitute products).
The threat from substitutes varies between markets and industries, but a few
examples of substitutes are listed below:

Domestic heating systems. Consumers might switch between gas-fired, oilfired and electricity-fired heating systems. This means that the ability of a
manufacturer of gas central heating systems to charge higher prices for its
products will be restricted by the threat that customers might switch to oilfired or electricity-powered systems. Similarly, providers of gas supply are
restricted in their ability to charge higher prices for gas by the threat of
customers switching to electricity.

Transport. Customers might switch between air, rail and road transport
services. This means that the competitive strength of a rail company is
restricted by the threat of competitive actions by air transport companies or
bus companies, and also by the costs of private motoring.

Food and drink products. With many food and drink products, consumers
might switch between similar products, such as rice, pasta and potatoes.
For example, the competitive strength of a manufacturer of a branded
coffee is therefore affected not only by other manufacturers of similar coffee
products, but also by producers of tea.
Bargaining power of suppliers
In some industries, the competitive position of a business entity might be affected
by the bargaining strength of its major supplier or suppliers. When this occurs,
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the suppliers might charge high prices to their business customers that these
businesses are unable to pass on to their own customers (by charging higher
prices for their own products). As a result, profitability in the industry is low.
Example:
An example of supplier power is possibly evident in the industry for personal
computers. Software companies supplying the computer manufacturers (such as
Microsoft) have considerable power over the market and seem able to obtain
good prices for their products. Computer manufacturers are unable to pass on all
the high costs to their own customers for PCs, and as a consequence, profit
margins in the market for PC manufacture are fairly low.
Porter suggested that the bargaining power of suppliers might be strong in the
following situations:

when there are only a small number of suppliers to the market

when there are no substitutes for the products that are supplied

when the supplier’s product is an important component in the end-products
that are made with it.
Bargaining power of customers
Customers can reduce the profitability of an industry when they have
considerable buying power. Powerful buyers are able to demand lower prices, or
improved product specifications, as a condition of buying. Strong buyers also
make rival firms compete to supply them with their products.
In many countries, a notable example of buyer power is the power of
supermarkets as buyers in the market for many consumer goods. They are able
to force down the prices from suppliers of products for re-sale, using the threat of
refusing to buy and switching to other suppliers. As a result, profit margins in the
manufacturing industries for many consumer goods are very low.
Porter suggested that buyers might be particularly powerful in the following
situations:

when the volume of their purchases is high relative to the size of the
supplier

when the products of rival suppliers are largely the same (‘undifferentiated’)

when the costs of switching from one supplier to another are low.
Competitive rivalry
Competition within an industry is obviously also determined by the rivalry
between the competing business entities. Strong competition forces rival firms to
offer their products to customers at a low price (relative to the product quality)
and this keeps profitability fairly low.
Porter suggested that competitor rivalry might be strong in any of the following
circumstances:

when the rival firms are of roughly the same size and economic strength

when there are many competitors in the industry or market

when there is only slow growth in sales demand in the market, so that firms
are competing for a fairly fixed total amount of sales and customers
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
when the products of rival firms are largely the same (‘undifferentiated’)

when the costs of withdrawing from the industry are high, so that even
unprofitable companies are reluctant to leave the market.
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CHAPTER
Certificate in Accounting and Finance
Business management and behavioural studies
3
Organisational structure
Contents
1 Types of organisation
2 Stakeholders
3 Organisational structure
4 Internal and external relationships
5 The most appropriate organisation structure
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INTRODUCTION
Learning outcomes
The overall objective of the syllabus is to equip candidates with the fundamentals of
management and behavioural studies.
Organizational process
LO 2
On the successful completion of this paper, candidates will be able to
show familiarity with the structure of business organizations, their
culture and the change process
LO 2.1.1
Explain the meaning and nature of organizational structure.
LO 2.1.2
Explain the importance of good structure and consequences of a deficient
structure.
LO 2.1.3
Describe how the elements of organizational structure can be combined to
create mechanistic and organic structures
LO 2.1.4
Describe the advantages and disadvantages of mechanistic and organic
structure of organization.
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1
TYPES OF ORGANISATION
Section overview

Types of organisation

Distinguishing features
1.1 Types of organisation
Accountants are employed by different types of organisation. Organisations can
be divided into two main types:

business organisations, and

not-for-profit organisations.
Business organisations engage in commercial and industrial activities, with the
purpose of making a profit.
Not-for-profit organisations do not seek to make a profit, although they must
operate within the limits of the funding and cash that is available to them. They
can be divided into two main types:

public sector organisations: these are government departments or
organisations that are funded by the government

non-government organisations: these are not-for-profit organisations that
are partly or wholly funded from non-government sources. Examples are
charities, clubs and societies.
1.2 Distinguishing features
Each type of organisation has features that distinguish it from the other types of
organisation.

Purpose. They have different purposes. Business organisations exist to
make a profit. Public sector organisations exist to provide a benefit to the
public, such as good government or key services such as health,
education, a police force, national defence, and so on.

Ownership. They have different types of owner. Companies are owned by
their shareholders, whereas public sector organisations are owned by the
government (as the representative of the general public). Co-operatives are
owned by members.

Funding. Business organisations obtain the funds they need to operate
from a variety of sources. A stock market company, for example, obtains its
long-term funds from a mixture of reinvesting profits in the business, issuing
new shares and borrowing. Charities rely on a mixture of government
grants and private donations for the money they need. Public sector
organisations obtain their money from the government, which in turn gets
its money from taxation.

Accountability. The management of an organisation is accountable to its
owners for the performance and achievements of the organisation. The
directors of a company, for example, are accountable to the shareholders
for the financial performance of the company. This is the main reason why
companies produce their annual report and accounts.
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Co-operatives
Co-operatives are organisations in which there are members, and all members:

are actively involved in its activities, and

share in the benefits that the co-operative provides.
There are different types of co-operative.

In a workers’ co-operative, a number of individuals co-operate to carry out
related activities, such as operating a farm or a factory. They work for the
co-operative and they share the benefits that the co-operative provides.

A number of individuals might form a co-operative for the purchase and use
of expensive equipment. Each member of the co-operative is entitled to
some use of the assets. For example, a number of small farmers might
form a co-operative to purchase and use expensive agricultural equipment.

In a retail co-operative society, the members buy goods and services from
the retail outlets of the co-operative society, and each year they receive a
share of the profits that the society has made.
Co-operatives are more common in some countries than in others.
Example:
In the UK there is a bicycles co-operative that operates a small number of bicycle
retail outlets. After one year of employment in the co-operative, every full-time
employee is entitled to become a member. The profits of the co-operative are
shared between its members.
The UK also has a Co-operative Society, whose activities include operating a chain
of retail stores and a commercial bank. Individuals can become members by
shopping in the Society’s outlets, and they receive a share of the Society’s annual
profits. The size of their profit share depends on the amount of profits that
Society has earned and the amount of shopping they have done in the Society’s
stores.
Co-operatives may be either commercial businesses or not-for-profit
organisations. If they are commercial businesses, the profits are shared by the
members. In not-for-profit co-operatives, other benefits (such as the output
produced by the co-operative) are shared by the members.
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2
STAKEHOLDERS
Section overview

Definition of a stakeholder

Internal stakeholders

External stakeholders

The main stakeholders

Stakeholder mapping: Mendelow’s power/interest matrix

Stakeholder conflicts of interest
2.1 Definition of a stakeholder
A stakeholder in an organisation is a person who has an interest (or ‘stake’) in
what the organisation does, and who might therefore try to influence the
decisions and actions of the organisation.
Stakeholders are individuals and other organisations, but they often have a
common interest. It is therefore possible to categorise some stakeholders into
groups of people with a similar interest.
Stakeholders can be either:

people or groups within the organisation (internal stakeholders), or

people, groups or other entities that are external to the organisation
(external stakeholders).
2.2 Internal stakeholders
Within a business organisation, internal stakeholders can be categorised into
groups as follows:

shareholders

executive directors and senior managers

other managers and current employees.
It might be appropriate to divide management and employees into subcategories, where there are groups with differing interests and concerns. For
example, managers and employees in different divisions of the company or in
different functional departments might have different interests and concerns.
Shareholders/owners
In large companies, the main shareholders are not usually involved in the day-today management (although there are some exceptions). Shareholders in a large
company are usually investors, seeking to earn a return on their investment in the
form of dividends and a higher share price.
Shareholders leave the management of their company to the board of directors
and executive management team. However, they might become more closely
involved in the company, and try to influence the decisions of the directors, when
they feel that their interests are threatened. For example, shareholders might
express their concerns about any of the following:

Falling profits and a falling share price
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
Lower dividend payments

A proposal to invest in a major project where the business risk is high

A proposed takeover bid for another company or from another company.
When shareholders feel that their interests are threatened, they might try to
become more actively involved in the company. Major shareholders can discuss
their concerns with the company chairman and other senior directors. All
shareholders might be able to express their displeasure by voting against the
directors at a general meeting of the company, although their rights and powers
are restricted by company law.
A company might have a majority shareholder, who owns enough shares in the
company that the shareholder is able to control the composition of the board and
the decisions that the company’s directors make. When there is a majority
shareholder, the interests of this shareholder might differ from those of the
minority shareholders owning the remainder of the shares. (In other words, the
majority shareholder and the minority shareholders might be different stakeholder
groups.)
Executive directors and senior managers
A board of directors might consist of executive directors and non-executive
directors. Executive directors are usually full-time employees of the company
(whereas non-executives are not).
As executives and full-time employees, executive directors are involved in the
management of the company. Their interests are therefore often similar to the
interests of other senior executives, who do not have a position on the board of
directors.
The interests of executive directors and senior managers are affected by matters
such as:

their remuneration, which consists of basic salary, pension rights, cash
bonuses and share incentive schemes

power and status

career prospects

job security.
Executive directors and other senior managers often want their company to grow
in size, because in a larger company, they expect larger remuneration, more
power and status and better career prospects. However, growing the company is
not necessarily in the best interests of shareholders, who are more concerned
about profitability, dividends and the share price.
Other managers and employees
Managers in the middle and junior ranks of a management hierarchy might have
ambitions to become senior managers. However, their interests and concerns are
different. Often, junior managers and other employees share common interests,
such as:

pay

working conditions

job security

job satisfaction
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
quality of life.
2.3 External stakeholders
Business organisations, particularly large organisations, have a large number of
external stakeholders. These include:

lenders

suppliers

government

customers

local communities

the general public, including special interest groups and pressure groups

non-executive directors.
Lenders
Lenders to a company include banks and bondholders. (Companies might issue
bonds or debentures in order to raise finance. Interest is paid on the bonds,
which represent a debt that the company must eventually repay.) The main
concerns of lenders are that the borrower should be able to repay the debt, with
interest, on schedule.
Lenders might therefore be concerned about heavy borrowing by a business
organisation, because when a borrower gets into heavy debt, the risks increase
that it will not be able to meet all the claims for interest and debt repayment,
especially if profitability falls.
Suppliers
Business organisations buy goods and services from suppliers. Suppliers will
usually agree to allow their customers some credit (time to pay) but their main
interests are that:

a customer will pay what is owed and will not become a bad debt

customers will continue to buy from them

customers will treat them fairly, and deal with them in an ethical way.
Government
The government has an interest in all business organisations, but especially large
organisations, for a wide range of reasons.

Businesses pay tax on profits, so government has an interest in company
profitability.

The government should want to create and maintain a strong economy.
This depends partly (or largely) on new investments by business.
Government might therefore want to encourage business investments.

The government should want to achieve low levels of unemployment.
Businesses are major employers.

The government regulates many different aspects of business activity:
employment law, environmental law, health and safety regulations and
company law are just a few examples.
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The government might be a significant external stakeholder in a business
because of its power to introduce new laws and regulations, or amend existing
laws.
Customers
Customers have a stake in a business organisation because they expect to
obtain value from the goods or services that they buy.
Local communities
In some cases, local communities might be stakeholders in a business
organisation, especially when the organisation is a major employer in the area
and the local economy depends on the work and business activity that the
organisation brings to the area.
The concerns of a local community might be very strong when a business
organisation proposes to close down operations in the area, and make its
employees redundant. Business shut down by a major employer in an area has a
knock-on effect for other businesses, which will lose trade and income.
The general public
The general public might consider that it has a stake or interest in major
companies, because the actions of these companies can affect society as a
whole. Public concerns might be expressed by action groups or pressure groups.
Areas of public concern might include:

public health, especially in the case of food manufacturers and
manufacturers of drugs and medicines

protection of the environment, reducing pollution, and creating ‘sustainable
businesses’

corruption in business practices (such as bribery)

the exploitation of the consumer through mis-selling and misleading
descriptions of goods

the monopolisation of a market by one or a small number of companies. (In
the UK for example there is public concern about the dominance of
supermarket chains in the retail market, and the shift of retailing from town
centres to out-of-town locations.)
Non-executive directors
Oddly, perhaps, non-executive directors are external stakeholders in a company.
Although they are members of the board of directors, they are not full-time
employees, and they are usually appointed to a company’s board because:

they bring experience and knowledge to the board that they have gained
outside the company, and which executive directors often do not have

their interests are different from those of executive directors and senior
executives: they are not affected by concerns about remuneration (bonuses
and performance incentives), power and status or job security.
Appointing independent non-executive directors to the board of directors of a
company is good corporate governance practice, because independent NEDs
can help to prevent a company from being dominated by the personal interests of
the executive directors.
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2.4 The main stakeholders
The main stakeholders in a business organisation, internal or external, are those
who exercise the greatest influence.
The most influential stakeholders in a company are usually the board of directors,
and possibly also senior executives below board level. These are the individuals
with the power to make most of the decisions for the company.
The directors will often be influenced by the opinions of their shareholders,
especially their largest shareholders, because shareholders can take some
action against the directors if they are dissatisfied. For example, shareholders
can vote against the re-election of directors (and in extreme cases can vote to
have a director removed from office).
Connected stakeholders
Other stakeholder groups, other than the directors, senior management and the
shareholders, might influence the decisions that directors and senior
management make. The term ‘connected stakeholder’ means a stakeholder who:

is not a decision-maker, or

is not a part of the permanent (full-time) infrastructure of the organisation,
but

is nevertheless very influential in shaping the future of the organisation and
the decisions of its leaders.
The main connected shareholders in a company are usually:

non-executive directors

employees

key suppliers

key customers.
The main connected stakeholders in a business organisation must have some
power that they are able to use to influence decisions. Some sources of power,
and the stakeholders who might have them, are listed below.
Source of power: the power comes
from an external source
Example
Legal rights
Shareholders have some legal voting
rights under company law.
Lenders have legal rights under the
terms of their lending agreements: for
example a lender has a right to take
action in the event of default by a
borrower.
Publicity, and ability to influence
customers or legislators
Pressure groups and protest groups
might be influential. These include
environmental protection groups,
human rights protection groups, and
animal welfare activists.
Control over key resources
A major supplier could exert influence
by controlling the supply of a key
resource to the organisation.
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Source of power: the power comes
from an external source
Example
Buying power
Customers can exert influence
collectively through their buying
power. If they do not like what a
business organisation is doing, they
can switch to buying from competitors.
Source of power: the power comes
from an internal source
Position power
Individual employees might be in a
position of power within the
organisation, perhaps because of
special expertise that they possess.
Top consultants and investment
bankers are examples.
Claim on resources
Power might arise from a claim or
control that exists over particular
resources of the business. For
example the power of employees or
trade union representatives might
come from their ability to withhold
labour in the event of a dispute with
management.
Personal charisma or influence
Some individuals might exercise
considerable influence through their
personal qualities and charisma.
2.5 Stakeholder mapping: Mendelow’s power/interest matrix
The managers of a business organisation should manage its stakeholders,
particularly those with the greatest influence. Stakeholder mapping is a technique
that can help senior managers to assess their main stakeholders, and consider
what should be done (if anything) to win the support of particular stakeholders for
particular decisions.
One approach to stakeholder mapping is to evaluate each stakeholder group
using a 2 × 2 matrix. One such matrix is a stakeholder power/interest matrix.
This is sometimes called a Mendelow matrix, named after the person who
‘invented’ it.
The matrix can be used to identify the position of each group of stakeholders in a
matter affecting the organisation. The matrix compares:

the amount of interest that the stakeholder has in a particular issue, on a
scale ranging from not at all interested (0) to very interested (+10), and

the relative power of the stakeholder, on a scale from very weak (0) to very
powerful (+10).
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The recommended approach to dealing with the stakeholder group is indicated in
each quadrant of the matrix. The key stakeholders are those who have
considerable power or influence, and also a keen interesting the matter or
decision that management is considering.

If a stakeholder has very little power and very little interest in a matter,
minimal effort is needed trying to keep the stakeholder informed about the
matter or satisfied.

If a stakeholder has very little power but a strong interest in a matter, the
appropriate way to deal with them is to keep them informed about what is
happening and why. The stakeholder should be kept informed even if they
oppose what the organisation is doing.

If the power of a stakeholder is strong but the stakeholder has very little
interest in the matter, it is important to keep the stakeholder satisfied. It is
essential to avoid any course of action that will increase the stakeholder’s
interest, and persuade the stakeholder to exercise its power.

The most significant stakeholders are those with a large amount of power
and a high level of interest in a matter. These stakeholders are key players
and it is essential to obtain and keep their support.
Example:
The board of directors of a major company want to make a takeover bid for
another company. Stock market rules require that the agreement of the
shareholders must be obtained before any such takeover can go ahead.
In this situation, the shareholders are stakeholders with large power and a high
level of interest. Clearly, the board of directors must ensure that they win the full
support of the shareholders so that the takeover will go ahead.
Example:
The directors of a company are planning to shut down an operations centre,
because it is losing money.
The employees who will be made redundant or transferred to other jobs within
the company are a stakeholder group that probably has relatively little power to
affect the shutdown decision. However, their interest in the matter is strong. The
directors should keep the employees fully informed about developments, what
the company is planning to do, and how this will affect each employee personally.
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2.6 Stakeholder conflicts of interest
The objectives of stakeholders differ, but need not be in direct conflict with each
other. For example, shareholders want to receive a good return on their
investment. This need not conflict with the objective of executive directors and
senior managers to earn high remuneration, especially if their remuneration is
performance-related. Employees want a secure job, good pay and good working
conditions: these objectives are not inconsistent with the objective of making
profits. Customers want value for the money they spend: business organisations
make profits by meeting customer needs more successfully than competitors.
A business organisation is therefore normally able to meet many of the objectives
of different stakeholders, provided that some compromises are accepted.
However, in some exceptional cases, there might be a strong conflict of interests
between stakeholder groups in a business organisation.
Example:
The board of directors of a major company might set as an objective a 20%
growth in annual profits. To do this, it might have to take the following measures:
(a)
reduce staffing levels and make a large number of employees redundant
(b)
switch to different suppliers of key materials, who are able to supply the
materials more cheaply because they use child labour
(c)
increase output in a way that will substantially increase waste levels and
carbon dioxide pollution.
In this example, the board of directors might face a strong conflict of interest with
employees (about redundancies), the general public and customers (about buying
from suppliers who use child labour) and the government, pressure groups and
the public (about waste and pollution).
Avoiding serious conflicts of interest
A company’s directors and senior managers should try to avoid serious conflicts
of interest between stakeholder groups. One approach is to apply principles of
good corporate governance and to recognise the corporate social responsibility
of companies.
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3
ORGANIZATIONAL STRUCTURE
Section overview

Formal and informal organisation

Strategy implementation

Organisation structure

Entrepreneurial organisation

Functional organisation structure

Divisional organisation structure

Matrix organisation structure

Project-based and team-based structures

Span of control

Organisational processes
3.1 Formal and informal organisation
Every large business entity and not-for-profit entity has both a formal organisation
and an informal organisation.
The formal organisation is the organisation structure that has been created and
maintained by its leaders. It can often be shown as an organisation chart, with job
descriptions. The earlier descriptions of organisation structures in this text are
descriptions of formal organisation.
In addition to the formal organisation structure, there is also an informal
organisation. This develops over time, but can change as some people leave the
organisation and new people enter it.
The informal organisation is a network of personal and social relationships. It
develops from the way in which individuals meet and communicate with each
other. They develop friendships and personal relationships, and they talk to each
other as individuals rather than simply as other employees who are required to
do a job. The focus of an informal organisation is people, not the work.
In an informal organisation, individuals begin to identify themselves with groups,
and these groups develop common rules of behaviour and normal ways of doing
things (‘norms’).
The significance of informal organisation
When an informal organisation is strong, it may become just as significant as the
formal organisation. Managers might need to consider how the informal
organisation affects behaviour at work – and work practice – and try to manage it.
For example, there might be a formal procedure for doing a particular task.
However, a group of individuals with strong interpersonal relationships might find
a different way of performing the task, which is easier or more acceptable than
the formal procedure.
The informal organisation might also affect attitudes to work – whether a group of
individuals are keen to complete a task on schedule, or do a job well, or agree to
work overtime, or whether they are collectively hostile to management and
working conditions.
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
Informal organisation can therefore support the formal organisation, and
help to make working practices more efficient and effective.

On the other hand, informal organisation might sometimes conflict with the
formal organisation, such as when a group of employees are hostile to their
work and their managers.

Managers might try to make use of a positive informal organisation by
formalising some aspects of the informal structure, for example by
changing work procedures or the methods used for communication.
3.2 Strategy implementation
After a strategic position analysis has been undertaken, available strategies have
been evaluated and the preferred strategies have been selected, the selected
strategies must be implemented. Achieving strategic objectives requires
successful strategy implementation.
Strategy implementation takes the form of day-to-day actions and relationships.
Three aspects of strategy implementation are:

organisation structure, including the organisation of processes and
relationships

managing strategic change

implementing strategy through a combination of intended strategy and
emergent strategy.
3.3 Organisation structure
Organisation structure is an aspect of strategy implementation. Strategy is
implemented through actions, and actions are planned and controlled through the
management and decision-making structure within the entity.
Organisation structures differ between entities. The organisation structure for an
entity should be appropriate for the size of the entity, the nature of its operations,
and what it is trying to achieve. Most important, the organisation must enable the
entity to develop plans and implement them effectively.
There are several different types of organisation structure. Within a single entity,
particularly a large entity, there might be a mixture of different organisation
structures, with different structures in different parts of the entity.
From a strategic perspective, however, the key question is: ‘What is the most
appropriate structure for a particular entity that will help it to achieve its strategic
objectives in the most efficient way?’
You should also be familiar with the following basic structures that might exist
within any entity or part of an entity:

an entrepreneurial organisation structure

a functional structure

a divisional structure

a matrix organisation.
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3.4 Entrepreneurial organisation
An entrepreneurial organisation is an entity that is managed by its entrepreneurial
owner. The main features of an entrepreneurial organisation are usually that:

the entrepreneur takes all the main decisions, and does not delegate
decision-making to anyone else

the entity is therefore organised around the entrepreneur and there is no
formal management structure

operations and processes are likely to be simple, and the entity will
probably sell just a small number of products or services.
An entrepreneurial structure is appropriate when an entity is in the early phase of
its life. As it grows larger, however, an entrepreneurial structure will become
inefficient, and a formal management structure is needed.
3.5 Functional organisation structure
A functional structure is usually the next stage in the development of the
organisation structure of a growing entity. In a functional organisation structure,
decision-making authority is delegated in a formal arrangement, and
responsibilities are divided between the managers of different activities or
functions. Typically, functions in a manufacturing entity include production (or
operations), marketing and sales, and finance and accounting. There might also
be a human relations function, an IT function, a research and development
function, and so on.
Each function has its own management structure and its own staff.
An organisation chart showing a simple functional structure is shown below.
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3.6 Divisional organisation structure
As entities grow still further, and develop their business operations into different
product-markets, a divisional structure might become appropriate. A division is an
area of operations, defined by:

markets in different geographical areas (for example, the European and the
North American divisions).

different products (for example the bus division and the rail division of a
transport company).

different customers (for example, industrial products and consumer
products).
A division might be a strategic business unit of the entity (group). Each division
has its own functional departments, such as marketing and sales, operations
(production), accounting and finance, and so on.
Authority is delegated from head office to the divisional management (led
perhaps by a divisional managing director), and responsibility for the
implementation of product-market strategy is mainly at divisional level.
Head office retains overall control, and there may be some head office functions
providing support services to all the divisions, such as corporate strategy, IT and
research and development.
The simple organisation chart below shows the organisation structure for a
divisionalised organisation with two divisions, where IT and research and
development are head office support functions.
3.7 Matrix organisation structure
Some entities have developed a matrix organisation structure for some of their
activities. The matrix organisation originated in the 1950s and 1960s, in entities
where it was recognised that different functions within the entity needed to work
closely together. Horizontal relationships across different functions were as
important as the ‘traditional’ reporting relationship within functions.
Matrix organisations and project organisation structures were both first used in
the defence and aerospace industries, where companies were required to carry
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out major projects for customers, such as building a quantity of aircraft for a
government customer.
The challenge was to complete projects on time and on budget. However, the
traditional functional structure within the construction companies meant that no
one was responsible for the project as a whole. A matrix organisation or project
management organisation was introduced to overcome the problem.

Project managers were appointed with overall responsibility for individual
projects. Project managers had to organise the efforts of individuals in all
the different functions.

At the same time, functional managers such as management of
engineering, production and sales and marketing, retained their decisionmaking authority.
In this way, a dual command structure was created. In a matrix organisation, the
traditional vertical command structure has an overlay of horizontal authority or
influence.
A matrix organisation has been defined as: ‘any organisation that employs a
multiple command system that includes not only a multiple command structure
but also related support mechanisms and an associated organisational culture
and behaviour pattern’ (Davis and Lawrence 1977).
The difference between a matrix organisation structure and a project organisation
is that with a project organisation, the project management comes to an end
when the project ends. With matrix organisation, the matrix structure of authority
and command is permanent.
Functional managers
Production
Project managers
Quality control
Design
Responsible to quality
control manager
Project A
Project B
Responsible to Project Manager B
Quality control expert
Project C
In the diagram above, the person shown is a quality control expert and is
responsible to the quality control manager for technical aspects of the job,
maintaining quality systems and so on.
The person is also responsible to the manager of Project B. That manager will be
concerned with completing the project on time, within the cost budget and to the
proper standard.
Obviously conflicts can arise: the project manager might want to skip some tests
to make up time, but the quality control department won’t want to do that. Both
can put the employee under some pressure. However the matrix structure should
allow the employee to ask the two managers to discuss the problem, as it is plain
that they are both involved.
Overall, matrix structures should:
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
encourage communication

place emphasis on ‘getting the job done’ rather than each manager
defending his or her own position.
Example:
Examples of matrix organisations are as follows.


A large company in which there are:

divisional managers responsible for a geographical market or a
particular product, and for the profitability of the market or the
product, and in addition

functional managers at head office responsible for the major functions
across the entire entity – for production marketing and sales, human
resources management and so on.
A university in which there is a traditional command structure based on
heads of faculty and heads of department, but in addition a course-based
management structure in which individual lecturers are responsible for all
aspects of particular courses or degree programmes (for example,
obtaining and managing the teachers from different faculties or
departments, finding the lecture rooms, marking the examinations, and so
on).
3.8 Project-based and team-based structures
In addition to having a formal management structure, entities might also use
project teams and other management teams to implement some activities.
Project teams are usually assembled to accomplish a specific task, such as
introducing a new system or a new process. The project team should consist of
members from different disciplines or functions, so that a wide range of skills is
assembled to implement the project.
Project teams might be used for implementing planned strategic changes.
3.9 Span of control
The span of control refers to the number of people who directly report to a
manager in a hierarchical management ‘command’ structure. There are two
extreme shapes:

Tall-narrow. In this type of structure, each manager has a small number of
subordinates reporting directly to him. As a result, in a large organisation,
there are many layers of management from the top down to supervisor
level. The span of control is narrow, and the shape of the organisation
structure is tall, because of the many layers of management.

Wide-flat. In this type of structure each manager has a large number of
subordinates reporting directly to him. As a result, even in a large
organisation, there are only a few layers of management from the top down
to supervisor level. The span of control is wide, and the shape of the
organisation structure is flat, because of the small number of management
levels.
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Tall-narrow
Wide-flat
(here the span of control = 2)
(here the span of control = 12)
Recent trends have
been to ‘flatten’ or
‘delayer’ the
structure.
The tall-narrow structure often has the following characteristics.

Formality in relationships between managers and subordinates.

Close supervision, with managers spending much of their time monitoring
the work of subordinates and giving them directions.

Task specialisation, with a small group of manager and subordinates
specialising in a very narrow aspect of the entity’s operations.

A strong cultural and procedural emphasis on formal roles, job titles and job
descriptions.

Slow vertical communication. Because of the many levels of management,
it can take a long time for information to get from top to bottom of the
management hierarchy, and from bottom to top. As a result, tall-narrow
organisations can be slow to react to change.
The wide-flat organisation structure often shows the following characteristics,
where the work is fairly complex and non-routine.

Greater egalitarianism. ‘Bosses’ and ‘subordinates’ will often respect each
other for their skills and experience, and will treat each other as equals.

Team-work and co-operation.

Greater delegation of responsibility to subordinates. Managers have too
many subordinates to apply close control. Managers must therefore trust
subordinates to get on with their work, with relatively little supervision.

Flexibility. There is less emphasis on roles and job descriptions, and
individuals are more willing to switch from doing one type of task to
another, as the demands of the work change.

There is rapid vertical communication and decision-making. Information
travels quickly from top to bottom of the organisation structure and from
bottom to top.
Wider and flatter organisation structures have replaced tall bureaucratic
structures in many organisations. The reasons why wide-flat organisations are
often preferred are as follows.
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
Wide-flat structures are more suitable to rapidly-changing business
environments, where entities must respond to changes quickly and with
flexibility. An organisation in which information travels quickly and decisions
can be made quickly is more appropriate in these circumstances that a
structure that is more formal and hierarchical.

Cost savings. It has been argued that in a tall-narrow organisation,
managers spend too much time managing each other, instead of adding
value. If middle managers do not add value, they should be eliminated from
the organisation structure.
3.10 Organisational processes
Actions are implemented within an entity through established processes. The
processes that are used within an entity vary. As explained above, they differ
between tall-narrow organisation structures and wide-flat organisations.
Processes affect the way that plans are made and implemented, and activities
are controlled. The nature of planning and control can differ widely between
different entities.

At one extreme, actions are controlled through direct and close supervision
of the work of individuals by their supervisor or superior manager.

At the other extreme, there is minimal supervision, and control is exercised
mainly by the individual himself.
Example:
Some investment banks have developed very complex financial products which
they sell to customers or trade for profit.
Due to their complexity, senior management do not understand the products in
any great detail. They rely on small investment management teams to use and
develop new products that are consistent with the bank’s strategic intent.
Supervision is therefore minimal, and control is often exercised through selfcontrol by the individual product experts.
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4
INTERNAL AND EXTERNAL RELATIONSHIPS
Section overview

Organisational relationships and implementing strategy

Internal relationships: centralisation versus decentralisation

External relationships

Outsourcing

The virtual organisation
4.1 Organisational relationships and implementing strategy
Plans are put into action by the co-ordinated efforts of many individuals and
groups within the entity. The way in which plans are implemented depends on:

the nature of internal relationships: these are relationships between
different parts of the organisation

the nature of external relationships: in many entities a significant amount of
work is done by other entities and individuals who are external to the entity
and not a part of it.
4.2 Internal relationships: centralisation versus decentralisation
An important aspect of internal relationships is the extent to which decisionmaking is centralised, so that major planning decisions are made (and
implemented) by ‘head office’, or decentralised.

In a centralised organisation, senior management retain most (or all) of the
authority to make the important decisions.

In a decentralised organisation, the authority to take major decisions is
delegated to the management of units at lower levels in the organisation
structure, such as strategic business units (SBU) managers, and divisional
managers.
The choice between a centralised and a decentralised organisation depends to
some extent on the preference of senior management. However, the size and
complexity of the entity also influence the extent to which decision-making,
planning and control are centralised or decentralise (‘devolved’). It is difficult to
control a large and complex entity from head office, without delegating
substantial amounts of authority to divisional managers.
Advantages of centralisation
Advantages of centralisation are as follows.

Decisions by management are more likely to be taken with regard for the
corporate objectives of the entity as a whole. There is a very strong
argument in favour of making strategic decisions centrally.

Decisions by management should be co-ordinated more effectively if all the
key decisions are taken centrally.

In a crisis, it is easier to make important decisions centrally.
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Advantages of decentralisation/devolution of authority
Advantages of decentralisation are as follows.

In many situations, junior (‘local’) managers have much better knowledge
than senior management about operational conditions. Tactical and
operational decisions are probably better when taken by local
management, particularly in a large organisation.

Giving authority to managers at divisional level and below helps to motivate
the management team.

Decisions can be taken more quickly at a local level, because they do not
have to be referred to head office.

In a large and complex organisation, many decisions have to be made –
probably too many for senior management at head office.
The appropriate amount of centralisation or decentralisation for an entity will
depend on the circumstances.
4.3 External relationships
An entity might use external relationships to deliver a particular strategy. These
are relationships with other entities, or with individuals who are not a part of the
entity but are external to it. External relationships may take the form of:

strategic alliances

value networks

outsourcing of functions

virtual organisation
4.4 Outsourcing
An entity does not need to carry out operations itself. Instead, it can outsource
work to a sub-contractor.
Outsourcing is common in certain industries, such as the construction industry. It
is also common to outsource ‘noncore’ activities, such as the management of the
entity’s fleet of motor vehicles, security services, some IT work and some
accountancy work (for example, payroll operations).
The size of an entity, and its organisation structure, will depend to some extent
on how much of its operational activities it chooses to outsource.
The reasons for outsourcing
Outsourcing is consistent with the view that an entity achieves competitive
advantage by concentrating on its core competencies. It does not achieve
competitive advantage doing work that can be done just as well – if not much
better – by another entity.

The entity should therefore focus activities within the entity on core
competencies, with the aim of gaining more competitive advantage in these
core areas.

The entity should outsource work to entities that have core competencies in
these areas of work. They should be able to add value more effectively
than the entity would if it were to carry out the work internally instead of
outsourcing it.
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
The outsourced work might require specialist skills that the entity cannot
employ internally, because it cannot offer enough work or a career structure
to full-time specialists. It therefore outsources its specialist work to
specialist firms.
Problems with outsourcing
The nature of the relationship with suppliers of outsourced work is critical to the
successful implementation of strategy.
A potential problem with outsourcing is the loss of control over the outsourced
activities. This can be significant when something goes wrong, and action
performance does not meet expectations.
For example a company might outsource its IT work and might commission a
software company to write some new software. The software, when written, might
not function properly. The problem is then to manage the external relationship
with the software company, to find a satisfactory solution to the problem.
4.5 The virtual organisation
The virtual company or virtual organisation does not have an identifiable physical
existence, in the sense that it does not have a head office or operational
premises. It might not have any employees.
A virtual organisation is operated by means of:

IT systems and communications networks – normally telephone and e-mail

business contacts for outsourcing all operations.
Many small businesses operate as virtual organisations. For example, a house
builder might operate his business from his home. When asked to build a new
house, he can hire all the labour – skilled and unskilled – that he needs to do the
work, supervise it and check it. He can employ a firm of accountants to deal with
the invoicing and payments. The builder does not need an office, or full-time
employees. His core competence is his personal skill and experience, which he
should use to give his firm its competitive advantage over rival house builders.
In the same way, there is no reason why a larger business should not be
operated as a virtual company. For example, a company that sells branded
footwear could operate as a virtual company, using its brand name as its major
core competence. It could outsource all its value chain and support activities.
Manufacture could be outsourced to producers in developing countries;
warehousing companies could be used to hold inventories. A network of selfemployed sales representatives might be used to sell the footwear into retail
organisations, and marketing activities might be outsourced to an external
agency.
One person, or a small number of individuals, can operate a virtual organisation
and indirectly control the actions of many ‘external’ entities and individuals.
A key to a successful virtual organisation is the successful management of all the
different external relationships, and successful co-ordination of their activities.
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5
THE MOST APPROPRIATE ORGANISATION STRUCTURE
Section overview

Contingency theory of organisation structure

Burns and Stalker: mechanistic and organic structures

Mintzberg’s five building blocks for organisational configurations

Mintzberg’s six organisational configurations

Conclusion: the most appropriate organisation structure
5.1 Contingency theory of organisation structure
Contingency theory of organisation structure is that the most effective
organisation structure for an entity depends on the circumstances. An entity
should use the organisation structure that is best suited to its size, complexity
and strategies. Organisation structure will vary according to differences in
organisational processes and internal and external relationships.
The consequences of adopting the wrong organisational structure may at best be
mere inefficiency and at worst corporate failure.
Benefits of adopting an appropriate structure

Staff morale is high as employees embrace reporting lines and logistics

Employees understand their roles and objectives

Relationships and processes appear logical and well organised

The company’s operations are highly efficient and the structure helps to
add value

Customers and clients receive quality products, on time and at fair prices

Decisions can be made quickly and by the right people

Inefficiencies such as redundant layers of management and delays in
responding to customer queries are minimised
Consequences of adopting a deficient structure

Staff can become frustrated through perceived overly bureaucratic
processes

Decision making can be delayed as it may be difficult to identify or
communicate with decision makers who are not local to the customers.
Furthermore, decisions made within a centralised organisation where
cultural variation is widespread may be inappropriate to sensitive
customers.

There may be a lack of clarity of roles and responsibilities, particularly
where multiple reporting lines exist in matrix organisations

The operations may be inefficient – for example the delivery costs of
adopting one large country-based central warehouse may exceed the cost
of operating three regional-based warehouses

Customers and clients lose out through delays and lower quality
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
Reputation and brand image could be damaged if the market concludes
that an organisation has adopted the wrong structure. This could ultimately
impact (lower) the share price of listed companies which may then be at
risk of a corporate take-over. Many bought-out companies then go through
a restructuring phase to streamline operations and improve profitability.

Ultimately a ‘bad fit’ may result in significant loss of customers to
competitors and overall corporate failure.
5.2 Burns and Stalker: mechanistic and organic structures
An example of contingency theory is the management study of Burns and
Stalker. They identified two categories of organisation structure, a mechanistic
structure and an organic structure.
The differences between the two types of structure are set out in the table below.
Mechanistic organisation
Organic organisation
Authority is delegated through a
hierarchical management structure.
Power over decision-making is
obtained from a person’s position in
the management hierarchy.
There is a network structure of
control. Individuals influence decisions
on the basis of their knowledge and
skills, regardless of their position in
the organisation.
A bureaucracy.
Control is cultural, not bureaucratic.
Communication is vertical, up and
down the chain of command.
There is much more horizontal
communication and free-flow of
information.
Jobs are specialised, and individuals
concentrate on their specialist area.
Doing the job is the main priority.
Specialist knowledge and expertise
are shared, and contribute to the
‘common task’ of the entity.
Contributing to the common task is
the main priority.
Job descriptions are precise.
Job descriptions are less precise.
Tasks and operations are governed
by instructions from a superior
manager.
Communications consist of
information and advice, rather than
decisions and instructions from a
manager.
Burns and Stalker found from their research that one type of organisation is not
necessarily better than the other. However, they did find that:

an organic structure is better-suited to an entity that needs to be responsive
to change in its products and markets, and in its environment.

a mechanistic structure is better suited to an entity in a stable environment,
where change is gradual.
Burns and Stalker also found that entities with an organisation structure better
suited to their environment perform better than entities whose structure is not well
suited to their environment. For example, an entity with a mechanistic structure
performs better in a stable market than an entity with an organic structure.
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Example: Mechanistic and organic combined
It is common for both mechanistic and organic elements to exist side-by-side
within the same organisation. Many hotel chains will employ mechanistic
processes within their ‘production departments such as housekeeping and
kitchens where structured processes and routine are vital, In the service
departments such as reception and marketing. They will adopt organic methods
that can react to change in consumer demands and identify creative ways to
monetise the assets and brand.
Example: Information technology vs. car manufacturing
Many IT companies such as Microsoft, Apple and Google operate in such a fluid
dynamic environment that their organisations need to be highly flexible and everevolving in order to continue to compete. These companies tend to reflect more
of the organic traits rather than mechanistic traits which help them thrive in an
industry that has notoriously short product lifecycles.
On the other hand, traditional car manufacturing plants display more mechanistic
traits. The industry is less dynamic than IT and product lifecycles are longer.
Reporting lines are more formalised and bureaucracy often more common place.
Example: Nestlé
It is important to recognise that the most suitable organisation structure depends
partly on circumstances and partly on management preference. Organisation
structures can also be changed.
An example is Nestlé. In an article in the Financial Times newspaper (22 February
2005), the CEO of Nestlé explained that in the past he had been frustrated by the
minor role played by the marketing function in the company. He had also disliked
the matrix organisation structure used by the company, where ‘local’ managers
were responsible for the profitability of their local markets, and functions such as
marketing had responsibility for their functions, but not for markets. The
marketing management were responsible for some innovation, but not for
country performance. Marketing managers had targets for returns on investment
in advertising, rather than responsibility for returns on business investment.
This organisation structure was changed. The head of marketing was made
responsible for the company’s seven strategic business units – dairy,
confectionery, beverages, ice cream, food, pet care and food services. These units
established the global business strategy for the company’s product markets. They
were responsible for research and development, production expertise and
systems control.
Regional business strategy was developed from the business strategies for each
of the SBUs. Local market strategy was developed from the regional business
strategies. In this way, the head of marketing became a key figure in strategic
management. He had to authorise every new factory opening by guaranteeing the
capacity utilisation of the factory and the return on investment.
The change in organisation structure, giving much more responsibility to the
marketing function, was the result of management preference rather than
strategic necessity. Clearly, however, the CEO believed that the new structure
would be more effective.
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Chapter 3: Organisational structure
5.3 Mintzberg’s five building blocks for organisational configurations
Mintzberg argues that an organisation structure exists to coordinate the activities
of different individuals and work processes, and to implement plans into action.
The nature of the organisation structure varies with differences in processes and
internal and external relationships. He suggested that there are five elements or
‘building blocks’ in an organisation. The way in which an entity is organised most
effectively depends on which of these elements is dominant.
These five elements are shown in the diagram below.

Strategic apex. This is the top management in the organisation.

Operating core. This represents the basic work of the organisation, and
the individuals who carry out this work.

Middle line. These are the managers and the management structure
between the strategic apex and the operating core.

Support staff. These are the people who provide support for the operating
core, such as secretarial staff, cleaning staff, repair and maintenance staff
and IT staff.

Technostructure. These are staff without direct line management
responsibilities, but who seek to standardise the way the organisation
works. They produce procedures and systems manuals that others are
expected to follow.
Mintzberg argued that the group that has the greatest influence determines the
way in which the entity is organised, and the way that its processes and its
relationships operate.

When the strategic apex is powerful, the organisation is entrepreneurial.
The leaders give the organisation its sense of direction and take most of
the decisions.

When the technostructure is dominant, the organisation often has the
characteristics of a bureaucracy, with organising, planning and controlling
prominent activities. The organisation continually seeks greater efficiency.
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
When the organisation is divisionalised and local managers are given
extensive authority to run their own division in the way that they consider
best, the middle line is dominant.

Some organisations are dominated by their operating core, where the basic
‘workers’ are highly-skilled and seek to achieve proficiency in the work that
they do. Examples might be schools, universities, and hospitals, where the
teachers and doctors can have an exceptionally strong influence.

In a professional bureaucracy, such as a firm of accountants or lawyers, the
middle line tends to be short (close contact between the partners and staff).
Unexpectedly, in view of the amount of standardised audit documentation,
the technostructure is small. This is because, although the documentation
is extensive, the use of the documentation is unique for each client. No two
audits or law cases are the same, so standardisation must be limited.
5.4 Mintzberg’s six organisational configurations
Mintzberg identified six different organisational configurations, each having a
different mix of the five building blocks. He suggested that the most suitable
organisational configuration would depend on the type and complexity of the
work done by the entity. The six configurations are:

simple structure

machine bureaucracy

professional bureaucracy

divisionalised form

adhocracy

missionary organisation
Simple structure
This is found in an entrepreneurial company. The strategic apex exercises direct
control over the operating core, and there is no middle line. There is also little or
no support staff or technostructure. The strategic apex might be an ownerdirector of the company. This type of structure is very flexible, and can react
quickly to changes in the environment, because the strategic apex controls the
operating core directly.
Machine bureaucracy
In a machine bureaucracy, the technostructure is the dominant element in the
organisation. The entity is controlled and regulated by a bureaucracy and the
emphasis is on control through regulation. It is difficult for an entity with this type
of organisation to react quickly to environmental change. This structure is
therefore more suitable for entities that operate in a stable business environment.
Professional bureaucracy
In this type of structure, the operating core is the dominant element. Mintzberg
gave the name ‘professional bureaucracy’ to this type of structure because it is
often found in entities where the operating core consists of highly-skilled
professional individuals (such as investment bankers in a bank, programmers in
a software firm, doctors in a hospital, accountants and lawyers in a professional
practice, and so on).
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Divisionalised form
In this type of structure, the middle line is the dominant element. There is a large
group of powerful executive managers, and the organisation structure is a
divisionalised structure, each led by a divisional manager. In some divisionalised
structures, divisional managers are very powerful, and are able to restrict the
influence of the strategic apex on decision-making.
Adhocracy
Mintzberg identified a type of organisation that he called an ‘adhocracy’. This is
an organisation with a complex and disordered structure, making extensive use
of teamwork and project-based work. This type of organisation will be found in a
complex and dynamic business environment, where innovation is essential for
success. These organisations might establish working relationships with external
consultancies and experts. The ‘support staff’ element can therefore be very
important.
Missionary organisations
In this type of organisation, all the members share a common set of beliefs and
values. There is usually an unwillingness to compromise or accept change. This
type of organisation is only appropriate for small entities that operate in simple
and fairly static business environments.
Differences between the six organisational configurations
The differences between the six organisational configurations are summarised
below. Note in particular how each configuration is likely to be suitable for
different types of business environment and different types of organisational
relationships. The main controlling and coordinating factor within each type of
configuration also differs.
Business
environment
Internal
features
Key
organisational
element
Main
coordinating
factor
Simple
structure
Simple and
dynamic
Small entity
Strategic apex
Direct control by
strategic apex
Machine
bureaucracy
Simple and
static
Large and
wellestablished.
Technostructure
Standardised
procedures
Operating core
Standardisation
of skills
Simple tasks
Regulated
processes
and systems
Professional
bureaucracy
Complex but
static
Simple
processes.
Control by
the
professionals
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Business
environment
Divisionalised Fairly static
form
Diverse
activities
Internal
features
Key
organisational
element
Main
coordinating
factor
Large and
wellestablished.
Middle line
Standardisation
of outputs
Support staff or
operating core
Flexibility and
adaptation
-
Standard beliefs
and values
Divided
activities
Adhocracy
Complex and
dynamic
Complex
tasks.
Young entity
Missionary
organisation
Simple and
static
Simple
systems.
Fairly well
established
(not young)
5.5 Conclusion: the most appropriate organisation structure
The organisational configurations suggested by Mintzberg, or the idea of Burns
and Stalker, can be used to consider whether the organisation structure of an
entity is well-suited to its circumstances and situation. The key point to note is
that the organisation structure should be designed to enable the entity to
implement its strategies successfully.
Johnson, Scholes and Whittington have commented: ‘Poor performance might be
the result of an inappropriate configuration for the situation or inconsistency
between structure, processes and relationships.’
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CHAPTER
Certificate in Accounting and Finance
Business management and behavioural studies
4
Managing change
Contents
1 Strategic change
2 Managing strategic change
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INTRODUCTION
Learning outcomes
The overall objective of the syllabus is to equip candidates with the fundamentals of
management and behavioural studies.
Organizational process
LO 2
On the successful completion of this paper, candidates will be able to
show familiarity with the structure of business organizations, their
culture and the change process
LO 2.2.1
Identify the external forces creating change on the part of organizations
LO 2.2.2
Describe process of organizational change
LO 2.2.3
Explain the forms of reactions to change
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Chapter 4: Managing change
1
STRATEGIC CHANGE
Section overview

The nature of change

Triggers for change

Consequences of change

Attitudes to change
1.1 The nature of change
Change happens continually within organisations and their markets. Strategic
development inevitably results in some change, which needs careful
management. Change is either planned or unplanned.

Planned change (or proactive change) is deliberate and intended. The
entity makes the change to move from an existing situation (or way of doing
things) to a new situation.

Unplanned change (or reactive change) happens in response to
developments, events and new circumstances that have arisen. The
change is not intended in advance.
With planned change, the entity might see an opportunity to develop. Unplanned
change is often seen as a reaction to a threat or an adverse event.
Change is either incremental or transformational.

Incremental change is a fairly small change. This type of change happens
without the need for a major reorganisation or restructuring of the
organisation and its systems and procedures. The entity should be able to
adapt easily to the change.

Transformational change is a big change. A transformational change
requires a major reorganisation or a restructuring of the organisation and its
systems and procedures. The change has a big impact on the entity, and
also on the people working in it.
Transformational change requires change management skills from the managers
who are responsible for introducing the change (the ‘change managers’).
Change is also either:

a ‘one-off’ event, so that the entity moves quickly from the old state of
affairs to a new state of affairs, or

a continuing process of development and change over a long period of
time.
1.2 Triggers for change
Triggers for change are the reasons for making a change, or the reasons for the
motivation to change. A trigger for change might come from either outside or
inside the entity.
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External triggers for change
External triggers for change are caused by changes in the environment. The
PESTEL analysis of the external environment provides a useful framework for
analysing external reasons for change.
Political reasons for change

Changes in strategy might be caused by an unexpected political crisis –
such as a civil war or major civil unrest – in a country that is either a major
source of supply or a major export market.
Economic reasons for change

Unexpected developments in the economies of various countries might
result in a change of strategy on foreign sales or expansion into foreign
markets.
Social and cultural reasons for change

Changing public attitudes and opinions might persuade an entity to alter its
strategy. For example, changing public attitudes to food safety following a
‘health scare’ about a food product might persuade a food manufacturer to
change its strategy to the design and production of its products.

Changing public attitudes to retirement age might persuade an entity to
change its retirement policy for employees, and its human resource plan.
Technological reasons for change

The significance of technological development has been mentioned earlier.
Ecological/environmental reasons for change

Change might be driven by ecological change, such as diminishing supplies
of fresh water, diminishing supplies of energy or factors related to climate
change. These changes might force a company to consider how its
businesses will continue to survive in the future, and what changes will be
needed to make the business sustainable.
Legal reasons for change

New laws on health and safety at work, laws against pollution and laws to
protect the environment might have an impact on strategy and procedures.
Internal triggers for change
Change might be motivated or caused by developments within the organisation.

Change of senior management. When there is a new senior manager,
such as a new chief executive officer or managing director, the new person
in charge might want to introduce change because he has his own ideas
about how things should be done.

Acquisitions and mergers. When there is a large acquisition or a merger,
major changes will probably be required to integrate the two separate firms
into a single entity.

Demergers and divestments. Similarly, when an entity is split up into two
separate entities (a demerger) or when a large part of the entity is sold off
(a divestment), changes in organisation, management and systems will be
necessary.

Reorganisation, downsizing and rationalisation. Change might be
necessary because the current organisation and systems are no longer
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appropriate and change is needed. This might happen when a loss-making
entity needs to close down an operating division, or needs to reduce the
size of its total workforce. Current operational systems might need to
change because they are no longer appropriate and have become
inefficient or ineffective.
1.3 Consequences of change
Transformational change must be managed carefully. It is extremely difficult to
introduce major changes without causing disruption. Many changes fail to
achieve the planned benefits because of the difficulties experienced with
implementing the change.
Change management requires:

identification of the strategic changes that should be made

recognising the need to change systems and organisation structures to
make the changes work successfully

recognising the effect of change on employees: this aspect of change
management is often overlooked, but is probably the most common reason
why attempts to make major changes are unsuccessful

careful planning and implementation of the change

making sure that the changes ‘stick’ and remain in place, after they have
been made.
There are several strategic models for the management of change. All models for
change management recognise the importance of people and attitudes to
change.
1.4 Attitudes to change
Some employees might welcome change and support the changes. More often,
however, employees fear change and resist change. Attitudes and culture may
therefore act as blockages to change. Here are several reasons for opposing
change:
Reasons related to the job

Employees might believe that the change will put their job at risk, and make
them redundant.

Employees might believe that their existing skills will no longer be required.
This is why employees often resist major technological changes.

Employees might fear that their working conditions will change for the
worse.
Personal reasons and fears

Employees might fear that the change will make them less important to
their employer.

They might believe that the call for a change is a criticism of the way they
have been working.

They might think that after the change, their work will be less interesting.
They might be reluctant to learn new ways of working.
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
They might fear the unknown.
Social reasons

Employees might resist change because they believe it will break up their
workgroup, and separate them from the people they enjoy working with.

They might think that after the change, they will be forced to work on their
own more, and there will be less interaction with colleagues.

They might dislike the manager who is forcing through the change.

They might dislike the way that the change is being introduced, without
consultation with the employees affected.
Change and organisation culture
Some entities are more capable of adapting to change than others. The reasons
listed above, and the earlier description of the cultural web, might suggest
reasons why resistance to major changes could be strong. Some entities,
however, are better at adapting to change than others, and in some entities,
change might be seen as a ‘good thing’.
The management writer Elizabeth Ross Kanter suggested that there are cultural
reasons why an organisation might be more change-adept than others.
According to Kanter, change-adept organisations have three key attributes:

The imagination to innovate. This comes from a leadership that seeks
new ideas for positive change.

The professionalism to perform. The management of the entity are
competent at introducing change. In addition, the workforce has been
suitably trained and developed, and has the ability to support its
management in introducing change.

The openness to collaborate. Change-adept entities share ideas with
other entities, such as suppliers and joint venture partners, and are able to
work well with other entities in making changes.
Kanter argued that change should be accepted by entities as something that is
natural, desirable and welcome. When change occurs as a defensive reaction, in
response to a threat, it is not welcomed. However, it is more appropriate to see
change as an opportunity for the successful implementation of business
strategies.
Entities that welcome change are most likely to be the first to innovate and adapt
to new technology, or entities with an ability to create sustainable competitive
advantage by creating extra value for its customers. Kanter argued that entities
that are change-adept are ‘fast, agile, intuitive and innovative’.
Reaction to change
When change occurs in an organisation employees may react in various ways
such as:

Entrenchment where employees refuse to change. This negative tactic
could lead to disciplinary proceedings and potentially dismissal. The
approach generally only results in a delay in the inevitable though with the
planned change invariably implemented.

Willing and enthusiastic acceptance where employees embrace the
change. This positive approach is more likely to end in win-win whereby the
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organisation achieves its change objective and also something positive
arises for the employee. For example the employee may embrace the
opportunity to learn new skills and experience different working practices.

Begrudging acceptance where employees do not support the change but
understand there is no choice other than to accept the change or resign.
This could be managed by involving employees in the change process and
explaining exactly why change is needed and how the employees will
benefit. If the employees do not ultimately embrace the change their morale
is likely to suffer and also their productivity. Furthermore their lack of
support during the change may play against them in the future, for example
with promotion opportunities offered to others.

Strike action when organisations attempt to bring in change that appears
to harm large groups of employees in the short-term they may choose to
strike, particularly if supported (or led) by unions. Strikes bring negative
publicity to an organisation and can harm the levels of service provided to
customers. This can lead to protracted negotiations between management
and strikers’ representatives both trying to achieve an acceptable
compromise.
Example: Off-shoring
During the first decade of the millennium it was commonplace for many
European companies to off-shore parts of their operations to India (and later to
Eastern Europe) in a bid to access lower wage rates and reduce operating costs.
This often led to the closure of large parts of the operation that traditionally
resided in Europe.
Employees would frequently be offered the choice of taking voluntary redundancy,
moving to India and being involved in running the operation and training offshore
employees, or taking alternative employment somewhere else within the
organisation.
Whilst for one employee the prospect of moving to India and experiencing a new
culture might be an exciting adventure, for others the upheaval and moving away
from friends and family might mean they prefer to take alternative employment.
For some employees who have worked in the same job for 30 years the prospect
of having to do something new may be so daunting that taking voluntary
redundancy is their preferred option.
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2
MANAGING STRATEGIC CHANGE
Section overview

Guidelines for change management: change levers and management skills

Lewin: force field analysis

Lewin: unfreeze, change, re-freeze

The change agent

The Gemini 4Rs

The 7S approach
2.1 Guidelines for change management: change levers and management skills
A general guideline for managing strategic change is as follows:

When change is planned, managing the change involves deciding how to
get from where we are to where we want to be, and recognising the
changes that are necessary to get there.

The change process consists of planning the changes, implementing them
and then maintaining the change, so that there is no ‘going back’ to former
ways and methods of operating.

There are several requirements for successful change. These are often
referred to as levers of change.
Levers of change
The following requirements are needed for successful implementation of change.

A clear understanding of the need for change, and what will be the desired
result of the change.

The commitment of the entity’s leaders to the change.

Effective communication with everyone affected by the change. This should
be two-way communication. Management should listen as well as explain.

Management should have the required qualities to implement change
successfully. Leadership qualities for managing change are described later.

The organisation structure and relationships within the organisation should
be adapted to meet the requirements of change.

Reward systems should be amended, so that rewards to managers and
other employees are based on performance targets that are consistent with
the requirements of the change.

Critical success factors and key performance indicators should be revised,
so that they are consistent with the requirements of the change.

Employees should be given education in the purpose of change and
training to meet the operational requirements of the change.
Skills for managing change
Rosabeth Moss Kanter suggested that a manager in a change-adept entity
should have the following skills.
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
Tuning in to the environment. Managers need to be aware of changes in
the environment that will make change by the entity necessary or desirable.
Kanter suggested that managers should create a network of ‘listening
posts’ that they should use to monitor environmental change. She
commented: ‘Pay special attention to customer complaints, which are often
your best source of information about an operational weakness or unmet
need. Also search out broader signs of change – a competitor doing
something differently or a customer using your product or service in
unexpected ways.’

Challenging the prevailing organisational wisdom. Change managers
should be prepared to challenge the ’conventional wisdom’ and question
accepted views about what is necessary or the way that things should be
done.

Communicating a compelling aspiration. A change manager should
have a clear idea of what he wants to achieve and should communicate this
‘vision’ to everyone he deals with. The manager must have personal
conviction that the change is necessary. Without this sense of purpose, he
will not be able to ‘sell’ the need for change to others.

Building coalitions. Managers cannot make change happen through
personal effort alone. They need to win the support and co-operation of all
the individuals with the knowledge, influence or resources to make change
happen. Making change happen is therefore a process of building alliances
and support.

Learning to persevere. Managers should continue with the process of
change even though there are likely to be setbacks and ‘defeats’ on the
way.

Making everyone a hero. The manager should give full credit to everyone
who helps to introduce change successfully, and should make them feel
that their efforts are fully appreciated. If possible, individuals who help to
introduce changes successfully should be rewarded.
Models for managing change
There have been several different suggestions about how transformational
change might be managed. Several of these ‘models’ for change are described in
the remainder of this section.
2.2 Lewin: force field analysis
Kurt Lewin was a social psychologist. He developed a theory, which he called
force field analysis, to describe the forces that came into conflict over planned
changes. He suggested that there are two opposing forces:

the driving forces that support the need for change, and

the restraining forces that oppose and resist the change.
Any of the following factors might be a driving force or a restraining force:

the people involved in the change, and what they want for themselves

the habits and customs of the individuals

their attitudes

the relationships between the people involved
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
organisation structures within the entity

vested interests

the entity’s policies

the resources available to make the change

regulations

events (happenings).
Lewin argued that each driving force or restraining force has a strength, which
might be measured on a scale of 1 to 5. The strength of the total driving forces
and the strength of the total restraining forces can therefore be measured.
Lewin also argued that:

Change will not occur if the forces resisting the change are stronger than
the driving forces for change.

Change is only possible when the driving forces for change are stronger
than the restraining forces against change.
A key task of the change manager is therefore to ensure that the strength of the
driving forces is stronger than the strength of the restraining forces. There are
two ways that this might be done:

Strengthen the driving forces for change
It might seem that the best answer is to strengthen the driving forces for
change. However, Lewin argued that by increasing the driving forces,
management run the risk that the restraining forces against the change will
also grow stronger.

The best approach is therefore to try to reduce the restraining forces
against change. Management should therefore:

identify the main restraining forces against change and

consider ways of reducing their strength, for example by discussing
the issues and difficulties with the individuals concerned, or by trying
to win the support of key individuals who currently oppose the
change.
2.3 Lewin: unfreeze, change, re-freeze
Lewin also suggested an approach to introducing planned transformational
change, which is sometimes called ‘prescriptive planned change theory’.
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He suggested that a planned process for change should begin with:

identifying the cause of the problems, and the reasons why change is
needed, and

identifying the opportunities of making improvements through
transformational change.
The change process then needs to go through three stages:

unfreeze

movement (change)

re-freeze.
Unfreeze
The process of ‘unfreezing’ is persuading employees that change is necessary.
Individuals will not want to change anything if they think that the current situation
is acceptable. Employees should therefore be encouraged to recognise what is
wrong with the current system or current situation and management should
encourage employees to feel dissatisfaction. Employees should be ‘unfrozen’ out
of their acceptance of the current situation
However, this is not enough. It is also necessary to offer employees an attractive
alternative for the future that can be reached by changing the current situation.
Management must therefore have a clear vision about what changes they want to
make, and they should encourage employees to want these changes to happen.
Management must therefore discuss the problems with the employees affected,
and communicate their ideas.
Unfreezing is therefore the process not only of making employees dissatisfied
with the current situation, but also persuading them about the nature of the
changes that should be made.
Movement (change)
The changes should then be made.
To introduce change successfully, the support for change must be strong enough
to overcome the opposition. This is consistent with Lewin’s force field analysis.
Management should be given sufficient resources to implement the changes.
(Having sufficient resources to make a change can be a driving force for change.)
The change managers should try to involve the employees affected and get them
to participate in making the changes. Participation in making changes helps to
reduce the resistance to change.
Re-freeze
Lewin argued that even if change is implemented, there is a risk that before long,
employees will go back to their old ways of doing things, and the benefits of the
change might be lost.
It is therefore essential that once change has happened, employees should be
encouraged to carry on with the new way of doing things.
One way of doing this might be to reward employees for performance based on
the desired behaviour and results.
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The process of getting employees to carry on with the new system is called refreezing.
2.4 The ‘change agent’
When a transformational change is implemented, there has to be a ‘change
agent’ who drives the change and is responsible for its successful
implementation. Often the change agent is an outside consultant. This individual
must have certain skills.

He must explain the reasons for the change, and provide employees with
reliable information. This will help to reduce the risk of false rumours
spreading.

As far as possible, he should involve the individuals affected, and get them
to participate in making the changes. When individuals are involved in the
change process, they are less likely to resist it.

He should maintain communications with employees at all time, monitoring
the progress of the change and providing information to others about the
progress.

Where appropriate, he should provide training to the employees affected.

He should emphasise the benefits of the change to the individuals affected.
A consultant is often used because:

An outside consultant is perceived to be independent and fair.

The consultant will have experience in managing the change process.

The consultant will have experience of many organisations and should be
able to advise on which changes are desirable

Large-scale changes can easily go wrong. Management will want all the
help and advice available.
2.5 The Gemini 4Rs
Another model for introducing transformational change was promoted by Gemini
Consultants. This is known as the 4Rs model.
The elements of the model are as follows.
Re-frame
Create the desire for change.
Create a vision of what the entity is trying to achieve.
Create a measurement system to set targets for change and
measure performance.
Re-structure
Examine the organisation structure, and create an economic
model showing how value is created by the entity, and therefore
where resources should be used.
Re-design the processes so that they work better to create more
value.
Revitalise
This is the entity’s commitment to the future. Find new products
and new markets that fit well with the entity’s environment.
Invent new businesses.
Change the rules of competition by making use of new
technology.
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Develop individuals within the organisation. Make sure that
employees have the skills that are needed and that they support
the change process.
Renew
Create a reward system to motivate individuals to seek change.
Develop individual learning and creativity within the entity.
2.6 The 7S approach
The 7S Framework was first published in 1981 and was subsequently adopted by
the consultancy firm McKinsey. It is therefore sometimes known as the McKinsey
7S model. It is a model for the successful implementation of strategic change.
The 7S model consists of seven factors that contribute to the effectiveness of an
entity. It is based on the view that in order to introduce strategic change,
managers must take into consideration all seven of the following factors (the 7Ss)
These seven factors consist of three ‘hard’ factors and four ‘soft’ factors.
Hard factors
Strategy
This consists of the formally stated goals and objectives of the
entity, and a plan for allocating the entity’s resources to activities
in order to achieve those goals.
Structure
This is the formal organisation structure of the entity. It is
concerned with the division of responsibilities and the allocation of
authority for the achievement of the strategic goals.
Systems
These are the systems that operate within the organisation,
including manufacturing systems, procedures and information
systems.
Soft factors
Staff
These are the people who work for the organisation, and their
attributes – numbers, motivation, loyalty, pay rates, working
conditions, career advancement, and so on.
Skills
These are the skills of key personnel. What can they do well, and
what do they do badly?
Style
Style refers to the cultural characteristics of the entity and the
people who work in it, and also the leadership style of its
managers.
Shared
values
These are the guiding beliefs about the purpose of the entity and
why it exists, shared by the individuals who work in it. These
might be, for example: ‘providing customer service and
satisfaction’, or ‘making profits’, or ‘providing a service to the
community’.
The hard factors are so-called because they are relatively easy to define:
strategy can be recorded in a strategic plan, structure on an organisation chart
and systems in a procedures manual.
The soft factors are harder to identify and define. Of course there are elements of
these factors that are relatively easy to define (such as wage rates) but there are
factors that are more difficult to pin down (such as staff motivation and loyalty).
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All seven factors are interrelated. The 7S model is therefore often depicted as a
molecule with seven atoms (balls) all joined to each other by molecular bonds (=
the ‘managerial molecule’)
When making strategic change, a failure to take any one of the seven factors into
consideration could have adverse implications for the other six factors, and the
change will not be successful. All seven factors must therefore be given
consideration when change is planned and implemented.

When the model was first devised, research showed that in many US
corporations managers tended to focus on those factors that they felt they
could change – structure, strategy and systems, i.e. the hard variables.

However they tended to ignore the other four factors (skills, style, staff and
shared values) – i.e. the soft variables.

According to McKinsey, this is why attempts at strategic change often fail.
The 7S model and change management
The 7S can be used to carry out an internal assessment of the capabilities or
competencies of an entity. However, the model has other applications, and in
particular it can be used to assess the possible implications of change within an
organisation.
A change in any one of the S factors will have a knock-on effect, so that there
might need to be changes in the other S factors too. Changes in ‘hard factors’
such as operational systems or the management structure will have an impact on
‘soft factors’. Problems with the soft factors could mean that changes to hard
factors are difficult to implement successfully.
Example:

A company recognises that it has a weakness in its after-sales service to
customers. It therefore decides to establish a new customer services
department, in order to improve customer goodwill. (= Change in Strategy).

It will need to recruit staff and organise them into customer service teams
(= Change in Structure).

The entity might recruit new staff who will have the confidence to use their
initiative in dealing with individual customers (= Change in Staff)

The staff will need suitable training in customer service skills (= Change in
Skills).

Senior management will need to promote an awareness of the need for
better quality throughout the organisation (= Change in Shared values).

New procedures need to be developed for guiding employees in how to
handle customer complaints and queries (= Change in Systems).

Although there will be procedures for handling standard problems,
management and supervisors might need to learn to ‘empower’ their
employees and allow them to use their initiative in dealing with unusual
cases (= Change in Style).
Strategic changes should therefore be considered from all seven perspectives. A
failure to deal with any one factor could result in a new weakness.
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Using 7S model analysis
One way of using the 7S model to analyse the possible consequences of change
is to take each pair of factors and consider the possible implications of a change
in one factor on the other.
For example, the connections between ‘structure’ and ‘skills’ might be
considered. An entity might be planning to increase the skills of a group of
employees by giving them training towards a professional qualification. A
possible implication of the change in skills could be that the employees, once
they are trained, might expect greater responsibility for decision-making and less
supervision. The change in skills would therefore have implications for the
organisation and management structure.
By analysing the implications of change in this way, it should be possible to plan
for the change, so that the change is carried out successfully. In the example
above, the strategy to raise skills levels might be accompanied by a plan to
restructure the management hierarchy, and gradually reduce the number of frontline supervisors.
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CHAPTER
Certificate in Accounting and Finance
Business management and behavioural studies
5
Culture
Contents
1 Organizational culture
2 Schein, Handy and Hofstede
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INTRODUCTION
Learning outcomes
The overall objective of the syllabus is to equip candidates with the fundamentals of
management and behavioural studies.
Organizational process
LO 2
On the successful completion of this paper, candidates will be able to
show familiarity with the structure of business organizations, their
culture and the change process
LO 2.3.1
Describe organizational culture using examples
LO 2.3.2
Discuss using examples the different levels of organizational culture
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1
ORGANIZATIONAL CULTURE
Section overview

Definition of culture: organisational, corporate and group culture

The significance of culture for management

Factors that shape organisation culture

Dysfunctional aspects of culture
1.1 Definition of culture: organisational, corporate and group culture
In addition to having informal organisation, business organisations (and other
types of organisation) also develop a culture. A culture is a set of dominant
beliefs, attitudes, values and norms that is shared by a number of people.
Edgar Schein suggested that employees working within a company have shared
values, beliefs and ways of thinking: these interact with the policies, organisation
structure and politics of the company’s management system to create a
corporate culture. Culture affects the expectations of employees within the
company about what the company should achieve.
Schein argued that organisation culture is strong because it is regarded as
something that helps the company to succeed. An organisation culture is a set of
assumptions that a group of people working together have invented, discovered
or discovered by learning how to deal with problems that the organisation faces,
internally and in its external environment. These assumptions work well enough
to be considered valid; they are therefore ‘taught’ to individuals who join the
organisation. New entrants therefore learn the culture of the organisation and
become a part of that culture.

Organisational culture refers to a set of beliefs, values and attitudes that
is shared by everyone in the organisation. Within an organisation,
organisational culture defines ‘the way we do things around here’. Peters
and Waterman argued that the most excellent business organisations are
characterised by particular cultural attitudes and beliefs.

Corporate culture refers to the way in which organisations are managed.
This is different from organisational culture, which is the set of values
shared by all the employees. However, the term ‘organisational culture’ is
often used with the same meaning as ‘corporate culture’.

Workgroup might also have their own distinct culture. Within the same
business organisation, there may be several workgroups, each with a
distinct ‘sub-culture’. For example, the culture in the sales department
might be very different from the culture in the accounts department, and
both these cultures may differ from the culture of the research and
development department staff.
Differences in organisational culture are probably best understood by looking at
different organisations with which you are familiar. It is widely understood, for
example, that business organisations are driven by a different set of priorities and
concerns than not-for-profit organisations. However, if you visit two different
companies in the same industry, you will probably find very noticeable
differences in culture – the way people talk to each other, the way they deal with
outsiders, their priorities and concerns.
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How does culture differ from informal organisation?
Culture is deeply embedded within an organisation, and a common culture might
be shared by everyone in the organisation. When new individuals join an
organisation, they are ‘taught’ the organisation culture and learn to adopt it. In
contrast, an informal organisation is no larger than the individuals who interact
socially at work and the nature of the informal organisation can change when
individuals leave or join.
Because culture is deeply-embedded, it is very difficult to change.
1.2 The significance of culture for management
Edgar Schein, a writer on organisation culture, has written: ‘The concept of
culture is still misunderstood in organisations, being treated too much as a
superficial phenomenon’. He also wrote: ‘Culture is really a very deep
phenomenon and ... if managers/leaders are serious about changing culture, they
must make an effort to understand how culture really ‘works’ and what it really is.’
An understanding of the culture of workgroups is ‘essential to leaders of they are
to lead’ (Schein). Managers need to understand the culture of the group or
groups that they manage. By understanding the group culture, they can try to
influence it and encourage positive attitudes to work.
Schein wrote: ‘Building an effective organisation is ultimately a matter of meshing
different sub-cultures by encouraging the evolution of common goals, common
language and common procedures for solving problems.’ He was the first person
to use the term ‘corporate culture’. He believed that successful managers
develop a positive corporate culture.
1.3 Factors that shape organisation culture
A combination of factors shapes the culture of a workgroup or an organisation.

Formal structure and size. To some extent, the culture of an organisation is
affected by its size and its formal organisation structure.

Leadership. The leaders of an organisation can influence culture, for
example by stating the values of the organisation, and its goals and
strategies.

Environment. Culture develops as a way of responding and reacting to the
environment in which the organisation operates.

Events. Culture develops as a result of many events, and how a group or
organisation has responded to those events.
The cultural web
An approach to analysing corporate culture has been suggested by Johnson and
Scholes. They have suggested that there is a cultural web within every
organisation, which is responsible for the prevailing culture, which they call the
‘paradigm’ of the organisation.
The cultural web consists of six interrelated elements of culture within an
organisation.

Routines and rituals. Routines are ‘the ways things are done around
here’. Individuals get used to the established ways of doing things, and
behave towards each other and towards ‘outsiders’ in a particular way.
Rituals are special events in the ‘life’ of the organisation, which are an
expression of what is considered important.
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
Stories and myths. Stories and myths are used to describe the history of
an organisation, and to suggest the importance of certain individuals or
events. They are passed by word of mouth. They help to create an
impression of how the organisation got to where it is, and it can be difficult
to challenge established myths and consider a need for a change of
direction in the future.

Symbols. Symbols can become a representation of the nature of the
organisation. Examples of symbols might be a company car or helicopter,
an office or building, a logo or a style of language and the common words
and phrases (‘jargon’) that employees use.

Power structure. The individuals who are in a position of power influence
organisations. In many business organisations, power is obtained from
management position. However, power can also come from personal
influence, or experience and expertise. The most powerful groups within an
organisation are most closely associated with the core beliefs and
assumptions in its culture.

Organisation structure. The culture of an organisation is affected by its
organisation and management structure. Organisation structure indicates
the important relationships and so emphasises who and what is the most
important parts of it. Hierarchical and bureaucratic organisations might find
it particularly difficult to adapt to change.

Control systems. Performance measurement and reward systems within
an organisation establish the views about what is important and what is not
so important. Individuals will focus on performance that earns rewards.
Together, the cultural web consists of the assumptions that are ‘taken for
granted’ within the organisation as being correct, and also the physical
manifestations of the culture.
1.4 Dysfunctional aspects of culture
The existence of a well-defined and robust culture can bring dysfunctional
aspects to an organisation as well. The three key dysfunctional aspects are:

Creating barriers to change towards something that is not considered
part of the existing culture – for example resistance from management to
the introduction of a ‘work-life balance’ initiative including relaxation, family
and leisure time in a high-performing corporate finance organisation.
This can be dysfunctional when the shared values are not in alignment with
those that would further the effectiveness of the organisation and is
typically seen in dynamic environments.
An example would be the corporate administration of Eastman Kodak who
failed to respond to the market’s shift in demand from traditional
photography equipment and processing to digital-based products.

Creating barriers to diversity for example facing resistance when aiming
to achieve greater gender balance in boardroom composition.
The diversity theme creates a kind of paradox whereby management wish
new employees to conform to existing cultural norms whilst simultaneously
wanting them to be different (diverse) in some way.
Organisations seek to hire varied and diverse individuals because of their
alternative approach and fresh ideas. However, in reality these diverse
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strengths and behaviours by their very nature are likely to weaken the
existing culture definition.

Creating barriers to mergers and acquisition when operational fit is
achieved but cultural practices are not aligned. The objectives and tests for
corporate consolidation are typically focused on synergies and cost savings
whereas in reality the greatest factor in success or failure tends to be
whether the cultures are matched or not.
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2
SCHEIN, HANDY AND HOFSTEDE
Section overview

Edgar Schein: three levels of culture

Corporate culture: the views of Handy

Hofstede: international perspectives on culture
2.1 Edgar Schein: three levels of culture
According to Schein, there are three levels of culture that members of an
organisation acquire:

the outer skin, or artefacts

the inner layer (or espoused values)

the paradigm (basic underlying assumptions).
These are interrelated and react with each other. However, aspects of culture,
particularly artefacts, are often difficult to ‘interpret’ and understand.
Levels of culture
Visible structures and processes in the
organisation
Artefacts
Philosophies (mission), ethics,
strategies, goals, stated values
Espoused values
Unconscious beliefs, perceptions and
thoughts that are taken for granted
Basic underlying
assumptions
The outer skin (artefacts)
At one level, the culture of a company is evident in what a visitor can see and
hear by visiting the company.

The facilities and surroundings in which employees work help to create
culture. So too does the way that employees dress. For example, some
organisations insist on office workers dressing formally. In others, even
senior managers go to work in casual clothes, such as an open-necked
shirt and jeans.

Culture is also seen in the way that employees talk to each other and
interact with each other. It can be heard in the language that individuals use
when talking to each other, such as the use of ‘jargon’.
The inner layer (espoused values)
A company might have a formal code of ethical behaviour, which is intended to
shape the attitudes of all its members. It might have a formal code of ethical
behaviour, which is intended to shape the attitudes of all its members.
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Stated values and mission statements are often expressed in general terms,
such as ‘providing a service to the community’ and ‘providing the best quality of
service to customers’.
Culture might also be expressed in the goals and strategies of the organisation.
This level of culture can be influenced by the organisation’s leaders.
The paradigm (basic underlying assumptions)
‘Paradigm’ is a term for the shared assumptions and attitudes about what really
matters, that are taken for granted and rarely discussed. These affect the way
that the organisation sees itself and the environment in which it operates, and is
the real ‘core’ culture of the organisation. Unlike mission statements and codes
of ethics, a paradigm is not written down, and it is difficult to identify or explain.
The ‘paradigm’ has also been described as the reason why the organisation
exists. A police force exists to catch criminals, and a school exists as a place for
learning.
A paradigm has been defined (by Capra, 1997) as: ‘a constellation of concepts,
values, perceptions and practices shared by a community, which forms a
particular vision of reality that is the basis of the way a community organises
itself.’
Schein argued that changing corporate culture is very difficult. The ‘outer skin’
can be changed fairly easily, with a determined effort by management, but it is
very difficult to change the paradigm.
2.2 Corporate culture: the views of Handy
Charles Handy (in his book Gods of Management) suggested that there are four
different categories of corporate culture. He described these as cultural
‘stereotypes’:

A power culture, also called a club culture and a spider’s web culture

A role culture

A task culture

A personal culture, also called an existential culture.
Power culture
In a power culture, there is one major source of power at the centre of the
organisation. Power, authority and influence spread out from this central point,
along functional or specialist lines, but control remains at the central point. Handy
compared the power culture to a spider’s web, with the spider at the centre
controlling everything. Individuals closer to the centre of the web have more
influence than individuals who are further from the centre.
A power culture is often found in small entrepreneurial organisations, where the
boss is usually the founder of the business and also a dominant personality, who
exercises close control over activities.

A power culture is based on trust.

The ‘boss’ maintains freedom of manoeuvre, and retains power, by writing
very little down and relying on the spoken word.

The ‘boss’ tries to influence other people through the force of his
personality, and personal charm.
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A problem with a power culture is that it depends on the character of the ‘boss’.
As an organisation grows in size, it becomes more difficult for one person to
control everything. There is a risk that the organisation will become inefficient
unless the corporate culture is changed. A power culture is therefore unlikely to
be efficient for organisations of more than about 20 people.
Role culture
A role culture is probably the most readily-understood of the four corporate
cultures. It exists in a bureaucracy, where the responsibilities of each individual
are defined by the job that he or she has, the job definition and its position in the
organisational structure. There is a traditional hierarchical structure to the
organisation, and each job (role) has a specific function. The organisation relies
on formal communications rather than informal communication.
A role culture has been compared with a pyramid of boxes, and each box has a
job description. The boxes remain in place and the culture is unchanged when
the individuals in the boxes leave the organisation and are replaced.
A role culture is probably best-suited to a large organisation in a fairly stable
business environment, where employees are expected to do the job that they
have been given, and where enterprise and initiative are relatively unimportant.
People in organisations with a role culture are ‘managed’ rather than ‘led’.
Task culture
In a task culture, the focus is on tasks and getting tasks completed in the most
efficient and effective way, and the main aim is the successful solution of
problems.
In a task culture, organisation is flexible. Work teams can be formed, disbanded
when a task is completed, and then re-formed into new workgroups to deal with
new tasks. Individuals gain respect and authority from their knowledge and skills,
rather than from their ‘official role’ within a work team. A task culture is typically
found in project teams and development groups.
A task culture is well-suited to an organisation that is continually facing new
problems and challenges. This is often found in rapidly-changing organisations
and industries such as IT companies and knowledge-based industries. It is also
found in building and construction companies. In these organisations,
workgroups are often formed to deal with a particular task, and disbanded when
the task has been completed.
In a team culture, personal relationships matter, and individuals are ‘led’ rather
than ‘managed’.
Person culture
In a person culture, the entire organisation structure is built around one individual
or a group of individuals. The rest of the organisation exists to serve the needs of
the central individual. The culture is based on the view that the organisation
exists to serve the talented individual or individuals.
It is unusual for an entire organisation to have a person culture, but small parts of
an organisation might be structured in this way. Examples are organisations built
around individuals in the sports or entertainment industries, small management
consultancies, or parts of investment banks. Firms of lawyers and small hospitals
might also have a person culture.
In an organisation with a person culture, the central individuals may share some
common resources, such as a small administrative support function. However,
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the individuals operate independently and have some dedicated support staff of
their own.
Different cultures may exist in different parts of the same organisation. The
culture of an organisation, or a part of an organisation, determines how it is
managed, and how individuals within the organisation think and act.
Example:
According to Handy’s analysis of cultural stereotypes, which one of the following
should be expected to adopt a task culture?
(1)
A government department with responsibility for collecting and publishing
official government statistics.
(2)
The human relations management department in a large commercial bank.
(3)
The department of a consultancy firm that specialises in providing IT
consultancy services to client firms.
(4)
A small fashion business that designs high-fashion clothes.
Answer
A task culture should be expected in (3), the department of a consultancy firm
that specialises in providing IT consultancy services to client firms. The IT
consultants are likely to work in teams, sharing their knowledge and expertise, to
provide IT solutions for clients. The team members are likely to show respect for
technical skills and experience among other team members, and there should be
relatively little concern for seniority or job descriptions.
A role culture should be expected in both (1) and (2). The structure is likely to be
hierarchical, with clearly defined job descriptions and responsibilities. This is
certainly the case with a civil service department, but is also likely to occur in the
HRM department of a large company such as a bank. Roles can be clearly
defined. If individuals leave, the same position is easily filled by someone else to
do exactly the same job.
A fashion business might have a task culture, where designers work in teams.
However, it is more usual, especially in small firms, for the organisation to be
dominated by the head fashion designer. Depending on the nature of the
company, a fashion business might have a power culture (where the organisation
is led by the entrepreneurial owner of the business) or a person culture, where the
organisation is based on providing administration support to key persons (fashion
designers).
2.3 Hofstede: international perspectives on culture
In the 1980s and early 1990s, Geert Hofstede added some useful views about
the effect of national cultures on organisational culture. Hofstede argued that
culture is a property of groups, not individuals. There is no such thing as
individual culture. Culture is the collective programming of the mind that
distinguishes the members of one group from the members of another group.
He argued that national cultures are different. As a result, the culture of business
organisations in one country will differ from the culture of organisations in a
different country.
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Multinational companies face the challenge of trying to create a common
organisational culture for an organisation that operates across national
boundaries.
Example:
Different national cultures mean that business practices that are considered
perfectly acceptable in one country might be considered unacceptable in others.
For example, the following business practices are acceptable in some countries
but not in others.
(a)
(b)
(c)
Paying an adviser to discover loopholes in the tax laws, in order to avoid
paying tax on business profits.
Inspecting the product of a competitor at a trade fair, and then developing a
close copy as a rival product.
Paying a government official to speed up the completion of a bureaucratic
procedure.
(d)
Giving a gift to the purchasing manager of a large company that buys your
products.
Hofstede suggested that there are five dimensions to differences in organisation
culture arising from differences in national culture.

Power-distance dimension. This refers to the way in which power is
dispersed within the organisation. When the power-distance dimension is
low, this means that inequalities in the distribution of power within the
organisation are minimised. When the power-distance dimension is high,
inequalities in power are regarded as acceptable and those without power
look to those with the power to make the decisions for the organisation.
Writing in the 1980s, Hofstede suggested that the power-distance
dimension was low in countries such as Sweden and New Zealand, and high
in Latin American countries and in the ‘Latin’ European countries such as
Spain and France.

Individualism versus collectivism dimension. In some countries the interests
of the individual come before the collective interests of the group. (Hofstede
gave Australia and Canada as examples.) In other countries, concern for the
group comes before concern for the individual. (Indonesia is an example.)

Uncertainty avoidance. This is the extent to which a group feels threatened
and endangered by unexpected and unfamiliar happenings. When a culture
of uncertainty avoidance is high, work behaviour such as precision and
punctuality are highly esteemed. (Hofstede gave Japan and South Korea as
examples.)

Masculinity versus femininity. In some countries there is a much stronger
cultural acceptance of ‘feminine’ qualities such as modesty, intuition and
quality of life, rather than aggressive ‘masculine’ qualities of
aggressiveness and competitiveness. Hofstede gave the US and UK as
examples of ‘masculine’ cultures.

Long-term orientation versus short-term orientation. In some countries,
there is a greater focus on short-term goals and short-term results, whereas
in other countries there is a greater willingness to consider the longer term.
Short-termism is a feature of organisation culture in the US and much of
Western Europe.
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CHAPTER
Certificate in Accounting and Finance
Business management and behavioural studies
6
Employee behaviour
Contents
1 Perception
2 Attitude
3 Job satisfaction and stress
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Business management and behavioural studies
INTRODUCTION
Learning outcomes
The overall objective of the syllabus is to equip candidates with the fundamentals of
management and behavioural studies.
Individual behaviour and motivation
LO 3
On the successful completion of this paper, candidates will be able to
demonstrate an understanding of human behaviour
LO 3.1.1
Explain perception and perception process
LO 3.1.2
Discuss using examples the difference between sensation and perception
LO 3.1.3
Discuss using examples the internal and external factors that affect perceptual
selectivity
LO 3.1.4
Describe the characteristics of Perceiver and Perceived
LO 3.1.5
Analyse the perceptual problems/distortions in dealing with other people like
stereotyping and Halo effect etc.
LO 3.2.1
Define attitude and its components with reference to culture of an organization
LO 3.2.2
Discuss the differences between cognitively based attitudes and affectively
based attitudes
LO 3.2.3
Describe the difference between implicit and explicit attitudes
LO 3.2.4
Discuss cross-cultural differences in the bases for attitudes
LO 3.2.5
Explain the relationship between attitude and behaviour
LO 3.3.1
Explain using examples the meaning of job satisfaction.
LO 3.3.2
Identify the outcomes of job satisfaction and ways to enhance satisfaction
LO 3.3.3
Describe stress and identify the causes of job stress
LO 3.3.4
Explain using examples the general categories of stressors that can affect job
LO 3.3.5
Identify consequences of stress and strategies in order to cope up with stress
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1
PERCEPTION
Section overview

Introduction to perception

Three stages of the perception process

Sensation vs. perception

Perceptual selectivity

Perceptual problems and distortions when dealing with people
1.1 Introduction to perception
Definition:
Perception is a process by which individuals organise and interpret their sensory
impressions in order to give meaning to their environment. In short, perception is
the process by which we attach meaning to the world around us.
The perception process involves observing, organizing and interpreting other
people, ideas, experiences and objects in the context of the person’s own beliefs,
values and expectations.
We use our senses to perceive the world around us including:

Sight

Hearing

Touch

Taste

Smell
Perceptions enable individuals to frame their behavioural responses towards
particular objects. Note that perception is unique to each person – no two people
view the world exactly the same.
Perceptions of an individual or individuals may not necessarily be in accordance
with the objective reality of the situation. In fact they frequently differ leading to
variation in individual and organizational behaviour.
Perception of an individual towards any object or situation could be influenced by
any one or a combination of the following factors:

Attitudes

Motives

Interests

Experience

Expectations

Beliefs
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Business management and behavioural studies
1.2 Three stages of the perception process
The perception process involves three stages:

Stage 1: Selection
Selection involves selecting stimuli to which we attend. We do this by
using our senses – i.e. touch, taste, sight, sound and smell

Stage 2: Organization
Organization involves mentally arranging information gained from the
stimuli so we can understand and make sense out of it.

Stage 3: Interpretation
Interpretation is the final stage and the key stage where we attach
meaning to the stimuli.
Our interpretations are subjective and based on our values, beliefs,
expectations, needs, involvement, self-concept and other personal
factors
1.3 Sensation vs. perception
Sensations are things in our environment that are registered by the five senses.
This process is limited in scope as it is restricted to the human body’s
physiological process involving the five senses.
However, there are an infinite number of ways in which individuals may perceive
the same information that was sensed through the five senses. This is what
makes us different and leads us to being individuals.
Some examples of the difference between sensation and perception in practice
are:

Someone makes a comment which they think is funny. However, someone
else, hearing the same comment, may take great offence at it.

Two people share the same food dish – one person finds it unpleasant and
overly spicy, whilst the other person enjoys the food immensely.

Music tastes – the same piece of music may be calming to one person yet
significantly disturbing to another – whether it is Mozart or Led Zepplin.

When moving towards a building from afar our sense of sight tells us that
the building gets bigger the closer we get to it. However, our perception
tells us that it’s the same building and does not change in actual size as we
approach it.

In the work environment one manager may perceive a set of financial
results as being highly favourable whereas a different manager may
perceive the same set of financial results as being a disaster.
1.4 Perceptual selectivity
Perceptual selectivity seeks to explain how, and why, people select only a few
stimuli out of the many stimuli they encounter at any given time. Perceptual
selectivity is influenced by various internal and external factors which can also be
thought of as characteristics of the perceiver (internal factors) and perceived
(external factors).
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Internal factors (characteristics of the perceiver)
Factor
Explanation
Habit
Individuals perceive objects, situations and conditions
differently according to their habits. For example a retired
soldier may take cover when he hears a tyre blow-out.
Personality
Both the personality of the perceiver and stimulator has an
impact on the perception process. This also incorporates
age, dress, race and sex.
Motivation and
interest
Motivational factors increase the individual’s sensitivity to
those stimuli that they consider as being relevant to the
satisfaction of their needs in view of past experience with
them.
For example a thirsty individual will inadvertently seek a
water fountain or grocery store to enable them to quench
their thirst.
Economic and
social
background
Socially and economically developed employees have a
more positive attitude towards development rather than
less developed employees.
Learning
People generally perceive at a level synonymous to their
level of education. Therefore it becomes important for an
organisation to develop its employees through education
and training.
Organizational
role and
specialization
Many modern organisations value specialization. The
speciality of a person predisposes them to select certain
stimuli and to disregard others.
Thus in a comprehensive report the departmental head will
typically first notice the text relating to their department.
External factors (characteristics of the perceived)
Factor
Explanation
Novelty and
familiarity
Either a novel object in a familiar situation or a familiar
object in a novel situation will tend to attract attention.
Motion
Individuals attend to changing objects in their field of vision
more readily than to static objects.
This is seen in nature where the hunter remains
motionless when attempting to catch prey. Advertisers also
embrace this concept.
Repetition
Repeated stimuli have greater impact on performance than
a single statement as it catches the attention.
This is seen in advertising where the brand name is
mentioned multiple times in each advert.
Contrast
Greater contrast also augments stimuli. For example a
white object against a dark background will receive more
attention than a white object against a yellow background.
Size
Size influences attention and recognition in a highly
effective manner. Generally, the larger the object the more
likely it will be perceived.
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Factor
Explanation
Intensity
Intensity provides that the more intense the stimulus audio
or visual, the more likely it will be perceived.
For example a loud noise, strong odour or bright colour sill
be more readily perceived than soft sound, weak odour or
dim light.
1.5 Perceptual problems and distortions when dealing with people
Introduction
‘Do not judge a book by its cover’ and ‘jump to conclusions’ are common phrases
you may have encountered in life. These describe situations where our
perception has drawn an incorrect conclusion through some kind of bias.
The notes below describe a number of common distortions encountered when
dealing with people.
Halo effect
The halo effect describes when someone draws a general impression about an
individual based on either a single or very limited number of characteristics. This
impression then influences how someone feels and thinks about the character of
another individual.
For example a senior manager may conclude that an employee should be
promoted to manager level based on one outstanding technical invention. In
reality the individual may be an excellent technician but poor manager.
Another example is with public figures, particularly celebrities. Given they are
perceived as successful, attractive and likeable people tend to also see them as
intelligent, kind and funny.
The halo effect is arguably the most common bias in conducting staff appraisals
in the work environment. The supervisor might bias the whole appraisal based on
how they rate say the timekeeping of an employee. In reality it could be the
employee with the worst timekeeping record who is the most productive and
effective.
Stereotyping
Stereotyping describes judging someone on the basis of one’s perception of the
group to which that person belongs.
This commonly manifests with the perception of people attached to certain
cultural, religious and political groups as well as age, gender, physique and
ethnicity.
It could be argued that stereotyping and generalization is not always a negative
trait – it certainly allows us to simplify a complex world and make decisions
quickly and consistently. However, problems tend to arise when the stereotyping
is inaccurate.
In practice, if people expect to encounter stereotypes then that is what they will
perceive, whether or not they are accurate.
Selective perception
Selective perception describes how people selectively interpret what they see on
the basis of their interest, experience, attitudes and background.
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See section above for more details.
Contrast effects
Rather than evaluate someone objectively, ‘contrast effects’ describes when
someone evaluation of a person’s characteristics is skewed by comparison with
other people recently encountered who rank higher or lower on the same
characteristics.
This can be a risk when conducting annual appraisals. A manager may
inadvertently ‘average down’ the grades from a particularly high performing team
due to associating the weakest team member relative to the others as performing
at a lower level than they actually were when considered objectively. Conversely
when assessing a particularly weak team, they may ‘average up’ the grades
compared to a truly objective judgement.
Projection
Projection bias exists when an individual attributes their own characteristics to
other people rather than perceiving them objectively.
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2
ATTITUDE
Section overview

Definition and components of attitude

Implicit and explicit attitudes

Cross-cultural variation in the bases for attitudes

Attitude and behaviour
2.1 Definition and components of attitude
Definition:
Attitude means a tendency in an individual to persistently feel and behave in a
particular manner towards any object or situation with which it is related. Thus in
practice it represents an expression of favour or disfavour towards a person, place
or thing (the ‘attitude object’).
Attitudes are subjective rather than objective. Therefore they are dependent on
perception, personal experience and information and the influence of other people.
Attitudes are formed from a person’s past and present.
Components of attitude
Attitude comprises a number of components:

Knowledge or informational/cognitive component - This component of
attitude consists of beliefs, perceptions and information that an individual
has about an object. For example, “I believe crocodiles are dangerous”.

Feelings or emotional/affective component - A person’s feelings or
emotions may be positive, negative or neutral towards an object or
situation. In certain situations, individuals may be asked to show particular
types of behaviour which may be different from their innate natural feelings.
For example “I am scared of crocodiles”

Behavioural component - This attribute consists of an individual’s
tendency to behave, respond or perform in a particular manner towards an
object or in a particular situation. Unlike the other two components of
attitude, the behavioural component can be observed directly. For example,
“I will avoid crocodiles and will run away if I see one”.
Consumer behaviours (engaged for their own sake perhaps through habit, ritual
or addiction) are likely to be affectively driven. For example eating lots of
chocolate because we enjoy the taste or relaxing on a sunny beach because we
enjoy the rest and sensation from the sun. We do not focus on the high sugar
content or dangerous ultra-violet light when taking pleasure from such
behaviours.
Conversely, instrumental behaviour (i.e. behaviour intended to accomplish a
rational goal independent from our attitude) is more likely to be cognitively driven.
For example when making decisions in the workplace to maximise profit.
Organisations will benefit from a blend of cognitive and affective views in running
their business. For example when designing a marketing campaign there needs
to be consideration for both components:
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
Affective component – is the marketing material visually attractive? Are
the samples tasty? Is the background music enjoyable?

Cognitive component - will the marketing campaign result in higher sales
enquiries? Can we charge higher prices as a result of the marketing?
Recognising whether people are more strongly persuaded by cognitive or
affective traits may help management influence and motivate both employees
and customers. Employees who are less emotionally developed with lower
emotional intelligence may respond better to cognitive based messages whereas
those who are much more emotionally developed and aware, may be more
influenced by affective based messages.
As is typical with most psychological discussions the most appropriate approach
is to embrace contingency and understand that effective tactics will vary
depending on the situation and people involved.
2.2 Implicit and explicit attitudes
Explicit attitudes
Explicit attitudes are attitudes that people are consciously aware of. They can be
measured reasonably easily through self-testing and observing behaviour
typically involving bipolar scales such as:

Strongly support to strongly oppose

Highly favourable to highly unfavourable

Very good to very bad
Implicit attitudes
Implicit attitudes are driven by the subconscious mind. They are largely
unacknowledged although they strongly reflect the underlying morals, beliefs and
values of a person.
In practice a person can control their explicit attitude but this may or may not
align with their implicit attitude.
2.3 Cross-cultural variation in the bases for attitudes
Variation in cultural heritage, morals, beliefs and values can significantly impact
people’s attitudes, particularly their implicit attitude. Care should be taken in the
work environment to ensure employees are aware of and sensitive to other
people’s culture.
Influence stems from a number of factors including:

Hereditary variables

Patriotism

Rituals and ceremonies

Symbols

Dress

Power structures

Government

Attitudes to risk
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
Views on long-term employment versus regularly changing jobs

Concern for employee welfare compared to concern for getting the job
completed at any cost

Collective and participative decision making versus autonomous leadership
and imposed decisions

Levels of trust between figures of seniority and the common workforce

Role of bureaucracy and rules

Levels of individualism – focus on groups or self

Masculinity vs. femininity traits in society – e.g. masculine traits include
possessions, status symbols and ego whereas feminine traits include
quality of life and concern for others

Religion

Access to education

Language

Social and business customs – e.g. gifts and hospitality
2.4 Attitude and behaviour
Attitude objects
People tend to have a positive attitude on ‘attitude objects’ when they are
exposed to them frequently.
Changing attitude
Effective and persuasive communication can be successful in changing attitudes.
Note:

The communication will be more effective if written with expertise,
trustworthiness and on a personal level.

Success also depends on target characteristics – for example more
intelligent people are less likely to be persuaded by unbalanced (one-sided)
messages. People of moderate self-esteem tend to be more easily
persuaded than people with either high or low self-esteem
Emotion also has a major impact in persuasion and attitude change as is
commonly found in advertising, health campaigns and political messages.
Reasoned action
The theory of reasoned action states that if a person evaluates a particular
behaviour as positive and thinks that significant others want them to perform the
behaviour then they are more likely to behave in that way.
Making use of attitude
Attitude can serve a number of useful functions for an individual. These functions
address both inner needs (expressing ourselves and protecting self-esteem) and
also the external environment (social acceptance and prediction).

Expressing ourselves – the attitude we express helps communicate who
we are and also brings confidence that we have asserted our identity on a
situation. Therefore, attitude forms part of our identity.

Protecting self-esteem – attitude can be used to help protect our selfesteem or justify actions that may make us feel guilty. For example, after
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Chapter 6: Employee behaviour
losing a tender for new work a manager may claim that they aren’t bothered
about losing the bid but that they were simply interested in gaining the
experience of going through the bid process.

Social acceptance–people will generally be rewarded in a group with
social acceptance if they express socially acceptable attitudes and
suppress socially unacceptable attitudes.

Prediction –people generally embrace consistency and stability.
Knowledge and an ability to embrace it through attitude enable us to predict
what is likely to happen giving us a sense of control and helping us
organize and structure our life. This extends to a person’s behaviour as
knowledge of their attitude helps us predict their behaviour.
This can be invaluable in business negotiations and arbitration.
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3
JOB SATISFACTION AND STRESS
Section overview

Job satisfaction - introduction

The outcomes of job satisfaction

Ways to enhance job satisfaction

Job stress – introduction

Job stress – triggers

Job stress – coping strategies
3.1 Job satisfaction - introduction
Definition:
Job satisfaction refers to the attitudes and feelings that individuals have in relation
to their jobs. The extent of positive and favourable attitudes towards the job
indicates the level of job satisfaction.
Job satisfaction is split between
-
Affective job satisfaction – the is the extent of pleasurable emotional feelings
individuals have about their job
-
Cognitive job satisfaction – this is the extent of individuals’ satisfaction with
particular elements of their job, for example working hours, pension
arrangements and salary
In summary, job satisfaction is the measure of how content an individual is with
their job.
Introduction
Levels of job satisfaction can be affected by many factors including:

rewards

recognition

quality of supervision

social relationship with workgroup

extent to which the individual is successful in the performance of their
duties
There is significant overlap between theories of motivation and job satisfaction
which reflect that a motivated employee is motivated because they are satisfied
with the various affective and cognitive elements.
For example, in applying Herzberg’s two-factor theory, there are hygiene
components that need to be in place to prevent an employee being dissatisfied
such as:

Sufficient pay

Fair and consistent company policies

Fair and consistent supervisory practice

Appropriate working conditions
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Chapter 6: Employee behaviour
Herzberg then states that there are separate motivating factors that relate to the
job (the job ‘content’) that will provide motivation and the opportunity to feel
satisfied such as:

The ability to achieve

Being recognized for effective work

Exposure to promotional opportunities
3.2 The outcomes of job satisfaction
The outcome of high job satisfaction will impact numerous stakeholders both
internal (the individual, team and organisation) and external (suppliers,
customers, shareholders)

Internal stakeholder impact




Employees

will feel happy and motivated with their job

this will extend to reflect in their more positive interaction with
others including colleagues, friends and family

the standard and efficiency of their work is likely to increase as
they naturally invest more energy, time and effort into their job
Team

the team will benefit through more harmonious interpersonal
communication and a generally much happier environment.

this is likely to manifest with increased productivity in the team
and a strong team identity and reputation
Organisation

the organisation will benefit through improved productivity and
profitability

the organisation’s reputation for being a happy place to work
will help retain employees (and thus reduce costs associated
with staff turnover) and also attract new employees

the improved reputation for looking after the workforce may also
attract both investors and customers who want to be associated
with a socially responsible organisation who keeps its workforce
satisfied
External stakeholder impact

Suppliers

© Emile Woolf International
where employees who are involved with inbound logistics
(suppliers) enjoy high job satisfaction they are more likely to
share improved interaction with external stakeholders such as
suppliers. This could lead to the forging of collaborative rather
than combative relationships resulting in much stronger
integration between the supplier and organisation.
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
Customers


similar to the improved interaction between employees and
suppliers, customers will also benefit through dealing with a
more satisfied workforce. This could manifest through improved
customer service and more efficient logistics leading to more
satisfied customers who then repeat-buy.
Shareholders

given the above mentioned impact on employees, suppliers and
customers, ultimately widespread job satisfaction should result
in improved profitability over the long-term and thus improved
returns for shareholders. This would in turn attract consistent
interest from investors.
3.3 Ways to enhance job satisfaction
The various theories on motivation and behaviour can be used to deduce a suite
of tactics for improving morale and enhancing job satisfaction. These tactics
might include:

Spend time developing employees’ skills and potential.

Involve and engage the workforce through participative management.

Provide frequent and appropriate rewards and recognition.

Provide a positive working environment. This might involve access to
childcare, a gym and nice restaurant, or outside space and quiet zones.
The key is to understand what the employees want in their environment
and to provide it.

Encourage and reward thoughtful risk-taking.

Invest time in evaluating and measuring job satisfaction. This might be
done informally through conversation, or more formally through employee
surveys.

Take part in opportunities provided by the organization such as training.
opportunities, employee benefit programmes and philanthropic initiatives.

Organize work and set daily goals.

Set some medium term objectives and take steps to ensure the opportunity
is there to achieve them.

Take time to relax, revitalise and refresh. Do something physical (e.g. go
for a walk or visit the gym).
3.4 Job stress - introduction
Definition:
Stress in the workplace describes feelings of tension or exhaustion typically
associated with excessive or overly demanding work.
Introduction and the consequences of stress
Job Stress is a harmful physical and emotional condition arising from the
interaction of individuals with their jobs.
Stress results from demands made on an individual’s physical and mental
energies such as monotony, feelings of failure or insecurity. High levels of stress
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can be triggered by just one significant factor or a combination of many stresscreating factors.
The consequence of job stress is that changes occur within the individual that
forces them to deviate or behave differently from their normal behaviour and
performance patterns. This is normally accompanied by a reduction in the
employee’s effectiveness and performance.
Behavioural symptoms can also occur due to job stress including:

Changes in eating habits

Sleeping disorders

Procrastination

Feelings of isolation

Smoking

Drug addiction

Nail biting

Feeling anxious, irritable or depressed

Fatigue

Loss of concentration

Social withdrawal

Stomach problems or headaches

Using drugs or alcohol to cope

Apathy and loss of interest in work
3.5 Job stress - triggers
Triggers of job stress - environmental factors
Environmental factors that might trigger job stress include:

High rate of inflation

Shrinking economy and job uncertainty – potentially leading to budget cuts
and redundancies

Shortages of essential commodities

Threats of political changes

Law and order problems

Technological changes

Pollution and environmental hazards
Triggers of job stress - organizational factors
Organizational factors that might trigger job stress include:

Unhealthy working conditions

Work-related hazards – particularly dangerous working conditions

Excessive noise

Extreme pressure to perform
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
Role conflicts – jobs that create multiple and conflicting demands on
individuals

Role ambiguities – jobs where there is ambiguity or confusion regarding the
individual’s role in terms of duties, authority and responsibilities

Unsatisfactory interpersonal or hostile relations with supervisors,
colleagues and subordinates

Jobs that do not offer much variety in their performance and are of a highly
repetitive nature

Jobs that require adherence to stringent working conditions, lack autonomy
and have low opportunities for career growth.

Jobs perceived to be of menial nature and considered to be of low value by
society
Triggers of job stress - personal factors
Personal factors that might trigger job stress include:

Poor health

Marital problems

Undisciplined children

Death of a close relative or friend

Inadequate income to meet unavoidable expenses – often arising from jobs
offering low remuneration resulting in difficult financial circumstances

Personal legal disputes
3.6 Job stress - coping strategies
Strategies to cope with stress
Employees should consider multiple strategies designed to help cope with and
avoid stress in the long term. These might include:

Improving communication skills in order to improve relationships with
management and colleagues

Identifying consistent ‘knee-jerk’ reactions that manifest in negative
attitudes and lead to work stress. Manage these situations and avoid
repeating the negative reactions in future

Taking responsibility for improving physical and emotional well-being
The above strategies can be implemented through a number of specific tactics
such as:


Break bad habits and eliminate self-defeating behaviours

Don’t try to control the uncontrollable

Switch from negative thinking to positive thinking

Tidy up your act – be on time, tidy the desk and make to-do lists. Plan
the day and stick to the schedule

Resist perfectionism (which is unrealistic)
Dispel stress

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Look for humour in situations
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


Connect with others at work

Talk it over with someone

Take a break – go for a walk or visit the gym (some kind of physical
activity will help enormously)
Improve your emotional intelligence (EI) – EI is the ability to manage and
use your emotions in positive and constructive ways. Arguably, EI is as
important as intellect when it comes to satisfaction and success at work. EI
includes:

Self-awareness

Self-management

Social awareness

Relationship management
Prioritize and organize



Time management

Plan regular breaks

Leave earlier in the morning to arrive on time

Don’t over-commit yourself leaving a schedule that is too tight.
‘Back-to-back’ meetings leave no time for spontaneity and
flexibility.

Create a balanced schedule
Task management

Be willing to compromise

Delegate responsibility

Sub-divide projects into smaller manageable tasks

Prioritize tasks
Take care of yourself

Regular exercise

Eat healthily

Avoid nicotine

Get enough sleep

Recognize warning signs (see earlier)

Improved management skills

Cultivate a friendly social climate

Consult with employees and include them in decision making

Improve communication and sharing of information
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CHAPTER
Certificate in Accounting and Finance
Business management and behavioural studies
7
Motivation
Contents
1 Theories of motivation
2 Reward systems and motivation
3 Other motivation concepts
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INTRODUCTION
Learning outcomes
The overall objective of the syllabus is to equip candidates with the fundamentals of
management and behavioural studies.
Individual behaviour and motivation
LO 4
On the successful completion of this paper, candidates will be able to
demonstrate an understanding of the concepts of motivation
LO 3.4.1
Describe using examples motivation
LO 3.4.2
Explain Maslow’s need hierarchy theory
LO 3.4.3
Explain strengths and problems in applications of Maslow’s theory
LO 3.5.1
3.5.1 Explain Herzberg’s two factors of motivation and major criticism thereon
LO 3.6.1
Explain the three motives by McClelland
LO 3.6.2
State the difference between intrinsic and extrinsic motives
LO 3.7.1
List the major dimensions of goal setting theory
LO 3.7.2
Explain why and how goals contribute to self-motivation
LO 3.7.3
Describe how to set effective goals and the problems sometimes created by
goals
LO 3.8.1
Explain the basic steps of the overall performance system of MBO.
LO 3.9.1
Define the term Self-efficacy
LO 3.9.2
Understand high self-efficacy and low self-efficacy
LO 3.10.1
Describe law of effect using simple examples
LO 3.10.2
Describe reinforcement as used in behavioural management
LO 3.10.3
Describe positive and negative reinforcers using examples
LO 3.11.1
Explain organizational justice and three components of the same, namely,
distributive, procedural and interactional.
LO 3.12.1
Describe using simple examples the Expectancy theory and its three
elements, namely, expectancy, instrumentality and valence
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1
THEORIES OF MOTIVATION
Section overview

Content theories and process theories of motivation

Maslow: the hierarchy of needs

Herzberg and motivation-hygiene theory (two-factor theory)

Vroom: expectancy theory

McClelland: motivational needs theory
Definition: Motivation
Motivation describes the reason or reasons one has for acting or behaving in a
particular way. This in turn impacts the general desire or willingness of someone to
do something.
In a business context, theories of motivation are concerned with identifying the
factors that affect the attitudes of employees (including managers) to their work
and the amount of effort that they put in to doing their work. For example, a
demotivated employee may refuse to work in excess of contracted hours even if
this might mean the loss of revenue or a client. However, a motivated employee
might do whatever it takes to secure the revenue or client.
If managers understand the factors that motivate their employees, they might be
able to take measures to improve motivation and effort.
Theories of motivation also help us to improve our understanding of our personal
motivation to work and what we hope to get from our job.
1.1 Content theories and process theories of motivation
There are many different theories of motivation. It might help to make a
distinction between:

content theories of motivation, and

process theories of motivation.
Content theories
Content theories concentrate on what motivates individuals in their work.
There is often an assumption that the same things motivate everyone. Rewards
will satisfy a need and individuals will be motivated to obtain those rewards.
Examples of content theory are:

Maslow’s hierarchy of needs

Herzberg’s hygiene and motivator factors

McClelland’s motivational needs theory (although there are also elements
of process theory in motivational needs theory).
Process theories
Process theories of motivation concentrate on the process by which individuals
are motivated, and the strength of that motivation. In other words, the key
question is: ‘how are people motivated?’
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It is argued that individuals are motivated differently, and the strength of their
motivation depends on a variety of factors, such as:

needs

personality

perceptions about whether more effort will result in achieving goals

the rewards

expectations about whether the rewards for achieving the goals will actually
meet the individual’s needs.
Rewards and perceptions of rewards are usually a key factor in process theory.
Examples of process theory include:

Vroom’s expectancy model

Handy’s motivational calculus.
1.2 Maslow: the hierarchy of needs
In the 1950s, US psychologist Abraham Maslow developed a theory of the
motivation of individuals at work. He argued that individuals have seven in-built
needs, and his theory is concerned with the motivating power of each of these
needs.
Two needs are needs of a ‘higher order’ that must be met before the other five
needs can be satisfied. These higher order needs are:

a need for freedom of inquiry and expression: social conditions must allow
free speech and encourage justice, honesty and fairness

a need for knowledge and understanding: a need to explore and
experiment.
The other five needs can be arranged in a hierarchy of five levels. The need at a
lower level is dominant until it has been satisfied. When the need at one level has
been satisfied – and only then – the need at the next level becomes dominant.

A need that has been satisfied no longer motivates the individual.

An individual is motivated by the need at a level in the hierarchy that has
not yet been satisfied.

The highest level of need – self-actualisation – can never be fully satisfied.
The hierarchy of needs (the five levels of need) is usually drawn as a pyramid.
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Self-fulfilment
needs
Esteem needs
Social needs
Safety/security needs
Physiological needs (basic needs)
Physiological needs (basic needs)
These are the needs for food, shelter, clothing and everything else that we need
to stay alive. These needs can be satisfied by money.
Safety needs or security needs
Safety needs are the needs for security in work. Individuals want to feel safe
against the risks of unemployment, and they want protection against the
consequences of illness or having to retire. People also want fair treatment at
work. These needs can be satisfied by:

employment legislation and

the employer’s arrangements for a pension scheme for its employees and
for the treatment of its employees who are affected by illness or injury.
Social needs
Social needs are the needs to interact with other people, and to be part of a
group. At work, social needs can be met by working with other people. However,
the way in which work is organised has an important effect on whether the social
needs of employees are fully met.
Esteem needs (or ego needs)
Esteem needs are the needs for the esteem of other people, and to feel good
about one’s own value or importance. Esteem needs can be met by promotion
and by the status of the job. However, promotion only offers short-term esteem.
In the longer term, individuals get esteem from their work by having some say in
how their work is organised.
Self-fulfilment needs (self-actualisation needs)
These are the needs to achieve something worthwhile in life. This need is never
fully satisfied. An individual at this level in the hierarchy needs continuing
success and achievements.
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The significance of Maslow’s ideas
The significance of Maslow’s ideas is that it suggests an approach that
management should take to improving the motivation of employees.
Management must make sure that lower-level needs are satisfied before they try
to motivate employees with initiatives aimed at the satisfaction of higher-level
needs.
For example:

Pay is extremely important, because it satisfies basic needs. Employees
must be paid enough to satisfy their basic physiological needs (whatever
these are perceived to be).

Unless employees feel secure in their job, there is no point in trying to
increase motivation through job design that improves social interaction.

Making individuals feel part of a group must come before satisfying needs
for esteem and status.
Limitations of the hierarchy of needs
The hierarchy of needs is a simple and logical idea about human motivation, but
it has significant weaknesses and limitations. The main problem is its assumption
that needs are the same for all people and can be satisfied for everyone in the
same way.

Individuals have different needs, and they are not necessarily in the
hierarchical order suggested by Maslow.

Many individuals may seek to satisfy several different needs at the same
time.

The same need may cause different reactions and responses from different
individuals.

There is an underlying assumption that the objectives of the organisation
will be achieved if individuals receive rewards of higher status (promotion)
or self-fulfilment. Maslow does not show any link between self-fulfilment
and improved organisational performance.

Maslow’s model is vague about the nature of self-actualisation or selffulfilment needs. More modern theories of motivation go into much more
detail about the nature of high-level needs and their satisfaction.

It is a ‘content theory’ of motivation. It does not explain the strength of
motivation, nor the effect on motivation of people’s perceptions.

The theory also fails to recognise that self-actualisation is not always
possible. The environment in which the organisation operates may not be
suitable for self-fulfilment – for example the nature of the product or service
of the organisation, its technology or environment might mean that
organisations should not (and cannot) offer their employees the satisfaction
of self-actualisation needs. An example might be working on the factory
floor. It is difficult to achieve self-actualisation working in a low-level job in a
factory environment
1.3 Herzberg and motivation-hygiene theory (two-factor theory)
In the 1950s, Frederick Herzberg carried out some research into the factors that
motivate individuals in their work, by interviewing 200 engineers and
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accountants. He developed a two-factor theory of motivation, which he set out in
his book The Motivation to Work (1959).
Herzberg identified two groups or categories of factors: those causing
dissatisfaction with work and those causing satisfaction. He called these:

hygiene factors (= the factors causing dissatisfaction) and

motivator factors (= the factors causing satisfaction).
The most significant hygiene and motivator factors were as follows:
Factors causing dissatisfaction
Factors causing satisfaction
Hygiene factors
Motivator factors
Company policy
Achievement
Supervision
Recognition
Relationship with the boss
The work itself
Working conditions
Responsibility
Salary
Advancement
Relationship with colleagues
Growth
It might be supposed that factors causing dissatisfaction and factors causing
satisfaction are opposites. However, Herzberg argued that this is not the case.

The opposite of dissatisfaction is not satisfaction: it is not being dissatisfied.

The opposite of satisfaction is not dissatisfaction: it is not being satisfied.
The conclusion from Herzberg’s analysis is that management need to deal with
two different categories of factors affecting the concerns of employees in their
work.

Management need to make sure that hygiene factors are given proper
attention. If employees are content with their hygiene factors, they will not
be dissatisfied. For example, employees need to feel that they are being
paid well enough in order to prevent them from being dissatisfied. However,
satisfying the hygiene factors only prevents dissatisfaction, it does not
create satisfaction.

In order to motivate individuals, the motivator factors need to be satisfied.
Creating motivation therefore means providing conditions at work that will
make individuals feel a sense of achievement and recognition. According to
Herzberg, a key factor in creating motivation is job enrichment – making
the work itself more interesting and fulfilling.
1.4 Vroom: expectancy theory
Victor Vroom published his ideas on expectancy theory in 1964. Expectancy
theory is a theory for predicting the strength of an individual’s motivation to put in
effort at work.
Vroom argued that our behaviour is the result of conscious choices that we make
between different alternatives. We each have our own personal goals and needs
for satisfying those goals. Some of these needs may be satisfied through work.
We can be motivated to work if we believe that:
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
there is a positive correlation between the efforts we make and the
performance that is the result of our efforts – in other words, the more effort
we put in, the better the performance will be, and

good performance will result in a desirable reward, and

the reward will satisfy an important need.
Rewards may be a mixture of:

extrinsic rewards – pay, bonuses, and so on

intrinsic rewards – promotion, sense of achievement, sense of
recognition, and so on.
The motivation to obtain rewards is an important aspect of the theories of writers
such as Vroom, Handy and McClelland, and it is important to understand that
‘rewards’ can consist of both extrinsic and intrinsic rewards.
Vroom also argued that there are two or three specific factors that determine the
strength of an individual’s motivation;

Valence. Valence is the strength of the individual’s need for rewards.

Expectancy. Expectancy is the strength of the individual’s belief that by
putting in more effort, he will improve his performance.

Instrumentality. Instrumentality is the belief of an individual that by
achieving a certain performance target, rewards will be obtained.
In a simplified version of the expectancy model, expectancy is defined as the
belief of the individual that by putting in more effort, he or she will get the desired
rewards. In this simplified model, expectancy is therefore a combination of
expectancy and instrumentality.
Vroom’s expectancy model for measuring the strength of an individual’s
motivation is:
Motivation
(Strength of motivation)
=
Valence
×
Expectancy
Implications of expectancy theory
Expectancy theory has several implications for management.

Motivation depends partly on valence, which is the strength of an
individual’s desire for particular rewards. Managers should therefore try to
find out what their employees do want.

Motivation also depends on expectancy. Some individuals do not believe
that they are able to achieve better performance by trying harder. They may
lack self-confidence, or lack training. (Alternatively, they may not be in a
position to affect performance, in which case motivation will be very low,
and possibly nil.) Management must consider ways of trying to increase the
expectancy of their employees, for example by providing training and
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development, giving them the resources they need to do the job, or by
providing supervision and guidance.

Instrumentality may also affect motivation. Managers must keep the
promises that they have given of rewards for performance – and try to
make sure that employees believe that the managers will keep their
promises.
1.5 McClelland: motivational needs theory
David McClelland (1917 – 1998) put forward a motivational needs theory, which
he developed into a needs-based motivational model.
He argued that there are three needs that are found in all employees. Everyone
displays all three needs, but one of the three needs is often dominant in affecting
the individual’s attitudes and behaviour. The three needs are:

a need for achievement (‘n-ach’)

a need for authority and power (‘n-pow’)

a need for affiliation (‘n-affil’).
He identified the characteristics of individuals who are motivated mainly by the
needs for achievement, power and affiliation, as follows:

N-ach person. This person seeks achievement. Targets for achievement
should be realistic but challenging goals. The person also seeks
advancement in the job, and has a need for:

feedback: this is information about his achievements and progress
towards the goals – the individual needs to know whether or not the
goals are being met

a sense of accomplishment from achieving the goals.

N-pow person. This person needs to be influential and effective, and to
make an impact. He has a strong need to lead, and for his ideas to be
accepted rather than the ideas of others. He needs status and prestige.

N-affil person. This person needs friendly relationships and is motivated
by interaction with other people. He needs to be liked and held in high
regard. He makes a good ‘team player’.
McClelland argued that n-ach people make the best leaders. However, they can
demand too much from their employees, because they often assume that
everyone else is motivated by the same need for achievement that they have.

N-affil individuals are usually poor leaders. This is because their need to be
liked will often affect their objectivity and prevent them at times from making
unpopular but necessary decisions.

N-pow individuals are also poor leaders. They are often determined
individuals, with a strong work ethic and a commitment to their organisation
and its goals. However, they often lack ‘people skills’ (skills at dealing with
other people) and also lack flexibility.
Achievement-motivated individuals are usually the ones who make things happen
and get results.

They set goals that they can influence (so the goals are achievable): this is
a characteristic of successful businessmen and entrepreneurs.

They consider achievement more important than financial rewards.
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
Achieving a goal or successfully completing a task gives them more
satisfaction than praise or thanks from others.

Security and status are not prime motivators for them in their work.

They are constantly looking for ways to do things better.

Crucially, however, they need feedback about their performance. They
must be told about their actual performance and what they have achieved.

For achievers, pay is a form of feedback about their performance. High pay
and bonuses are a measurement of their success in achieving goals.
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Chapter 7: Motivation
2
REWARD SYSTEMS AND MOTIVATION
Section overview

Extrinsic and intrinsic rewards

What managers can do to motivate staff

The reward system and motivation

Constructive feedback and motivation
2.1 Extrinsic and intrinsic rewards
For an individual, rewards from doing a job can be both extrinsic and intrinsic.
Extrinsic rewards are rewards that are outside the control of the individual.
Another person, often the individual’s boss, has the power to provide extrinsic
rewards. The main examples of extrinsic rewards are:

basic pay (and the size of a pay increase)

cash bonuses and incentive payments

when the employer is a company, rewards in the form of share options or a
gift of some shares

pension benefits

free medical insurance (and other forms of insurance, such as disability
insurance, or even life assurance)

the award of a company car, or a company helicopter or jet

subsidised loans (these are loans from the company at an interest rate that
is lower than the normal market rate).
Intrinsic rewards are rewards that are within the control of the individual himself.
They include:

a sense of achievement in doing the work

a sense of recognition for doing the work

enjoying the status that the job provides

pride in doing the work

personal satisfaction from doing the work

a sense of responsibility that the individual enjoys.
According to theorists such as Vroom and Handy, the strength of the motivation
of an individual depends partly on how strongly the individual wants these
rewards – and how big are the expected rewards.
2.2 What managers can do to motivate staff
There are differing views on how individuals are motivated. Consequently, there
are differing views about what management can do to improve the motivation of
their employees.

There is a view that management must get the ‘basics right’ first: they
must offer a fair pay structure for staff and fair employment policies – to
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meet the physiological needs and security needs of their employees
(Maslow) or to prevent dissatisfaction from employees (Herzberg).

Herzberg argued that management should take some measures to prevent
dissatisfaction, but that a completely different approach is also needed in
order to create motivation. Herzberg believed that job enrichment was a
key to better motivation.

Adams argued that the rewards system should be seen to be fair:
however, rewards can be intrinsic rewards as well as extrinsic rewards
such as higher pay.

McGregor and Argyris argued in favour of a participative style of
management, and getting employees involved in problem-solving and
decision-making. They argued that this management style gets more out of
employees, and this improves the performance of the organisation.

McClelland argued that the best leaders were individuals with a need for
achievement. Management should therefore try to identify and develop
high achievers.

One of the factors affecting the strength of motivation is the belief that the
individual’s efforts will lead to better performance. Managers should
therefore try to increase the strength of this expectancy. Vroom argued that
managers should give encouragement and advice to their employees, give
them the resources they need to accomplish their tasks and, where
necessary, give them suitable training.

It can also be argued that managers can motivate staff by providing
inspiring leadership.
The ability of managers to motivate their employees may also be affected by the
differing needs of different employees. Whereas some content theorists
(Herzberg) argued that all individuals were motivated by the same needs, there
are differing views that:

different people have different needs (for example, McClelland, Vroom)

these needs can change over time (for example, Maslow).
It seems clear, however, that:

managers can influence the motivation of their employees

needs as well as rewards are an important factor in motivation, therefore

managers must try to understand what the needs of their employees are,
and what rewards – intrinsic as well as extrinsic – will help to satisfy those
needs.
2.3 The reward system and motivation
The reward system refers to the system of ‘extrinsic’ rewards that an organisation
can give to its employees. The most significant extrinsic rewards are usually:

pay (remuneration), and

promotion or advancement.
Elements of pay include basic pay, bonuses, commissions, premium pay for
working overtime, pension rights and so on.
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It is generally agreed that individuals need to be kept satisfied about their pay, in
order to avoid feelings of dissatisfaction or inequality and unfairness.
Dissatisfaction about pay will affect the attitudes and behaviour of individuals in
their work.
It is not certain, however, whether offering pay incentives will increase the
motivation of employees. (It is also not certain that extra motivation will lead to
better performance.)

McClelland would have argued that pay rewards might be seen as a
measure of recognition and goal accomplishment by high achievers.
Rewards in the form of higher pay or bonuses may therefore be an
important motivator.

It may also be argued that getting paid more for better performance (for
example receiving a cash bonus) is important for many individuals,
because the money can be used to fulfil some important needs.

Process theories of motivation often place strong emphasis on financial
rewards, because money can be used to buy satisfaction of many needs.

There is also a view that group reward systems are able to improve the
collective motivation of teams.
However, as explained already, there is also a view that in many organisations,
pay systems do not provide motivation, and employees can be motivated by
other things, such as participation in decision-making or an ‘enriched’ job.
Performance-related pay for individuals
Even so, many organisations in practice do have systems for rewarding
individuals for the achievement of certain levels of performance or performance
targets.
Performance-related pay may be cash bonuses or other forms of incentive.

Cash bonuses are payments in cash that are related to meeting short-term
targets, such as meeting budget targets such as achieving or exceeding a
profit target. Sales representatives may be paid a sales commission based
on the value of sales they have won during a period of time. Performance
targets do not have to be financial targets: cash bonuses might be paid to
an individual who achieves a specific non-financial target, such as
completing a particular task on time or before a specified date.

Incentives for the achievement of longer term goals are often paid to
senior managers, often in the form of company shares or share options.
If companies use a system of performance-related pay, they presumably believe
that the pay incentives are successful in motivating employees. If they did not
think that this was the case, there would be no point in offering the incentives!
It is also important to remember that rewards are not always given in the form of
pay. Promotion and recognition may be equally important to an individual.
However, there is a limit to the number of individuals who can be rewarded with
promotion, especially in small business entities.
Performance-related pay for groups
Cash bonuses might be paid to groups of workers, such as all the employees in a
department, section or project team. For group bonuses to be effective as a
motivator, however, it is important that individuals should identify themselves with
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the group and should believe that the efforts of the group as a whole are capable
of earning a bonus.
A problem with group bonuses, however, is to decide how the total bonus for the
group as a whole should be divided between the individual group members. If the
basis for sharing the bonus is seen as unfair, a bonus payment might create
resentment and arguments rather than act as a motivator.
Company-wide bonuses
Sometimes a company pays a bonus to all its employees, particularly if it has had
a highly profitable year. For example in 2007, UK stores group Marks and
Spencer announced strong profits growth for the previous year and a £91 million
bonus to be shared by all its employees as a reward. Such a bonus might help to
persuade employees to remain with the company, but it is doubtful whether it can
be effective in motivating individual employees to do their work more efficiently or
effectively.
Bonuses and performance
For a cash bonus scheme to be effective, the payment of a bonus should be
clearly linked to the performance of an individual (for individual bonuses) or a
group (for group bonuses). A clear link can only be established when the
following conditions apply:

The performance of the individual or group can be measured.

The individual or group can affect the measured performance through
efficient or effective working. As stated in some of the earlier descriptions of
motivation theory, there should be a connection between effort (motivation)
and outcome.
2.4 Constructive feedback and motivation
Process theories of motivation emphasise the importance of:

the link between putting in more effort and improving performance (or
reaching targets), and

the link between reaching targets and obtaining rewards.
Individuals need to know how they are performing, and whether they are on
course for achieving their goals.
If they are not on target for achieving their goals, they need to be given advice
and guidance from their boss.
The process of providing information to individuals about their performance is an
example of feedback. Feedback should be constructive and helpful, rather than
critical, to maintain the motivation of the individual. If individuals are criticised in a
negative way for failing to reach their goals, their motivation will disappear.
A system for providing constructive feedback about performance (but not the only
system) is a system of job appraisal.
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3
OTHER MOTIVATION CONCEPTS
Section overview

Goal setting

Management by objectives (MBO)

Self-efficacy

Law of effect and reinforcement theory

Equity and organisational justice
3.1 Goal setting
A hierarchy of objectives and plans
As part of a strategic review, management should always re-consider the
purpose of the entity that they manage – what it is trying to achieve. In the
strategic planning process, goals, objectives and strategies should be decided
with the aim of fulfilling the entity’s purpose. A business entity should have a
hierarchy of aims and plans. A useful way of presenting this is shown below.
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Mission and mission statement
Definition:
A mission is the purpose of an organisation and the reason for its existence. Many
entities give a formal expression to their mission in a mission statement.
‘A mission describes the organisation’s basic function in society, in terms of the
products and services it produces for its customers’ (Mintzberg).
A mission statement should be a clear and short statement. Drucker suggested
that it should answer the following fundamental questions:

What is our business?

What is our value to the customer?

What will our business be?

What should our business be?
Some entities include a statement about the role of their employees in their
mission statement, or include a statement on the ethics of the entity.
Example: The World Bank – Mission statement
‘Our dream is a world free of poverty
To fight poverty with passion and professionalism for lasting results.
To help poor people help themselves and their environment, by providing resources,
sharing knowledge, building capacity and forging partnerships in the public and
private sectors.
To be an excellent institution able to attract, excite and nurture diverse and
committed staff with exceptional skills who know how to listen and learn.’
Commercial entities also often emphasise the ethical aspects of their mission,
perhaps as a method of motivating employees.
The relevance of the mission statement
A mission statement can have several different purposes:

to provide a basis for consistent strategic planning decisions

to assist with translating broad intentions and purposes into corporate
objectives

to provide a common purpose for all groups and individuals within the
organisation

to inspire employees

to establish goals and ethics for the organisation

to improve the understanding and support for the organisation from external
stakeholder groups and the public in general.
Goals and objectives
There is some confusion about the meaning of goals and objectives, and the
terms might be used to mean different things.
However, it is useful to think of goals and objectives as follows.
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
Goals are aims for the entity to achieve, expressed in narrative terms. They
are broad intentions. For example, an entity might have the goal of
maximising the wealth of its shareholders, or the goal of being the world’s
leading business entity in one or more markets.

Objectives are derived from the goals of an entity, and are aims expressed
in a form that can be measured, and there should be a specific time by
which the objectives should be achieved.
The objectives specified by the strategic planners should be SMART:

Specific/stated clearly

Measurable

Agreed

Realistic

Time-bound (a time must be set for the achievement of the objective).
Example: Goals and objectives
A company might have a goal of maximising the wealth of its shareholders. Its
objective might therefore be to double the share price within the next ten years.
Objectives might be expressed as a hierarchy of corporate and strategic objectives:
-
A corporate objective might be to double the share price within the next ten
years. This is the overall objective for the entity.
In order to achieve the corporate objective, it is necessary to set strategic objectives
for key aspects of strategy. Examples of strategic objectives might be:
-
to increase the annual profit after tax by 125% in the next ten years
-
to introduce an average of three new products each year for the next ten
years
-
to become the market leader in four market segments within the next ten
years, an improvement in each case from the current position of secondlargest competitor in each of these market segments.
Some strategic objectives are more important than others, and there is a
hierarchy of strategic objectives. However, the main strategic objectives might be
identified as critical success factors, for which there are key performance
indicators.
Goals and objectives can therefore be used to convert an entity’s mission into
specific strategies with strategic targets for achievement within a strategic
planning period.
Who decides mission, goals and objectives?
When an entity states its mission in a mission statement, the statement is issued
by the leaders of the entity. For a company this is the board of directors.
Similarly, the formal goals and objectives of an entity are stated by its leaders.
However, the decisions by a board of directors about the goals and objectives of
an entity are influenced by the way in which the company is governed and the
expectations of other stakeholders in the company.
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How do goals contribute to self-motivation?
Goals contribute to self-motivation because they provide a justification to actions
in the context of delivering a personal benefit associated with achieving the goal.
They help do this by:

Focusing effort in a consistent direction

Improving an employee’s chances of success

Improving both motivation and satisfaction
Goals help to clarify the gap between where we are now, and the target we need
to achieve. This knowledge allows us to understand what is then required to
achieve the goal. Anecdotally, simply understanding the scale of the journey from
now to achieving the goal provides a sense in comfort that the problem is
understood and can be tackled.
There are two orientations of goals:

A learning orientation means that the individual focuses on acquiring new
skills and mastering new situations

A proof orientation focuses individuals on demonstrating and validating the
adequacy of competence by seeking favourable judgments of competence.
In both scenarios the individual gains a sense of wellbeing and happiness from
either learning something or proving a competence. This serves as a motivator
as the individual naturally aspires to want to enjoy that feeling.
Managers often encourage employees to participate in the personal goal setting
process and also in tracking their own performance. This participative approach
tends to increase the acceptance and ultimate achievement of the goals.
An even wider application of goals and self-motivation can be achieved when
personal goals are integrated with career goals. These may include social and
family, hobbies and interests, physical and mental health as well as career and
financial goals. For example, an employee who likes adventure, variety and travel
would better suit a job with opportunities to extensively travel compared to
another employee who needs to maximise time with their family and new-born
babies.
When work and personal goals are aligned they are both much more likely to
motivate and succeed.
How to set effective goals
Techniques for setting effective goals include:

Participate in the goal-setting process

Ensure that the goals include intrinsically motivating work

Ensure there is a system that can provide feedback on the achievement of
goals

Goals must be SMART (see above)

Align personal and commercial goals

When recording goals state them in a positive statement

Set priorities
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Problems sometimes created by goals
The most effective and motivating goals are those that are challenging yet remain
achievable. The extremes either side are likely to be demotivating whether they
are

unrealistically challenging – result is the employee simply gives up

too easy – resulting in the employee slacking off, feeling under-utilised and
lacking inspiration.
Other problems that are perceived to be caused by setting goals include:

goals create inflexibility and can lead to a narrow focus. This means that an
opportunity that falls outside the scope of recorded and stated goals is
potentially overlooked as time spent on the opportunity will not help achieve
the previously agreed goals.

goals may generate stress through a constant pressure and reference to
needing to constantly perform at the highest levels in order to achieve or
exceed stated goals. This can detract from taking enjoyment and interest
from the task.
3.2 Management by objectives (MBO)
Introduction
Management by objectives (MBO) is an approach that seeks to align employees’
objectives with the organisation’s goals. The system was developed by Peter
Drucker in the 1950’s and has proved popular ever since.
Benefits of MBO

MBO ensures that team members are clear about their work and how it
benefits the whole organisation.

This enables employees and managers to distinguish between tasks that
are necessary and those that do not contribute to the organisation’s
objectives.

MBO helps managers control teams and provides a robust reference point
for team briefings, goal setting, performance appraisal, delegation and
feedback.

Provides a sense of purpose for individuals
Disadvantages of MBO

MBO is often challenging and lengthy to implement needing what can be
perceived as an unnecessarily expensive underlying goal tracking system.

Implementing MBO requires commitment across the whole organisation.
Significant employee resistance can occur.
The MBO process
MBO involves six steps:

The organizational objectives should be expressed concisely in easilyunderstood mission and vision statements.

The organizational objectives must be cascaded down to employees. This
involves setting goals and objectives for every business unit, department,
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team and employee – i.e. cascading down from level to level within the
organization. Goals should be SMART.

Goal setting should be a participative with team members understanding
how their personal goals and values fit with the organization’s objectives.

Monitor the progress of individuals and teams against their achievement of
goals.

MBO is designed to drive performance at all levels of the organisation.
Whilst the overall approach, participative nature and monitoring
components of the goal setting process are all important, it is as equally
important to adopt a comprehensive evaluation and reward system. The
system should allow managers to strategically compensate employees for
work they do and demonstrate that the achievement of objectives will be
rewarded.

Repeat the above cycle.
3.3 Self-efficacy
Definition:
Self-efficacy is the measure of the belief in one’s own ability to succeed in
situations – to complete tasks and reach goals.
Self-efficacy in action
By determining the beliefs a person holds regarding their power and ability to
affect situations, self-efficacy strongly influences both the power a person has to
face challenges competently and the choices a person is most likely to make.
For example, when confronted with a challenge does an employee naturally
believe they can succeed or will their default reaction be that they are convinced
they will fail?
People with strong self-efficacy are those who believe they are capable of
performing well which means they are more likely to view challenges as
something to be mastered rather than avoided.
Human functions
Levels of self-efficacy impact human functions in a number of ways:

Motivation – people with high self-efficacy are more likely to make the
effort to complete a task and persist with those efforts than people with low
self-efficacy. However, this can also manifest as high self-efficacy people
being over-confident, less thorough and less well-prepared compared to
someone with low self-efficacy.

Behaviour choice – high self-efficacy generally leads to tasks being
undertaken whereas low self-efficacy generally leads to tasks being
avoided. High self-efficacy beyond one’s ability level to complete a task can
lead to poor execution of the task, whereas self-efficacy significantly below
ability levels can lead to under-achievement and stifle growth. The optimal
level of self-efficacy is considered to be slightly above ability.

Thought patterns and responses

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High self-efficacy people will attribute failure to external factors,
whereas low self-efficacy people will blame themselves.
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

Barriers and obstacles will stimulate high self-efficacy employees
whereas they will tend to discourage low self-efficacy employees.

Employees with high self-efficacy tend to take a broader overview of
a task and embrace ‘big-picture’ thinking whereas low self-efficacy
employees will limit their thinking and focus on achieving rather than
exceeding.

Low self-efficacy employees tend to think that tasks are harder than
they actually are. This then can result in poor planning and increased
stress levels.
Academic productivity – It has been argued that students with high selfefficacy demonstrate better academic performance than those with low selfefficacy. This is because they are more likely to proactively take control of
their learning experience, participate in class and enjoy hands-on learning
experiences.
3.4 Law of effect and reinforcement theory
Definition:
The law of effect is the belief that a favourable after-effect strengthens the action
that produced it. The converse is also true.
This means that responses closely followed by satisfaction will become firmly
attached to the situation and therefore more likely to reoccur when the situation is
repeated.
However, if the situation is followed by discomfort, the connections to the situation
will become weaker and the behaviour of response is less likely to occur when the
situation is repeated.
Law of effect
The law of effect was first published in 1905 and evolved from scientists
investigating the link between stimulus (S) and response (R). They concluded
that once the stimulus and response are associated, the response is likely to
occur without the stimulus necessarily being present.
They noted that responses that produce a satisfying or pleasant state of affairs in
a particular situation are more likely to occur again in a similar situation.
Conversely, responses that produce a discomforting, annoying or unpleasant
effect are less likely to occur again in a similar situation.
The original experiments involved a cat learning to press a lever to exit a box. A
more up-to-date example frequently quoted is drug addiction whereby someone
who receives a pleasant sensation from trying a drug for the first time is likely to
repeat the behaviour.
Reinforcement theory
Definition:
Reinforcement theory states that people seek out and remember information that
provides cognitive support for their pre-existing attitudes and beliefs.
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The main assumption that guides reinforcement theory is that people generally
do not like to be wrong. They feel uncomfortable when their beliefs are
challenged and therefore seek out and remember information to help ‘prove their
point’.
One common example often cited is the world of politics where pre-election polls
demonstrate that relatively few people remain undecided during pre-election
lobbying. The majority of voters have a consistent voting pattern and seek out
information in the political lobbying that justifies their beliefs and vote.
Reinforcement theory includes three primary mechanisms:

Selective exposure - a change or shift in attitude can be interpreted as an
admission that the original belief was inaccurate or inadequate. However,
people generally do not like to be wrong. Therefore people tend to avoid
information that may discredit their views in order not to have their opinions
challenged.
When faced with inconsistent information the person may justify rejecting
the information by attacking the source’s credibility.
Selective exposure also manifests with people exposing themselves only to
stimuli that are pleasurable and therefore avoid stimuli that may induce a
negative reaction.

Selective perception - when exposed to dissonant messages (given that
in practice it is effectively impossible to avoid all such messages) people
will skew their perceptions to coincide with what they desire.
To use the political example again, a voter may not agree with one of the
policies of a politician that they otherwise support. Subsequently, one of
three things may happen:


The voter learns about the candidate’s policy then either changes
their opinion of the candidate or alters their own stance on the policy.

The voter can accept disagreement but instead lessen the issue’s
personal importance.

The voter engages in selective perception and misperceives the
candidate’s position in order to better align with their own stance
(even though in reality they remain mis-aligned).
Selective retention – this describes people only remembering items which
are consistent with their own predispositions. Furthermore, the ease with
which a person can recall information impacts the level and intensity of
judgment related to the topic. Specifically, people who can easily recall an
example related to the message are more likely to make an intense
judgment about it.
This mechanism is often referred to as ‘selective memory’.
Positive reinforcement
Positive reinforcement involves the addition of a reinforcing stimulus following a
desired behaviour. The objective is to make it more likely that the behaviour will
re-occur in future. Examples might include:

Receiving public praise (“well done, great job”) or an award for doing
something well

Receiving a bonus for achieving a sales target
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Positive reinforcement is normally most effective:

when it occurs immediately after the event

when delivered with enthusiasm

when it occurs frequently
Negative reinforcement
Negative reinforcement involves the removal of a stimulus following a desired
behaviour. The objective is to make it more likely that the behaviour will re-occur
because of the removal of the negative reinforcement in future.
Note the difference between punishment (aimed at preventing the re-occurrence
of an activity) and reinforcement (aimed at increasing a behaviour).
Examples might include:

An employee is loudly reprimanded for arriving at work late. However, if
they arrive on time the reprimand does not happen. Therefore they are
motivated to arrive on-time more frequently.

The seat-belt warning alarm that sounds in cars if the seat-belt is not used.
The annoying alarm then disappears when the seat-belt is engaged which
encourages the seat-belt to be worn in future in order to avoid hearing the
alarm.
Negative reinforcement is normally most effective:

when it occurs immediately after the event; and

when it occurs frequently
Reinforcement theory in business
Managers can target both positive and negative behaviours. However, it is
argued that focusing on rewarding desired behaviour helps employees develop
positive habits and foster less resentment than focusing on punishing negative
behaviours.
Reinforcement theory can be employed in the business environment by adopting
the following tactics:

Set clear and reasonable expectations – limiting rewards to impossible or
extremely difficult tasks can lead to anger and a sense of helplessness
resulting in worse performance. Therefore, expectations should be clear
and achievable.

Identify strong motivators – the best way to do this is adopt a participative
approach and mutually agree with the employees what an appropriate
reward would be. For example, a parachute jump experience would not be
a suitable reward for someone scared of heights.

Encourage desirable behaviours – behaviour such as strong teamwork,
quality production and punctuality should be reinforced in order to turn them
into strong work habits over time. An effective technique is to target
rewarding one behaviour at a time in order to eradicate negative
behaviours in that sphere before moving onto the next negative behaviour
to manage.
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3.5 Equity and organizational justice
Employees on the whole care about justice. The traditional approach leads them
to consider then conclude on the fairness of outcomes, procedures and
interpersonal treatment as well as consider apparent injustices.
Modern perspectives on organizational justice take this classic view to the next
level and examines the reasons employees care about justice (called ‘content
theories’) and the processes that lead to both the formation of fairness
perceptions, as well as individuals reactions to perceived injustice (process
theories).
In summary, organizational justice embraces the broader topic of employee
perceptions of fairness in the workplace. Perceptions can be broken out into four
categories:

Distributive justice – this is conceptualized as the fairness associated with
decision outcomes and the distribution of resources (e.g. pay or praise).

Procedural justice – this relates to the fairness of the process that leads to
the outcome – e.g. did the accused receive a ‘fair trial’. Consider
consistency, accuracy, ethics and absence of bias.

Interactional justice – this refers to the interpersonal communication
element of delivering news with sensitivity and respect once a decision has
been made. Interactional justice is sometimes split into two streams:

Interpersonal justice – the perceptions of respect and propriety in
one’s treatment

Informational justice – the adequacy of the explanations given in
terms of their specificity, truthfulness and timeliness.
Justice research can occur at a number of levels including:

Justice climate - how shared perceptions of justice form within work
groups and organizations

Organizational and national cultures - how justice perceptions and
reactions vary across cultural groups
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CHAPTER
Certificate in Accounting and Finance
Business management and behavioural studies
8
Leadership
Contents
1 Leadership style
2 Theories of leadership: contingency theories
3 Leadership qualities
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INTRODUCTION
Learning outcomes
The overall objective of the syllabus is to equip candidates with the fundamentals of
management and behavioural studies.
Leadership, negotiation and conflicts
LO 5
On the successful completion of this paper, candidates will be able to
show familiarity with the nature and kinds of leadership
LO 4.1.1
Discuss different leadership styles, namely, free-rein, engaging, participative,
task oriented and autocratic
LO 4.2.1
Discuss using simple examples different theories of leadership, namely, trait
theories, Blake and Mouton theory, situational and contingency theories
LO 4.3.1
Discuss leadership roles and activities
LO 4.3.2
Identify Skills needed for effective leadership
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Chapter 8: Leadership
1
LEADERSHIP STYLE
Section overview

The importance of effective leadership

Effective leadership and leadership style

Trait theories of leadership

Lippitt and White’s leadership styles

Blake and Mouton’s grid

Tannenbaum and Schmidt’s leadership continuum

The Ashridge model

Likert’s leadership styles
1.1 The importance of effective leadership
Leadership involves interpersonal skills and an ability to motivate others.
Effective leadership within an organisation involves:

guiding and directing others to achieve the goals of the organisation

making the best use of the knowledge, skills and talent of others in the
organisation

developing the knowledge, skills and talent of others in the organisation.
Effective leadership therefore increases the effectiveness of the organisation, by
getting the best out of employees to achieve the aims and objectives of the
organisation.
1.2 Effective leadership and leadership style
Since leadership is an aspect of management, it is necessary to establish
whether there are any particular skills that a manager should have to be an
effective leader. What makes a person a good leader? Are people born to be
leaders? Can leadership skills be taught and learned?
Several writers have considered whether effective leadership is a matter of how
the leader behaves –the leader’s style – and there are differing views about what
personal characteristics or style might make a good leader.
There are several types of theory about effective leadership style:

Personal characteristics (‘traits’ or ‘qualities’). There is a view that a
leader must possess certain personal qualities of leadership. The best
leaders are ‘charismatic’. These characteristics are natural, and some
individuals are born with them. They cannot be taught.

It depends on circumstances. ‘Contingency theories’ of effective
leadership take the view that the requirements for effective leadership vary
according to circumstances. Different styles of leadership are the most
effective in different circumstances and situations.

Leadership styles range from domineering (autocratic or
authoritarian) to democratic or even ‘laissez-faire’. The most suitable
leadership style depends on circumstances.

Some writers have argued that there is a ‘best’ leadership style.
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
Others have argued that the most appropriate leadership style
depends on circumstances (‘contingency theory’ of leadership).
The differing views about effective leadership can probably be appreciated by
looking at several theories of leadership style.
1.3 Trait theories of leadership
A trait theory of leadership is that there is a set of personal qualities and
characteristics that make a good leader. Individuals either have these qualities or
they do not. Some people are therefore ‘born leaders’.
Trait theory may have an immediate ‘popular’ appeal. Descriptions of great
leaders in history often refer to the leader’s personal qualities that distinguished
him or her as someone special and a natural leader.
However, a serious problem with trait theory is that there are many different traits
that could be attributed to an effective leader. Some of the more ‘obvious’ traits
are listed below:

Physical vitality and energy

Intelligence and good judgement

Eagerness to accept responsibility

Enthusiasm and self-confidence

Competence in the tasks

Understanding their followers and their needs

Skill in dealing with people (interpersonal skills or ‘soft skills’)

Having a powerful need for achievement

A capacity to motivate others

Decisiveness

Trustworthiness

Assertiveness

Flexibility
It is not necessarily obvious which of these traits are more important than the
others in making an effective leader.
Another problem with trait theory is that if leadership skills are natural skills that
an individual either has or does not have, this means that leadership skills cannot
be learned. Organisations would therefore have to look for natural leaders and
promote them, without being able to do anything to improve leadership skills
through training and development.
Trait theories of leadership are now largely discredited as a means of identifying
leaders. However, if an effective leader is identified and described, it is almost
certain that he or she will possess some of the traits in the above list.
1.4 Lippitt and White’s leadership styles
In 1938/1939 Lippitt and White carried out an investigation into leadership styles,
using groups of schoolchildren working on arts and crafts projects, such as
making masks. Three different types of leaders were assigned to the groups, and
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Chapter 8: Leadership
the behaviour of the children with each of the different types of leader was
studied.
The three types of leadership style for the groups were:

Authoritarian or autocratic leadership style. The leader continually gave
orders and instructions without offering any consultation.

Democratic style. The leader offered guidance and encouragement to the
children, and participated actively with the group.

Laissez-faire style. The leader gave the children the knowledge they
needed to do the work, but did not become involved and did not participate
in the activities of the group.
The study looked at the effects of the different leadership styles on the behaviour
and the output of the group members. Their findings are summarised below.
Groups with
democratic leaders
Groups with autocratic
leaders
Groups with laissezfaire leaders
Morale was high.
Two types of behaviour
were found in group
members:
These were the worstperforming groups.
Relationships between
the group members and
between the group
members and the leader
were friendly.
Aggressive behaviour:
These individuals were
rebellious. They
constantly demanded
attention from the leader
and often blamed others
when things went wrong.
Productivity (quantity
produced) was low.
Quality of output was low.
Satisfaction of group
members was low.
The group members
showed themselves
capable of working
independently, with the
leader out of the room.
Apathetic behaviour:
These group members
placed few demands on
the leader and showed
not much interest
Group members were
unable to work
independently.
There was a reasonable
amount of originality in
the work done by the
group members
The quality of the output
of children in this group
was less than the quality
produced by groups with
a democratic leader.
Group members did not
cooperate with each
other.
The quality of their output
was higher than the
quality produced by
groups with an
authoritarian leader.
The quantity of their
output was higher than
the quantity produced by
groups with a democratic
leader.
The quantity of their
output was lower than the
quantity produced by
groups with an
authoritarian leader.
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The conclusions from the study were that:

The democratic style of leadership was ‘best’, providing high quality of
output, reasonable originality and productivity, and high satisfaction of
group members.

However, some of the boys in the study preferred the authoritarian style of
leadership.
1.5 Blake and Mouton’s grid
Robert Blake and Janet Mouton (1964) argued that there are two basic elements
in leadership behaviour:

Concern for the task. This includes a concern for achieving targets, the
volume of output, work efficiency and so on.

Concern for people. This includes personal commitment, ensuring good
working relationships with others (particularly subordinates), maintaining
good interpersonal relationships, and keeping the trust and respect of the
group.
These two concerns are independent of each other and a leader or manager can
be either weak or strong in showing either concern.
Blake and Mouton devised a grid, often known as Blake’s grid, which shows
these two elements of leadership, one on each axis of the grid. Each axis of the
grid is numbered from 1 to 9.

A score of 1 indicates lowest level of concern.

A score of 9 indicates the highest level of concern.

Individual managers or leaders can be placed on the grid, according to their
concern for the task and their concern for people.
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Style
(1,1): Impoverished style
The leader gives little effort to getting work done
and has a lazy approach. The worst type of leader
possible.
(1,9): Country club style
Low concern for getting the task done, but high
concern for people and maintaining good relations.
(9,1): Authoritarian,
compliance style
The leader concentrates on efficiency, and getting
the work done, with little concern for people. Will
seek to eliminate people from the work if at all
possible (for example through automation).
(5,5): Middle-of the road
style: ‘organisation man’
Does enough to get the job done, but may not be
pushing to extend the boundaries of what is
possible.
(9,9): Team
management
High concern for the task and high concern for
people. Provides effective leadership to the team.
The most effective type of leader.
Managers/leaders show differing amounts of concern for the task and concern for
people, and so may be placed anywhere on the grid.
Blake and Mouton argued that the most effective leaders show high concern for
both the task and for people.
1.6 Tannenbaum and Schmidt’s leadership continuum
Tannenbaum and Schmidt (1958) developed a model to describe different styles
of leadership. They did not argue that one style was the best. Instead, they
suggested that leaders might start with one style (an authoritarian or autocratic
style), and then change their style (towards more delegation of authority to
subordinates) as the group members gain experience and become more mature.
They argued that providing leadership has two main elements:

Leaders may exercise their authority and make all the decisions for the
group. Leaders who behave in this way are authoritarian.

Leaders might also give the group members freedom to make their own
decisions. A democratic leader delegates decision-making, although they
also identified an ‘abdicates’ style of leadership, which is similar to a
laissez-faire style.
Tannenbaum and Schmidt described the balance between using authority and
allowing freedom to subordinates as a continuum or spectrum. The balance can
range from strict authoritarian leadership at one end of the continuum to
delegation of virtually all decision-making responsibilities at the other end.
Their continuum is shown in the diagram below. Every leadership style involves a
varying balance between using authority and giving freedom to subordinates.
Use of authority
Area of freedom
for subordinates
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It is important to remember that although the leader delegates authority, he must
always retain responsibility for the decisions, actions and performance of his
subordinates.
A task of the leader is to develop the individual members of the team and the
team as a unit. He should therefore delegate authority and ask the team to make
decisions according to the level of their abilities and maturity. Over time,
however, a leader’s style should move from the left of the continuum
towards the right hand side.
Tannenbaum and Schmidt identified seven levels of delegated freedom on their
continuum.
Level
1 Tells
The manager takes the decisions and announces his decision to
the team.
2 Tells and
sells
The manager takes the decisions, but then ‘sells his decision to the
group. He explains the reasons for the decision, emphasising the
benefits for the team.
3 Tells and
talks
The manager takes the decision, presents his decision to the team
with the background ideas that led to the decision, and then invites
questions. This makes it easier for the team to understand the
decision and agree with it, and to understand the issues involved
and the implications of the decision.
4 Consults
The manager announces a provisional decision and invites the
group members to discuss it. The manager then takes into
consideration the views of the team members, and may change his
decision. The team members therefore have some influence over
the decision.
5 Involves
The manager presents the problem to the team, perhaps
suggesting some options. He asks for suggestions about what
should be done. He then decides. The team members are therefore
closely involved in the decision. This style is appropriate when the
team has a high level of knowledge and experience.
6 Delegates
The manager explains the situation to the team, defines the
parameters and asks the team to decide. The manager therefore
delegates the decision-making entirely, within the stated limits. This
leadership style requires a mature team.
7 Abdicates
The manager allows the team to identify the problems, develop
options, make a decision and develop action plans for a solution –
within the stated limits of his own authority.
1.7 The Ashridge model
A research team from Ashridge College in the UK identified and explained four
different styles of leadership:

Tells

Sells

Consults

Joins
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Tells style
A ‘tells’ style of leadership is dictatorial. The leader makes decisions and imposes
them on his subordinates, expecting them to be obeyed without question.
The main advantages of the ‘tells’ style are:

Speed of decision-making: the leader does not need to consult anyone
before making the decision.

It will probably result in better decisions when the subordinate is
inexperienced or lacks the required understanding to contribute usefully to
discussions of problems.
The disadvantages of a ‘tells’ style are greatest when there is no requirement for
fast decisions and the subordinates have experience and skills that they can
contribute to discussions. When the leader has a ‘tells’ style:

The views of subordinates are ignored

Any initiative or creativity the subordinates might contribute is lost

There is too much dependence on one person, the leader.
Sells style
A ‘sells’ style of leadership is autocratic. An autocratic leader makes his own
decisions but then tries to ‘sell’ them to his subordinates. This means that there is
a small amount of consultation about decisions, but not much.
The advantages of a ‘sells’ style are that:

Subordinates at least know why certain decisions have been made

The leader is not dictatorial
However, with a ‘sells’ style the leader is imposing his views on subordinates and
the communication is largely one-way.
Consults style
A ‘consults’ style is a democratic style of leadership. The leader asks for
comments from subordinates before making a decision, and the comments from
subordinates might persuade him to change his mind or alter his view about
something.
The advantages of a ‘consults’ style are:

Greater interest and involvement for subordinates.

Therefore possibly stronger motivation amongst subordinates.

The ability of subordinates to contribute their knowledge and experience to
the decision-making process.

The opportunity for subordinates to gain better insights and understanding
through being involved in the decision-making discussions.
The disadvantages of a ‘consults’ style are that:

Subordinates might not have sufficient knowledge or experience to
contribute effectively.

The decision-making process might be slowed down too much, and is
unlikely to be desirable at times of crisis when quick decisions are needed.
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Joins style
A ‘joins’ style of leadership is called a ‘laissez-faire’ style by some management
theorists. With this style, the subordinate is allowed to get on with his work and
do whatever he likes, within established guidelines and constraints.
The potential advantages are high motivation and commitment from
subordinates.
The potential problems are that:

Individuals often need guidance from a leader.

Co-ordination between subordinates might be poor.

There is a risk that the actions of subordinates might undermine the
authority of the leader.

The potential risks are too great if the subordinates are insufficiently
knowledgeable and experienced.
Conclusion
Research by an Ashridge College team concluded that:

Subordinates prefer a ‘consults’ style of leadership.

The worst style of leadership is inconsistency in style.
1.8 Likert’s leadership styles
Writing in the 1960s, Rensis Likert identified four different leadership styles.
Leadership
style
Features of the style
Exploitive
authoritative
The leader has a low concern for people. He uses threats
and other fear-based methods to get others to do what he
instructs. Communication is almost entirely a downward
process, from the leader to the subordinates.
Benevolent
authoritative
The leader is authoritarian, but also shows concern for
people. He is a ‘benevolent dictator’. He uses rewards to
encourage performance. He listens to concerns of people
lower down in the organisation, but he is often told by
subordinates what they think he would like to hear. Most
decisions are taken by the leader. There is not much
teamwork among the subordinates.
Consultative
The leader makes a genuine attempt to listen to his
subordinates. He has substantial trust in his subordinates,
but not enough to let them take major decisions (which he
takes himself). There is some two-way vertical
communication between leader and subordinates, and
some horizontal communications between subordinates,
with a moderate amount of teamwork and cooperation.
Participative
The leader engages subordinates in the decision-making
process. He has complete confidence in his subordinates,
who feel a responsibility for the organisation’s goals.
People are psychologically close and work well together.
Subordinates receive economic rewards based on
achieving goals that have been set with their participation.
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Likert argued that a participative style of leadership was ideal for the profitoriented, human-concerned organisation.
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2
THEORIES OF LEADERSHIP: CONTINGENCY THEORIES
Section overview

The nature of contingency theory

Fiedler’s contingency model

Hersey and Blanchard: situational leadership theory

Handy’s best fit approach
2.1 The nature of contingency theory
Contingency theory of leadership is based on the view that the most effective
leadership style in a given situation will depend on the situation. In other words,
the most effective leadership style is ‘contingent upon’ the circumstances of the
situation.
Contingency theories of leadership have been developed by:

Fiedler

Hersey and Blanchard

Handy.
2.2 Fiedler’s contingency model
Fred Fiedler’s contingency theory of leadership was developed from research he
conducted in the 1960s into two leadership styles, and which style was the more
effective. He began by identifying two leadership styles:

task-orientated leadership, and

relationship-orientated leadership.
These styles could be related to Blake’s grid and ‘concern for the task’ and
‘concern for people’.
Fiedler developed a system for deciding whether a leader was task-orientated or
relationship-orientated, based on getting leaders to reply to a questionnaire about
their ‘least favourite co-worker’.
Having categorised the individuals in his research into one or the other
categories of leader, he then tried to establish which style of leadership was more
effective.
He concluded that the effectiveness of a leader depends on:

the leader’s style, and also

the extent to which the work situation gives the leader control and
influence.
The work situation depends on three factors:

The relationship between the leader and the subordinates: If the leader
is liked and respected, he is more likely to have the support of his
subordinates.
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
The structure of the task. If the task is clearly defined, with clear goals,
methods of working and standards of performance, it is more likely that the
leader will be able to exert influence.

The position power of the leader. If the organisation gives power to the
leader, for the purpose of getting the job done, this is likely to increase the
influence of the leader.
For example, the leader may have to be authoritarian in his approach when a
quick decision is needed, or when employees are used to being told what to do.
The work situation can be favourable to the leader, unfavourable to the leader, or
something in between (intermediate favourableness). Fiedler defined a
favourable work situation as:

good relationship between leader and subordinates

a highly-structured task, and

a large amount of position power for the leader.
So which leadership style was most effective? Fiedler found that it seemed to
depend on the circumstances:

When the work situation is favourable, a task-orientated leader is more
effective.

When the work situation is unfavourable, a task-orientated leader is also
more effective.

When the work situation is somewhere between favourable and
unfavourable (‘intermediate’), a relationship-orientated leader is more
effective.
Fiedler was therefore one of the first management theorists who argued that the
effectiveness of leadership style depends on the circumstances.
He went on to argue that individual leaders are task-orientated or relationshiporientated by nature, and it is impossible to change them. An organisation
should therefore assess whether a work situation is favourable, unfavourable or
in between, and try to appoint a leader with the more appropriate style for the
work situation.
2.3 Hersey and Blanchard: situational leadership theory
Paul Hersey and Kenneth Blanchard (1968) developed another contingency
theory of leadership, which they called situational leadership theory. Like
Fiedler’s contingency theory, their theory states that the most appropriate
leadership style depends on the work situation.
Some of the assumptions in their theory are that:

A leader should adjust his or her leadership style to meet the requirements
of the work situation. Leaders must be able to use any leadership style, and
should switch from one style to another as circumstances require. (In this
respect their views differ from Fiedler’s. Fiedler did not believe that
individuals can change their leadership style, because this is ‘personal’ or
‘natural’ to each individual. It was therefore necessary to pick an individual
as leader who could bring the most suitable leadership style to the job.)

Subordinates or team members are at different levels of personal
development. Some are more mature psychologically than others and
some are more mature (experienced and skilled) in the job than others. The
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appropriate leadership style depends on the extent to which the
subordinates are mature. For the purpose of their theory, Hersey and
Blanchard identified subordinates’ maturity in terms of:

competence in their job and their ability to undertake successfully the
tasks they are given – job maturity

confidence in their ability to deal with the challenges of the task

commitment to the organisation’s goals and commitment to undertake
the task – psychological maturity.
They referred to the maturity of the team members as their ‘functioning
maturity’.
Leaders are involved in:

directive activity – giving guidance and direction: this is similar to ‘concern
for the task’ and can be described as ‘task behaviour’.

supportive activity – giving emotional and social support to subordinates:
this is similar to ‘concern for people’ and can be described as ‘relationship
behaviour’.
The amount of involvement by leaders in directive activity and supportive activity
can range from low to high. The appropriate level of activity required from an
effective leader varies with the work situation, which in turn depends largely on
the maturity of the subordinates or team members.
Hersey and Blanchard identified four leadership styles, which can be presented
in the form of a 2 x 2 matrix.
The four leadership styles are explained in more detail below, together with the
views of Hersey and Blanchard about which leadership style is most effective for
a given work situation.
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Leadership
style
Characteristics
Most effective
when
subordinates
have…
Telling
High task focus, low relationship focus. The
leader defines the roles and tasks of
subordinates and supervises them closely.
Decisions are announced by the leader.
Communication is mainly one-way, from the
leader down to subordinates.
Low competence
High task focus, high relationship focus.
The leader defines the roles and tasks of
subordinates. He seeks ideas and
suggestions from subordinates, so
communication is two-way. The leader
makes the decisions.
Some
competence
Selling
High commitment
Some
commitment
Subordinates may need direction because
they are inexperienced. They also need
support and praise from the leader to build
their self-esteem.
Participating
Low task focus, high relationship focus. The
leader delegates some day-to-day
decisions to subordinates (for example,
work scheduling). The leader facilitates and
participates in discussions about other
decisions with subordinates.
High competence
Variable
commitment
Subordinates are competent in their work,
but lack the psychological confidence of
motivation. Some support is necessary from
the leader to boost confidence and
motivation.
Delegating
The leader is involved in discussions about
problem-solving and decision-making, but
control is with the subordinates. The
subordinates decide how and when the
leader will be involved. The subordinates
can do the work themselves with little
supervision or support.
High competence
High commitment
2.4 Handy’s best fit approach
Charles Handy described his contingency approach to leadership styles as a best
fit approach.
There are four factors that influence the effectiveness of a leader:

the leader himself – his personality and character, and also his leadership
style

the subordinates – the personalities of the individuals in the group, the
character of the group as a whole, their preferences for a particular
leadership style

the task – what are the objectives of the group’s tasks, what methods of
working are used?
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
the environment – this factor covers a wide range of possible issues,
including the organisation structure, the culture and norms of the
organisation, the technology of the organisation’s operations and the
variety of tasks performed by subordinates in the group.
Leadership styles range between autocratic and democratic. A leader’s style is
not necessarily one or the other. It can be somewhere in between the two
extremes.
The characteristics of the subordinates in a group range between having a low
opinion of themselves (and wanting to be told what to do) and having a high
opinion of themselves (and so liking challenging work and freedom from
supervision). Most groups are somewhere between these two extremes.
The tasks that are done by a workgroup can range between all routine and
repetitive tasks at one extreme and all complex work at the other extreme.
Normally, the characteristics of the work is somewhere between these two
extremes.
Handy described a ‘best fit’ spectrum, in which the three factors of leader,
subordinates and tasks are placed on a range or spectrum, each between two
extremes. He called these two extremes ‘tight’ and ‘flexible’.
TIGHT
The leader
FLEXIBLE
Prefers an autocratic style
Prefers a democratic style
Low opinion of subordinates
High regard for subordinates
Dislikes uncertainty
Subordinates
Accepts a reasonable amount of
uncertainty
Low opinion of their own
abilities
High opinion of their own
abilities
Like certainty. Like to be told
what to do
Like challenging work
Prefer autocratic leaders
Prefer democratic leaders
See their work as unimportant
The task
The work requires no initiative.
It is routine and repetitive, and
trivial
The work involves important
tasks with a long timescale for
completion and results
Short timescale for completion
Complex work, involving
problem-solving or
decision-making
Handy suggested that in any work situation there is a best fit of leader,
subordinates and task (and environment, which is not on the spectrum). The best
fit occurs where all three items – leader, subordinates and task – are at the same
position on the spectrum.
Whenever there is a mismatch on the spectrum of leader, subordinates and task,
and change will be required to create a new best fit for the altered work situation.
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3
LEADERSHIP QUALITIES
Section overview

What do leaders do?

Adair’s action-centred leadership

Warren Bennis: leaders as enablers and originators

John Kotter: what leaders really do

Ronald Heifetz: leadership as an activity
3.1 What do leaders do?
The leadership theories described so far in this chapter have considered
leadership style and which particular style of leadership is the most appropriate.
Other writers on leadership have considered what leaders do, and what makes
leadership different from management. Some of these theories are described in
this section.
3.2 Adair’s action-centred leadership
John Adair’s action-centred leadership model is based on the view that effective
leaders need full command of three aspects of leadership:

achieving the task and meeting the demands of the task

managing and maintaining the team or group

managing individuals within the group and meeting the needs of individuals
in the group.
A good leader keeps each of these three elements of leadership in balance.
Adair argued that in any work situation, a leader is faced with problems and
issues that will require the use of the three leadership skills. However, the
particular skills that are needed to deal with any given situation will vary
according to its nature. In other words, the skills required to deal with each
problem will depend on the nature of the problem. An effective leader needs skills
in all three areas.
Adair argued that all three aspects of leadership skills can be learned through
training and development.
Sometimes a leader must show one of the leadership skills to deal with a
problem, and sometimes he must show two of the skills or all three skills. The
action-centred leadership model, indicating the skills required by the leader, can
therefore be shown as three overlapping circles, which Adair calls the ‘three
circles diagram’.
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The leadership skills required for each of the three areas of leadership are
summarised below.
Achieving the task
Managing the team
Managing individuals
Define the task and the
objectives/goals
Agree standard of
performance/behaviour
Understand the team
members as
individuals
(personality, skills,
needs)
Make the plan for
achieving the task
Establish the culture of
the group
Assist individuals
Identify and acquire the
resources needed
Maintain ethical
standards and discipline
Give support to
individuals
Establish responsibilities
for group members
Resolve conflicts
between group members
Give praise to
individuals
Set standards and target
performance standards
Change the balance/
membership of the group
when necessary
Agree individual
responsibilities and
objectives
Establish reporting
systems
Develop the ability of the
team members to work
together
Make use of the
strengths and skills of
the individual
Control actual
performance by
comparison with the
targets
Build team morale.
Motivate the group as a
team
Reward individuals (for
example with more
responsibility or higher
status)
Monitor performance
Develop the collective
skills and maturity of the
group
Train and develop
individual team
members
Review on completion of
the task
Facilitate
communications – within
the group and externally
Consult with the group
Give the group feedback
on its performance
Provide group training
The emphasis that a leader gives to each of these skills will obviously vary
according to the situation, but a well-trained and effective leader is able to make
use of the appropriate skills for each situation.
Note: Adair’s 50:50 rule
Adair suggested a 50:50 rule that applies to his thinking about leadership.
Leadership is influential, but effective leadership on its own is not sufficient.

50% of motivation comes from within the individual. The other 50% of
motivation comes from influences outside the individual, including the
influence of the leader.

50% of building a successful team comes from the team members and 50%
comes from the leader of the team.
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3.3 Warren Bennis: leaders as enablers and originators
Warren Bennis, writing from the 1980s, made a distinction between managers
and leaders.

The role of the manager is to administer and maintain systems in order.
Managers focus on systems and controls. Their main concern is for the
‘bottom line’ (short-term profit). He referred to management as
transactional leadership, which is ‘doing things right’.

The function of the leader is to innovate and develop. Leaders focus on
people, not systems. Their main concern is for the longer-term, not the
short-term profit figure. Bennis referred to leadership as transformational
leadership, which is ‘doing the right things’.
His comparison of managers and leaders is summarised in the table below.
Managers
Leaders
Transactional leadership
Transformational leadership
Doing things right
Doing the right things
Administer
Innovate
Maintain
Develop
Focus on systems and structures
Focus on people
Reliance on control
Inspire trust
Short-range view
Long-range perspective
Imitates
Originates
Accepts the status quo (no change)
Challengers the status quo
Bennis has argued that leaders must get involved if they are to provide
leadership. Here are two quotations from his work, suggesting how leaders
should provide innovation (a ‘vision’) and earn trust from his followers.

‘It’s not a question of giving speeches, sending out memos and hanging
laminated plaques in offices. It’s about living the vision, day in day out –
embodying it – and empowering every other person in the organisation to
implement and execute that vision in everything they do.’

‘Leadership will have to be candid in their communications and show that
they care. They’ve got to be seen to be trustworthy human beings. That’s
why I believe most communication has to be done eyeball to eyeball, rather
than in newsletters or videos or via satellite broadcasts.’
Leadership at all levels
Bennis argued that leadership is needed at all levels in an organisation, and
believes that everyone has the capacity and ability to provide leadership. He is
opposed to the trait theory’ that leadership is a natural talent and that there are
‘born leaders’.
He has argued that the role of the leader is not to be an all-knowing problemsolver who knows the answer to every problem. Instead, a leader is someone
who stimulates the group, encourages its creativity and maintains an atmosphere
or culture in which the group members can find the solutions to the problems
together.
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3.4 John Kotter: what leaders really do
John Kotter also considered what leaders do (His most well-known book is
entitled ‘What Leaders Really Do’.) He has argued that leadership is largely
concerned with:

anticipating change

dealing with change, and

‘adopting a visionary stance’ – in other words having a vision about what
the organisation is trying to achieve and what it must do to get there.
More change demands more leadership, and Kotter advocated the creation of a
culture of leadership within business organisations.
Like Bennis, Kotter has compared management (transactional leadership) and
leadership (transformational leadership), as follows.
Managers
Transactional leadership
Leaders
Transformational
leadership
Planning and budgeting
Establishing directions
(Develop a detailed plan
and create a detailed map
of how to achieve planning
targets.)
(Develop a vision for the
organisation, and identify
the direction in which it
should go. Concern with
strategy.)
Human relations
aspects
Organise the work and fill
staff in the positions
(Decide which individual
best fits each particular
job.)
Align the people with the
vision.
(There is a
communication problem –
getting people to
understand and then
believe in the ‘vision’)
Execution of tasks
Control. Problem-solving
leadership
Motivate and inspire
Outcomes
Produces a degree of
predictability in outcomes
Produces change – often
dramatic
Creating the
agenda
3.5 Ronald Heifetz: leadership as an activity
Heifetz has argued that leadership is an activity, not a personal quality. We often
confuse ‘leadership’ with ‘authority’.

Authority is often seen as the possession of powers based on a formal
management role within an organisation The manager has the right to tell
subordinates what to do, because he is simply exercising his ‘legitimate
power’. Subordinates do what the manager tells them, to avoid dismissal,
demotion or other disciplinary measures.

However, employees may follow an individual, not because of his formal
authority, but because the individual shows leadership qualities. A leader is
someone who has the ability to make sense of situations that are out of the
ordinary, and know how to act in these situations. Leadership of this kind
gives the individual informal authority.
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Successful leaders need this informal authority as well as the formal authority
granted to them by their position.
Heifetz (‘Leadership Without Easy Answers, 1994) suggested that there are two
types of challenge for leaders in business. Each type of challenge needs different
leadership qualities. The two types of problem are as follows:

Technical problems. These are problems that have a relatively simple
answer. Current knowledge can be applied to find a solution to the problem.

Adaptive problems. These are problems where the answer involves a
need for people to change – change their culture and outlook. People are
resistant to change; therefore the solution to the problem involves getting
people to learn new ways.
Technical problems can be solved by managers (transactional leaders). For
adaptive problems, transformational leadership is needed. Heifetz has referred to
problems requiring significant change as ‘adaptive work’.
Six principles of leadership and adaptive change
Successful leadership depends on judgement, and making decisions about when
to act, and how far to go each time. Change should not be introduced too quickly,
but only at a pace that individuals can accept. Leaders must act within the
context of ‘permission to change’ from the people affected and ‘restraint’ – not
going further at any time than other people are willing to tolerate.
Heifetz suggested that there are six principles of leadership for adaptive change.
1
Get on the balcony
A leader must have an ability to observe
changes that are happening and to mobilise
others to respond. It should be as if the leader is
on a balcony with a clear view of all the entity’s
activities. The leader must then be able to
mobilise the right people in the right way to do
the required adaptive work.
2
Identify the adaptive
challenge
A leader has to see what response is needed to
the new challenge and change. Heifetz used as
a comparison an example of a band of
chimpanzees that knows how to respond to a
threat from a leopard, but does not have the
leadership to know how to respond to a new
challenge from a human with a gun.
3
Regulate distress
Having identified the adaptive challenge, the
leader must generate just the right amount of
’distress’ among other people in order for
everyone to see and understand the need for
change. Change and progress must be
introduced at the right pace – a leader must
progress at the ace that other people are willing
to accept. The leader must always point others
in the right direction by asking them key
questions.
(Heifetz even suggested that the assassination
of a political leader is a failure of leadership. A
political leader who tries to bring in changes too
quickly might expose himself to assassination,
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from people who dislike the pace at which the
changes are happening.)
4
Maintain ‘disciplined
attention’
The leader must get conflict out into the open
and use this as a source of creativity.
Constructive conflict among individuals leads
eventually to collaboration and agreement. The
leaders most likely to succeed are those who
make followers aware of their responsibilities.
5
Give work back to the
people
Leaders should not control and direct. They
should provide support and allow people to find
the solutions to problems through their own
efforts. Change is a collaborative process.
6
Protecting voices of
leadership from below
Leaders should give a voice to other people in
the organisation, and should allow others (below
them in the ‘hierarchy’) to raise contentious
issues.
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CHAPTER
Certificate in Accounting and Finance
Business management and behavioural studies
9
Team management
Contents
1 Individual and group behaviour in business
organisations
2 Teams and team roles
3 Team formation and development
4 Effective and ineffective teams
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INTRODUCTION
Learning outcomes
The overall objective of the syllabus is to equip candidates with the fundamentals of
management and behavioural studies.
Leadership, negotiation and conflicts
LO 5
On the successful completion of this paper, candidates will be able to
show familiarity with the nature and kinds of leadership
LO 4.4.1
List differences between groups and teams
LO 4.4.2
Explain and illustrate balance theory of group formation
LO 4.4.3
Identify and describe stages of group development
LO 4.4.4
List down the factors that increase and decrease group cohesiveness
LO 4.4.5
Explain the ways to make teams more effective
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Chapter 9: Team management
1
INDIVIDUAL AND GROUP BEHAVIOUR IN BUSINESS ORGANISATIONS
Section overview

Characteristics of individual behaviour at work

Characteristics of workgroup behaviour: formal and informal groups

Individual and team approaches to work

The role of management in team building
This chapter looks at the role of individuals in work and the role of workgroups. You
should be able to relate many of the ideas in this chapter to your own experience,
either at work or in other entities, such as a business school or college.
1.1 Characteristics of individual behaviour at work
Individuals go to work for a number of reasons. The main reason is the need to
earn money in order to have a good life outside work. Many individuals have a
keen interest in the type of work that they are doing, and enjoy the work that they
do.
Working in a business affects behaviour, but individuals behave in different ways.

Individuals might think that when they are at work, the employer regards
them as someone who is paid to do a job. They might therefore decide that
they need to get on with the job they have been given, and perform the job
adequately, so that they don’t get into trouble from their boss.

Some individuals have a pride in their work, and try to do their job to the
best of their ability.

Some individuals need to be told what to do by their boss; others are much
happier using their initiative and getting on with their work without having to
be told what to do.

Individuals do not work in isolation, on their own. They work with
colleagues, and individuals differ in the way they interact with their
colleagues. Some enjoy communicating with other people, and like this
aspect of their work. Other individuals do not communicate well with other
people, and so might concentrate on their work and even refuse to join in
conversations in the workplace.

The behaviour of individuals can also be affected by the prospects of
promotion, career advancement or higher pay.
1.2 Characteristics of workgroup behaviour: formal and informal groups
Individuals work with other people. A workgroup is a group of employees who act
with a common purpose and a sense of identity. There are two types of
workgroup:

informal workgroups, and

formal workgroups.
Informal workgroups
An informal workgroup is a group of employees that does not have a formal or an
official identity. It is a group of individuals who get on well with each other and
interact socially. They might have lunch together regularly, or might talk about
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personal interests and family matters over a cup of tea or coffee. Some informal
groups might meet together outside work, on a social basis.
Informal workgroups often develop a collective attitude to their work. This attitude
might be positive, or it could be hostile to management.
Informal workgroups can also be important because of the way they
communicate with each other. Sometimes, news of an event or a new
development at work gets around much more quickly through informal
communications (e-mail messages to colleagues and phone calls) – ‘through the
grapevine’ – than it does by more formal communication channels.
Formal workgroups
Formal workgroups are created in order to organise work. The employer
establishes workgroups to perform specific roles or functions. Each workgroup
has a number of jobs to be performed, and employees are appointed to fill the job
vacancies. When one employee leaves his job, another person is appointed in
his place, and the formal workgroup continues unchanged.
Employees work together in their workgroups, each performing their own job
within the group. The workgroup has a formal leader (a manager or supervisor),
and will develop its own characteristics and ‘culture’.
The purpose of a formal workgroup
The purpose of a formal workgroup is to:

combine the efforts of several employees, working together,

to achieve a common goal.
Teams are established because individuals working on their own would be
unable to achieve the same output or end results.
Comparison of formal and informal workgroups
The differences between a formal workgroup and an informal workgroups are set
out below.
Formal workgroups
Informal workgroups
Members of the formal work team are
appointed by management.
An informal workgroup comes
together through the social
interaction of its members.
Membership of a formal workgroup is
‘permanent’.Employees continue to
work in the group until they leave their
job or until they are moved to other
work by the employer.
Membership of an informal work
team depends on the social
interactions between members. New
members may join the group at any
time, and existing members may
leave.
A formal workgroup has a clear set of
work tasks, with specific objectives.
These are set by management.
An informal workgroup is not
organised by management and does
not have a specific objective or
tasks.
The workgroup has a formal existence.
The informal group does not exist in
a formal or clearly-defined sense.
Workgroup members have formal roles
and job titles.
Informal workgroup members do not
have set roles or titles.
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Formal workgroups
Informal workgroups
A formal workgroup has a formal
decision-making structure. Decisions
are commonly taken by the group
leader.
Informal workgroups might not make
any decisions that affect their work.
However, if they do, the group
members will reach a collective
agreement.
Management assess the performance
of a formal workgroup by its
performance (efficiency and
effectiveness in carrying out its tasks)
An informal workgroup is not
assessed. However, its collective
attitude to management can range
from supportive at one extreme to
hostile at the other. Employee
attitudes to management can be
determined by the shared attitudes
of informal groups.
Formal workgroups work together
through established procedures and
systems.
Informal workgroups can be much
more efficient (than formal methods)
in communicating information.
1.3 Individual and team approaches to work
A function of management is to get the best performance possible from the
employees who work for him (or her). There are two approaches to achieving
effective performance.

The individual approach. This approach is based on the view that work
should be properly organised, and employees should be appointed to carry
out specific job functions. If each individual performs his job effectively, the
entire workgroup will perform effectively. The effectiveness of the
workgroup is the total sum of the effectiveness of each group member.

The team approach. This approach is based on the view that a workgroup
will be more effective if its members work together as a team. Effectiveness
comes from the ways in which the group members work with each other, as
well as from the way that individuals perform their own job. A task of
management should therefore be to develop an effective team, not just
effective individuals.
A useful way of comparing these two approaches might be to think about a
football team or any other type of sports team. The effectiveness of the team
depends to a large extent on the individual talents and skills of the team
members, and their ability to perform the function for which they are in the team,
such as goalkeeper or goal scorer. However, the team will not be successful
unless its members can also play well together.

When team members do not work together well, the effectiveness of the
team as a whole is less than the effectiveness of each team member taken
individually.

When team members work well together, the collective effectiveness of the
team as a whole can be much greater than the effectiveness of each team
member taken individually.
The effectiveness of individuals is important. However, the effectiveness of teams
could be even more important.
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1.4 The role of management in team building
A role of management is to provide leadership to teams and workgroups, so that
the team is successful. More specifically, in addition to the more general tasks of
a manager, team management involves:

Bringing together a suitable group of individuals to form the team

Allowing and encouraging the team to develop

Assessing the performance of the team and, where appropriate, rewarding
the team as a group for the performance it has achieved.
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2
TEAMS AND TEAM ROLES
Section overview

The differences between a workgroup and a team

A successful work team

Team roles: the ideas of Belbin
2.1 The differences between a workgroup and a team
For the purpose of your examination, you should make a distinction between a
workgroup and a team. A team is a workgroup, but not all workgroups operate
like a team.
A team is a workgroup in which the team members work effectively together, and:

all the team members identify with the team and see themselves as part of
a team, and

the team reaches decisions by agreement and consensus.
Decisions taken by a team have the support of the entire team, which means that
a team cannot exist in a group where decisions are taken by the group leader
(manager or supervisor) and imposed on the group, whether the group members
agree with the decision or not.

Since teams take decisions by consensus, it is impossible for large
workgroups to act as teams. In a work environment, teams are often quite
small.

For a similar reason, it is difficult to build a team when the workgroup
members are spread across different geographical locations. Team
members need to meet and communicate on a regular basis.
Project teams
The word ‘team’ may be used to mean a project team. A project team has the
following characteristics:

A project team is created to perform a specific task, and is then disbanded.
The team is often made up of individuals from different functional areas of
the organisation (the team is ‘multi-disciplinary’).

Other workgroups are more permanent, and are established to fulfil specific
roles. They may be organised by function (for example workgroups in
production, in marketing, in accounting, and so on).
2.2 A successful work team
A successful work team has several characteristics. Some of the characteristics
of a successful team apply to effective workgroups in general. Others relate more
specifically to teams.

The team should have a clear purpose.

Its area of authority should be clearly defined. The team members should
know what they can do, and what they do not have the authority to do.

The team should have effective leadership. One of the tasks of the team
leader is to create an effective team: team leadership skills are therefore
essential.
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
If the team is a project team that is required to complete a specific task,
there should be a clear timescale for completion of the task.

The team should be given the resources that it needs (equipment,
materials, money) to complete its tasks successfully.

The team members should have the necessary skills or experience to
complete their task successfully. Every individual does not need all the
necessary skills; however, collectively, the team members should have all
the skills, expertise and experience required.

The team members should have the motivation and commitment to
achieving the objectives of the team.

There should be good communications between the team members. There
should be an effective and rapid exchange of all relevant information.

Each member of the team should perform a role that adds to the
effectiveness of the team. The role of team members is partly to carry out
technical or operational tasks. Team roles are also concerned with adding
to the effectiveness of the way in which the team functions as a unit. Team
roles are described below.

There should be strong team loyalty and good teamwork. Morale or team
spirit should be high, and there should be respect for the team manager.

The work of the team should produce benefits for the business. Providing
benefits to the business is essential, because this defines ‘success’.
2.3 Team roles: the ideas of Belbin
An important contribution to ideas about the management of teams was made by
Belbin. Belbin studied the behaviour of individuals in teams and the ‘team role’
that each individual plays. He defined a team role as ‘our tendency to behave,
contribute and interrelate with others in a particular way’.
He suggested that in a successful team, the team members should have a
balance of certain behavioural skills. He identified nine types of behavioural
characteristics that team members should have between them. (An individual
may have more than one behavioural characteristic, which means that a team
can possess all nine characteristics without the need for nine team members.)
The nine team roles are grouped into three broad groups:

Doing/acting. Some team members are good at getting things done. When
they see what needs to be done, they do it or encourage others to do it.

Problem-solvers and thinkers. Teams are often confronted with problems
and difficulties that need to be resolved. Some team members need to be
good at finding answers to problems.

Showing concern for people. A team is a group of individuals acting
together in a work environment. A successful team needs members who
have skills in bringing the team together, by showing concerns for others,
by helping others or through communicating well with others and showing a
concern for the team as a unit.
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The nine team roles are as follows.
General nature
of the role
Team role
Doing/ acting
Problem
solving/
thinking
Concern for
people and
feelings
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Description
Implementer
A well-organised and predictable person.
He takes basic ideas and makes them work
in practice. However, he can be slow.
Shaper
A person with energy, and full of action. He
challenges other members of the team to
move forward and make progress.
However, he can be insensitive to the
feelings of others.
Completer/
finisher
A person who is reliable in seeing a task
through to the end and getting it finished.
He sorts out minor problems and makes
sure that everything is working well.
However, he can worry too much and may
not trust other people.
Plant
A person who solves difficult problems
with original and creative ideas. However,
he is a poor communicator and may ignore
details.
Monitor/
evaluator
A person who ‘sees the big picture’. He
thinks accurately and carefully about issues.
However, he may lack energy and an ability
to inspire other people.
Specialist
A person who is driven by a pursuit of
knowledge and information, and wants to
go into detail. The ‘specialist’ role is a
behavioural characteristic rather than
functional specialism. However, he
becomes an expert in some key areas and
will solve problems in those areas. He may
be disinterested in all other areas of the
team’s activities.
Coordinator
A respected leader who helps everyone
else in the team to focus on their particular
tasks. However, he may be seen as wanting
to control things too much.
Team worker
A person who cares for individuals and the
team, and who is a good listener. He works
hard to resolve social problems between
other team members. However, he may find
it hard to take difficult decisions.
Resourceinvestigator
A person who explores new ideas and
possibilities with enthusiasm, and
discusses them with others. A good
‘networker’. However, he may be overoptimistic and may lose energy after an
initial period of enthusiasm.
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None of these nine roles is the role of team leader. The coordinator in a team
may be the team leader, but this is not essential.
A useful way of trying to learn the nine team roles identified by Belbin is to think
about the consequences for a team of not having a team member capable of
performing any one of the roles in the list.
Managing a team: using the ideas of Belbin
Belbin suggested that teams will work most successfully when there is a suitable
balance between these nine roles amongst the team members, and when team
members:

understand their role in the team

work to their strengths, and

try to manage their weaknesses.
A team manager can use the ideas of Belbin when developing a team to perform
a particular function or task. The manager can assess the role or roles played by
each team member, and look for roles that the current team members do not
fulfil. These gaps should then be filled by recruiting new members to the team, or
by encouraging existing team members to fulfil the missing role (if this is
possible). If necessary, some existing team members should be replaced by new
members who will perform the missing roles.
Belbin’s ideas can be applied in practice fairly easily. Questionnaires have been
developed that enable individuals to assess which behavioural characteristic (or
characteristics) they have, and which team roles they can perform well.
Management can use this assessment of individuals to ensure that teams consist
of individuals who together possess all the characteristics of a successful team.
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3
TEAM FORMATION AND DEVELOPMENT
Section overview

The ideas of Tuckman on team development

The value of Tuckman’s analysis

Balance Theory of group formation
3.1 The ideas of Tuckman on team development
Bruce Tuckman (1965) provided an analysis of how small teams develop and
change character over time. The appropriate form of team leadership changes as
the team goes through each new stage of development.
In Tuckman’s original analysis, there were four stages of team development:

forming

storming

norming

performing.
In 1977, he added a fifth stage:

dorming (also called adjourning, de-forming and mourning).
Forming
In the initial stage of its existence, a team is forming. The team is a collection of
individuals, but their individual roles and responsibilities within the team are
unclear. There is a high level of dependence on the team leader for guidance and
direction. The team leader must therefore direct the team members, and tell them
what to do.
Storming
The second stage in team development is storming. During this stage, decisions
do not come easily. There is usually conflict between team members, and the
attitudes, norms and preconceptions of individuals are challenged by other team
members. Team members compete with each other for status and position within
the team. There may be cliques and factions, and power struggles between
them. However, there is an improvement in the clarity of the purpose of the team
and its goals. The role of the leader is to act as coach to the team members, and
to encourage them to focus on the team’s tasks rather than on relationships and
emotional issues. The leader also encourages team members to find
compromises to settle conflict.
Norming
During the norming stage of team development, the team develops norms of
behaviour and operating. The roles of the team members become clear. The way
in which decisions are taken is also established. Major decisions are taken by the
team collectively, with all team members contributing to the decision-making
process. Commitment to the tasks of the team and team unity is strong. The team
leader can use a participative style of management, so that team members take
on greater responsibility for decisions.
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Performing
During the fourth stage of team development, performing, the team operates at
its full potential. The team members are strategically aware and they understand
why the team exists and what it is trying to achieve. The team members are also
able to get on with their jobs without interference from the team leader, and do
not need to be told what to do. The role of the team leader is to delegate new
tasks and oversee performance. Disagreements may occur between team
members, but these are resolved in a friendly and constructive way.
Dorming (adjourning)
In 1977, Tuckman added a fifth stage of team development to his earlier analysis.
There are various ways of describing this phase.

The group may break up, having achieved its purpose. The members of the
team may feel a sense of loss, and the break-up of the team may be
stressful for them, particularly if it is unplanned and unexpected.

Alternatively, the team may lose its efficiency, and might lose its ability to
make good decisions. Members of the team may share common views that
ignore developments in their business environment and changing
circumstances. Keeping the group in existence becomes the prime
objective of the team members, rather than achievement of the team’s work
objectives. It may be necessary to break up the team.
3.2 The value of Tuckman’s analysis
Not all teams go through all the stages of development and some teams progress
more quickly than others to the performing stage. Others get stuck and fail to
reach the performing stage.
However, Tuckman’s analysis is useful for the management of small teams for
the following reasons:

Management should be aware that it takes time to develop a new team,
and should be patient in allowing the team to progress to the ‘performing’
stage of its development.

However, it should also be possible to identify when a team is not
progressing as it should and is stuck, for example, in the norming stage of
development.

Tuckman’s analysis also gives some insight into the style of management
that might be best-suited to the team at each stage of its development, in
order to encourage the team to develop as rapidly as possible.
Example:
Three years ago a research team was established in the business school of a
university. Six members were appointed to the team. The purpose of the team
was to identify research projects, obtain funding for the projects from commercial
sponsors, carry out the research and prepare research papers for publication.
Initially, there was a lot of uncertainty about what the group should do, or how it
should set about the task of obtaining funding for their work.
As the team gained experience, the team became more confident about what it
was doing and what it was trying to achieve. However there were some
arguments between the team members about the work that each of them should
be doing. They carried out their research as a group, but some team members
were better at some tasks than others. Eventually, the group began to operate
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much more efficiently. Each member of the group adapted to a function, and
each group member understood instinctively what each of them should be doing.
Decisions were taken collectively as a team, by mutual agreement and
consensus.
Recently, three team members left, one to take up a job in another business
school and the others retiring from the business school for family reasons. Three
new team members have been appointed.
The team leader needs to recognise that the team has reached a new stage in its
development. Having gone through the forming and storming stages of
development, and having reached the norming stage, the change in team
membership has taken it back to a new forming stage. The team will have to go
through the forming and storming stages again, to become as effective as it was
before the three team members left.
3.3 Balance theory of group formation
Theodore Newcomb suggested that people are attracted to others on the basis of
sharing similar attitudes and values relating to subjects such as work, marriage,
lifestyle, politics, religion and authority. Once formed, people then attempt to
maintain balance within those relationships of the attraction, common attitudes
and values.
Illustration: Balance theory
Consider the situation where your best friend dislikes someone you love. In this
situation there is an imbalance as either the ones you love should also be loved by
your best friend, or conversely the ones you dislike should also be disliked by your
best friend.
In the above illustration the imbalance will naturally lead to a change of attitudes.
You may conclude that your best friend is not your best friend after all, or you
may conclude that you don’t love the person as you thought you did. The
resultant change in attitude will then restore balance in your relationship.
Balance theory concludes that where tensions arise between or within people
they will attempt to reduce those tensions through either:

Self-persuasion; or

By trying to persuade others
So, if we feel ‘out of balance’ we are motivated to restore a position of balance.
Note that balance does not need to reflect only positive emotions – two people
who share mutual dislike represents a state of balance as equally as two people
who share mutual attraction. An imbalance would occur if one party liked the
other when the other party disliked the first party.
Balance theory and Tuckman
Balance theory can be applied to Tuckman by considering where attitudes
change and imbalances are eliminated.
The journey from ‘form’ to ‘perform’sees differences and conflicts removed and
accepted rules and roles established through negotiation and persuasion in the
storming and norming phases.
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By the time we reach ‘perform’ stage, balance has been achieved with mutual
recognition of skills and roles, and interpersonal relationships with accepted
modes of communication established.
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Chapter 9: Team management
4
EFFECTIVE AND INEFFECTIVE TEAMS
Section overview

Characteristics of effective and ineffective teams

Evaluating team performance: success in achieving objectives

Tools and techniques for building team effectiveness

Factors that impact group cohesion
4.1 Characteristics of effective and ineffective teams
An objective of a team manager should be to create an effective team. He needs
to understand what makes an effective team, and why a team might be
ineffective, so that he can assess the effectiveness of his own team.
Many writers on the theory of business management and organisation have
suggested what the characteristics of effective and ineffective teams are. Some
of these characteristics are shown in the table below.
Effective work teams
Ineffective work teams
Success. An effective team is one that is
successful at achieving its goals or
objectives.
Lack of success. An ineffective team
fails to achieve its objectives or goals.
Teams that are only partially successful are likely to be ineffective in some ways.
Focus. An effective team is aware of its
goals and objectives, and keeps these in
mind all the time. They use their time and
resources well.
Lack of focus. An ineffective team
sometimes loses sight of its objectives.
Team members might allocate their
time badly.
Collective decision-making. An
effective team reaches decisions through
discussion and agreement.
Decision-making is dominated by
one team member. In an ineffective
team, one person (or perhaps a very
small group) makes the decisions, by
imposing his views on the rest of the
team. Other team members might
disagree, but do not speak out.
Good communication. In an effective
team, the team members communicate
with each other well, and keep each
other well-informed. They are also
truthful in communicating with each
other.
Lack of communication. In an
ineffective team, communication might
be poor. Team members might not be
fully truthful with each other.
Collaboration. In an effective team, the
members will cooperate and collaborate.
Each team member will do whatever is
necessary to get the job done, even if
this means doing work that is unfamiliar
and outside their normal experience.
Doing your own job. In an ineffective
team, the team members do not give
each other support. Each team
member does his own job and is
unwilling to do anything that is not
specified in the job description.
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Effective work teams
Ineffective work teams
Positive conflict. Positive conflict occurs
when there is disagreement, but the
team members are willing to discuss their
differences fully, and reach a suitable
agreement about what the solution
should be. Some conflicts are inevitable
in teams: the way that the conflicts are
resolved is important.
Failure to resolve differences. In an
ineffective team, the team members fail
to resolve their differences properly.
Disagreements are not discussed fully.
They are often resolved by an
ineffective compromise that ‘patches
up’ the differences of opinion, and the
compromise might not last for long.
Mutual support. In an effective team,
each team member is aware of the
contributions provided by the other team
members.
Lack of mutual support. In an
ineffective team, the team members
are not properly aware of what the
other team members have achieved.
Team spirit. In an effective team, team
members identify themselves with the
team and feel a part of the team. Team
spirit and team loyalty is strong.
Lack of team spirit. Members of an
ineffective team do not have any team
spirit and simply get on with their job.
4.2 Evaluating team performance: success in achieving objectives
One of the tasks of management is to evaluate the performance of the workgroup
for which they are responsible. Performance evaluation is linked to planning,
coordination and control. Measuring and evaluating team performance is also
necessary when there is a system of team incentives and rewards.
There are various ways of measuring and evaluating performance. Three basic
approaches to performance measurement are measurements of:

economy

efficiency, and

effectiveness.
Economy is measured by the success of the team or workgroup in controlling its
costs. Cost control may be judged by comparing actual spending with the
planned spending limit. (There is often a spending limit for each workgroup or
team in the annual budget for the organisation.)
Efficiency (or productivity) measures the amount of resources used for the tasks
that have been achieved. For example, the productivity of a workgroup may be
measured by the output per member of the team during a period of time, or the
output per labour hour. Alternatively, productivity may be measured by the sales
achieved per member of the team (for example, annual sales revenue per
member of the sales team).
Effectiveness measures success in achieving goals and targets. Targets may be
short-term or long-term. They may also be:

quantitative – measuring the volume of work achieved or the size of results

qualitative – measuring output in terms of quality (percentage of rejected
items, level of customer satisfaction, and so on)

timescale for achievement – whether a particular task is completed before a
target date for completion.
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Team performance may also be measured in other ways, such as the level of job
satisfaction amongst team members. However, it is doubtful whether a clear link
exists between work satisfaction and achieving the goals of the organisation.
4.3 Tools and techniques for building team effectiveness
The effectiveness of a team can be improved through good team management. A
team leader should try to build a team by appointing individuals to fulfil all the
necessary roles, and he should give it time to develop.
The manager should keep the team aware of its objectives and targets. He
should encourage openness in communication and a full discussion of problems
and ideas. As the team develops, he should allow the team to reach its own
collective decisions.
Team-building tools
There are some training tools that may be used by team leaders to encourage
the development of the team. These involve various types of team activities on
training courses, such as ‘outward bound’ activities.
The purpose of this type of team training is to enable the team members to get to
know each other and go through shared experiences outside the work
environment. In addition, the tasks they are given force the team members to rely
on each other in order to accomplish these tasks. Team members have to work
for the ‘good’ of the team in order to benefit themselves.
The experience of such training courses should continue after the course has
ended, so that team members work better together when they return to their
work.
Motivation and incentives
It might also be possible to improve team effectiveness by offering incentives for
the successful achievement of team objectives and targets.
4.4 Group cohesion
Definition: Group cohesion
Group cohesion describes the strength of the bond uniting the group. When
cohesion is strong the group will remain strong and stable and continue to exist.
Conversely when cohesion is weak the group may ultimately disband.
Factors that impact group cohesiveness include the following:
Factor
Explanation
Size of group
Smaller groups tend to display greater cohesion than
larger groups
Heterogeneous
vs. homogeneous
Homogeneous groups who share common characteristics
such as race, gender and religion will typically
demonstrate greater cohesion than groups who are more
diverse (heterogeneous) sharing fewer common
characteristics.
Group success
This is arguably a ‘self-fulfilling prophecy’ – the more
successful a group the greater the incentive to be part of it
and hence the greater the cohesion. The less successful
the lower the cohesion.
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Factor
Explanation
Barriers to entry
and prestige
Human nature means that the more difficult it is to become
a member of a group the greater the desire for outsiders to
join the group. Subsequently the group becomes
prestigious and more cohesive. A good example might be
an elite academic institution.
Task cohesion
The greater the need for a task to be completed by a
group rather than individuals (e.g. a sports team or military
operation) the more cohesive the group becomes as
members on the whole accept the need to work together to
achieve the shared objective.
Rewards and
punishment
The availability of reward for membership and/or
punishment for leaving can have a bearing on the
attractiveness of being part of a group and hence influence
group cohesion.
Competition from
external groups
A lack of competition from alternative groups can lead to
erosion in cohesion as members do not feel any pressure
to perform. However, with the emergence of competition,
groups typically become more cohesive as their
competitive instincts amplify and the desire to defeat a
rival drives them on.
Location
Groups who enjoy segregation from others will tend to be
more cohesive as strong interpersonal communication
patterns develop and a sense of visible identify builds.
Leadership style
An effective leadership style that matches the skills and
personalities of the group can have a significant impact on
promoting group cohesion. An ineffective leadership style
for that particular group of people is likely to have the
opposite effect and erode group cohesion.
Social cohesion
Social cohesion is the degree to which group members
enjoy each other’s company and how much they like each
other. Group cohesion will be highest when members
enjoy the social side of being part of the group.
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CHAPTER
Certificate in Accounting and Finance
Business management and behavioural studies
10
Negotiation skills and
conflict resolution
Contents
1 Negotiation skills
2 Conflict resolution
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INTRODUCTION
Learning outcomes
The overall objective of the syllabus is to equip candidates with the fundamentals of
management and behavioural studies.
Leadership, negotiation and conflicts
LO 6
On the successful completion of this paper, candidates will be able to
show familiarity with the nature and importance of negotiation and
conflict resolution
LO 4.5.1
Explain various stages of the negotiation process
LO 4.5.2
List five skills of an effective negotiator
LO 4.5.3
Explain the low risk techniques of negotiation
LO 4.5.4
Explain the high risk techniques of negotiation
LO 4.6.1
Discuss the conflict resolution process
LO 4.6.2
Explain Intra-individual conflict with model of frustration
LO 4.6.3
List some of the physical, psychological and behavioural problems occur due
to conflict
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Chapter 10: Negotiation skills and conflict resolution
1
NEGOTIATION SKILLS
Section overview

The negotiation process

Skills of an effective negotiator

High risk and low risk negotiation techniques

Conciliation and arbitration
1.1 The negotiation process
Definition: Negotiation
Negotiation is a process in which there are at least two parties and each party
needs the involvement of the other to reach a desired outcome.
The parties begin negotiations with a different set of objectives and each party
considers that the other party will be willing to modify its initial position and
compromise to reach a successful outcome of the negotiation process.
Stages in the negotiation process
The various stages of the negotiation process are:

Preparation and Planning: This includes understanding the nature of the
conflict and perceptions of the parties to the conflict. The outcome of the
negotiation process from the most favourable to the minimum acceptable is
determined. The weaknesses and strengths of the other party are identified
and a strategy is developed for conducting the negotiations

Definition of Ground Rules: This includes agreement on procedures for
conducting the negotiations, including names of the participants, venue and
time limits, if any, for conduct and conclusion of the negotiations.

Clarification and Justification: After both the parties have presented their
initial viewpoints, each party offers its explanations, clarifications, and
justifications. This exchange of information brings into focus the
importance of the issues to the parties and rationale for fairness of their
respective positions.

Bargaining and Problem Solving: The parties make concessions and
yield from their initial positions in order to reach consensus and move
towards a mutually acceptable agreement

Closure and Agreement: The consensus reached between the parties is
stated in a formal agreement and include a procedure for its
implementation and monitoring.
Distributive bargaining and integrative bargaining
Distributive bargaining and integrative bargaining are the two approaches
typically adopted in the negotiation process. These approaches differ in their
bargaining characteristics as follows:

Goals: In the distributive bargaining approach, each party strives to obtain
the maximum advantage for its own self-interest, whereas in an integrative
bargaining approach both the parties attempt to expand the scope and size
of the benefits to be able to maximise them to their mutual advantage
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
Motivation: In the distributive bargaining approach, the motivation for each
party is to adopt a win-lose position in which the gain of one party is at the
expense of the other, but in the integrative bargaining approach the
motivation is that both the parties should emerge as winners in a win-win
situation

Focus: In the distributive bargaining approach the focus is to assume a
particular position and stick to it to obtain the opponent’s agreement to a
specific target or as close to it as possible, whereas in an integrative
bargaining approach the focus is on understanding the respective positions
of each of the parties and try to reach a mutually acceptable outcome.

Interests: In a distributive bargaining approach, the interests of each of the
parties are opposite, whereas in an integrative bargaining approach there is
a convergence of interests of both the parties to arrive at a mutually
acceptable position.

Sharing of Information: In a distributive bargaining approach, each party
withholds information to out manoeuvre the other party, but in an integrative
bargaining approach both the parties share information to satisfy the
interests of each of the parties.

Duration of Relationship: In the distributive bargaining approach, the
duration of relationship between the parties is of a short-term nature,
whereas in the integrative bargaining approach the engagement or
relationship between the parties is of a long-term character.
1.2 Skills of an effective negotiator
Skills
The ability to negotiate requires a blend of interpersonal and communication
skills used together to achieve the desired result.
The key skills required include:
Skill
Explanation
Problem
analysis
Negotiators must have the skills to analyse a problem
to determine the interests of each stakeholder in the
negotiation.
The negotiator will understand the issue, who the
interested parties are and the outcome goals.
Active listening
Effective negotiators are able to listen actively to other
parties during the debate, reading their body language
as well as listening to the verbal communication.
This will help the negotiator identify areas for
compromise during the meeting.
The most effective negotiators will spend more time
listening rather than talking.
Verbal
communication
Negotiators must be able to communicate effectively
and clearly to the other parties during a negotiation.
Clear statement of the case will help avoid
misunderstandings.
The negotiator must state their reasoning as well as
their desired outcome.
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Skill
Explanation
Problem solving
The skilled negotiator has the ability to visualise
solutions to problems rather than focus purely on the
ultimate goal without understanding how to achieve it.
Interpersonal
skills
Effective negotiators are able to maintain good
working relationships with those involved in the
negotiation process.
This requires patience and the ability to persuade
others without using manipulation and maintaining a
positive atmosphere during a difficult negotiation.
Preparation
Thorough preparation before entering a bargaining
meeting is critical to the success of the negotiation.
Preparation should include determining goals,
identifying areas for compromise and alternatives to
the stated goal.
Furthermore, skilled negotiators study the history of
the relationship between the parties and past
negotiations to identify areas of agreement and
common goals.
Past precedents and outcomes often set the tone for
current negotiations when researched effectively.
Emotional
control
Whilst negotiations on contentious issues can be
frustrating it is vital that the negotiator has the ability to
keep in control of their emotions during the
negotiation.
Collaboration
and teamwork
The most effective negotiation tends to be
collaborative rather than hostile with a ‘them against
us’ mentality.
It is ultimately of mutual benefit for those involved in a
negotiation on both sides of the issue to work together
to reach the agreeable solution.
Decision making
ability
Good negotiators are typically leaders with the ability
to act decisively during a negotiation and actually
make a decision. This approach can lead to a quicker
and more efficient agreement of a compromise to end
the stalemate.
Ethics and
reliability
Demonstrating the highest ethical integrity and
reliability promotes a trusting environment for
negotiations.
It is important that both sides trust the other party to
honour their promises and agreements and that the
negotiator has the skills to execute promises after the
bargaining ends.
Good posture
and body
language
Look confident and stay focused.
Don’t be in a
hurry to close
the deal
Aim for a ‘win-win’ situation where all negotiators
achieve at least some of their objectives.
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Avoiding deadlock
Serious efforts are required to avoid deadlocks in negotiations. Quite often the
deadlock appears when the negotiation process is in an advanced stage. Some
of the measures that a skilled negotiator may adopt to avoid a deadlock in the
final stages of negotiations include:

Offer a comprehensive and convincing explanation of the reasons why the
concessions sought by the other party cannot be accepted.

Express willingness to review the matter or concessions or benefits sought
by the other party, in the future.

Attempt to close the deal by offering some benefits in the future by giving
additional concessions or benefits in an ancillary contract while finalizing
the main contract.

State discreetly the consequences of failure to reach an agreement and
emphasize the advantages and benefits of concluding the deal without any
further loss of time.
1.3 High risk and low risk negotiation techniques
In addition to the skills discussed above that a successful negotiator needs to
demonstrate they will also adopt a number of tactics during the negotiation, some
of which will carry greater risk than others. Some of the more common tactics are
mentioned below.
High risk negotiation techniques

‘Take it or leave it’ (Boulwareism) – This is a highly aggressive strategy that
may produce anger or frustration in the other parties. Furthermore, an
apparent unwillingness to compromise may mean that no deal is reached
and both parties lose out.

Waiting until the final moment – This technique involves using stalling
tactics knowing the deadline is near. At the last minute a reasonable but
favourable offer is then made, leaving the counterparty little choice but to
accept. However, this may then verge on the ‘take it or leave it’ approach
and risk losing all.

Losing the temper – This is actually a sign of weakness and can be
interpreted as unprofessional and potentially manipulative. It is more likely
to lead counterparties to harden their position.

‘The chicken’ – This is a slang term that describes combining a bluff with a
threat of action – for example a strike or lock-out. However, this high-risk
tactic increases the probability of deadlock. Furthermore, if the bluff is
called but the threat is not realised then power and credibility are lost.
Low risk negotiation techniques

Inflated opening position – By inflating the opening position this may illicit a
counter-offer that may show the opponents position or elevate the point of
compromise. However, care must be taken not to be seen to be unethical
or untrustworthy.

Silence – This can be effective and shift the power to the one being silent.
Be careful not to provoke anger or frustrate the other parties.
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
Flattery – Subtle flattery and charm can help put the other party at ease.
Ensure you are respectful though and consider differing perspectives due
to age, sex and cultural factors.

Oh poor me –This approach could lead to sympathy although may as easily
bring out the aggressive and killer instinct nature in the other party.

Address the easy points first – this can help build trust and momentum
towards the more challenging issues.
1.4 Conciliation and arbitration
At times parties to a conflict are unable to resolve their differences through direct
negotiations. In such situations, they may induct a third party to help them to find
a solution.
There are four basic third party roles: mediator, arbitrator, conciliator and
consultant.
Role
Explanation
Mediator
A mediator is a neutral third party who facilitates a
negotiated solution through reasoning and persuasion
and by offering suggestions for pursuing different
alternatives.
Mediators are generally used in labour management
negotiations and in civil court disputes.
Mediation is most effective in situations where there is a
moderate level of conflict.
Mediators must be perceived to be neutral and not
coercive.
Arbitrator
An Arbitrator is a third party with the authority to dictate
an agreement.
Arbitration can be voluntary, i.e. requested by the parties,
or compulsory i.e. forced on the parties by law or
contract.
Arbitration is more likely than not to lead to a settlement.
Conciliator
A Conciliator is a trusted third party who provides an
informal communication link between the opposing
parties.
The roles of conciliator and mediator may overlap at
times.
In practice, a conciliator also engages in establishing the
facts, interpreting messages and persuading the
disputing parties to reach agreement.
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Role
Explanation
Consultant
A Consultant is a skilled and impartial third party who
attempts to facilitate problem-solving through
communication and analysis as he has specialized
knowledge of the intricacies of the conflict.
Instead of putting forward specific solutions, the
consultant helps the parties to develop mutual
understanding and work with each other.
This approach therefore, has a long-term focus to build
new and positive perceptions and attitudes between the
conflicting parties.
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Chapter 10: Negotiation skills and conflict resolution
2
CONFLICT RESOLUTION
Section overview

Sources of conflict

Benefits and problems

Dealing with conflict
2.1 Sources of conflict
Intra-individual conflict
Conflict among staff can adversely affect the quality of service or product as
personal effectiveness is eroded and staff lose their motivation.
Some of the more common drivers of individual conflict might include:

Blaming colleagues for past mistakes

Employees feeling that favouritism has been shown by management in
allocating work to employees

General disagreements – for example about the method for performing a
particular task

Non-congruent goals between personal goals and commercial goals

Rivalry for scarce resource (e.g. bonus pool or hours) between
management

Poor personal hygiene

The perception that someone is working harder, or longer hours, than other
employees and not being fairly rewarded

Personality clashes – for example one employee being free thinking,
creative, spontaneous and unorganized compared to another who is more
scientific, logical and organised

Inappropriate dress for work – e.g. culturally or religiously unacceptable,
unprofessional or simply inappropriate for some other reason
Inter-group conflict
Inter-group rivalry and conflict can arise through poor leadership and lack of
effective management. Some of the more common factors include:

Lack of Leadership – Leadership which is not able to articulate the goals
and objectives and provide a clear-cut sense of direction to the staff would
create confusion within an organisation.

Lack of Coordination – Lack of proper control and coordination could
result in loss of focus creating conflict and affecting the performance of a
team.

Unrealistic Targets –The targets may be unrealistic and over ambitious
and not attainable. This may adversely affect the motivation and morale of
staff and create internal conflicts which would adversely affect the quality of
services rendered to the customers.
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
Role Ambiguity – A team may be faced with problems of conflicting roles,
lack of clear job descriptions, or overlapping of responsibilities.

Incompatibility among the Staff – When a team is resourced from
multiple groups they may struggle to work in a team environment due to
their internal differences arising from strong group affiliations and loyalties.

Biased attitude of management – Staff in one team or of a particular
category of staff may be treated in a biased manner affecting terms of
rewards, perquisites, job designations and working conditions.

Lack of Recognition – The management may not give due recognition or
reward to those employees who may have made significant contribution
towards achievement of the company’s goals in the past. They may,
therefore, not be fully motivated.
Other factors that can be responsible for creating group conflicts in business
include:

Interpersonal Differences/Group Politics – The inherent differences in
personality, temperament and outlook of individuals are often the main
sources of interpersonal and group conflicts. Discerning managers
recognise these differences and make efforts to create a conducive
environment in which people with interpersonal differences are able to work
together as cohesive groups.

Differences in Values and Beliefs – Values and beliefs of individuals are
shaped by their upbringing and life experiences and therefore differ
considerably. Values such as honesty, affiliations, beliefs and
competitiveness are often deep rooted in individuals and may at times
result in discrimination, consciously or subconsciously, in their group
interactions which can cause conflicts.

Differences in Allocation of Resources – Groups have different interests
in the allocation of resources such as salaries and perquisites, deployment
of staff and equipment and allotment of space. Each group has its own
goals and perceptions of favouritism in allocation of resources which gives
rise to inter-group conflicts. Incompatibility of goals and objectives and
allocation of resources thus give rise to inter- group conflicts.

Task Interdependence – In business organisations, various groups have
to share outputs and inputs from different departments/divisions for
completion of their allocated tasks. Inability to adhere to time schedules,
quality of workmanship and allocation of responsibilities can result in group
conflicts.

Ambiguous Roles – Uncertainty among the different departments about
their specific roles and authorities and responsibilities in the organisation
can give rise to inter-group conflicts. The ambiguities are often the result of
weaknesses in organisation structures.

Communication Problems – Absence of an environment of open
communications and withholding of important information from others can
affect the performance and undermine the trust between groups and can
give rise to group conflicts.
2.2 Benefits and problems
Conflict can result in both positive and negative results for the business.
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Benefits
Some of the benefits that can arise from conflict include:

Helping to bring about radical changes to alter existing power structures
and entrenched attitudes which have led to complacency in the
organisation.

Encourages innovation and testing of new ideas and eliminate groupthink
attitude.

Brings emotions in the open and therefore result in release of internal
hostile feelings.

Results in constructive levels of tension within the organization and
motivates individuals to work to their optimum levels.

Open communication and improved dialogue

Improved customer service and product design

Long-standing problems are brought to the surface and resolved

Sound viewpoints are clarified and accepted

Interest and creativity is stimulated

It generates an environment where employees can test their capabilities
Problems
Some of the problems that can arise from conflict include:

Demotivated staff

Breakdown in communication

Reduced quality of product or service

Disciplinary action

Internally-focused destructive decisions are taken rather than customerfocused decisions

Creation of an environment of distrust and suspicion

Concentration of efforts within narrow group interests

Undermining of team effort
Functional (constructive) conflict
Functional (constructive) conflict is a conflict which supports the goals of the
group and helps to improve its performance.
In functional conflicts, it is important to separate personalities of the parties from
the issues which cause or create conflicts. The individuals involved in functional
conflict do not take disagreements personally but in a spirit of harmony to
examine and understand all the aspects which have a bearing on the issue to
achieve optimal results for achieving the goals of the group.
Functional conflict can contribute to improving the performance in an organization
by:

Evaluating the current position objectively and promoting reassessment of
group activities and goals as an on-going process.
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
Stimulating creativity and innovation among the participants who express
their opinions and views in an open and constructive manner.

Creating initiatives for changes in an orderly manner without causing
disruptions or affecting the smooth coordination of activities of the
organization.

Releasing of pent-up tensions of the participants because the individuals
feel that their opinions have received consideration.

Providing opportunities to dissidents to self-evaluate their own analytical
abilities and the expertise they bring on important issues.

Introducing a culture in which groupthink or ‘rubber-stamping’ of decisions
taken by the comparatively more articulate or dominating personalities is
discouraged.
2.3 Dealing with conflict
Thomas and Kilmann
Thomas and Kilmann identified five key styles of dealing with conflict. The styles
vary in the degree of assertiveness and cooperativeness.
They argued that people typically have a preferred conflict resolution style
although the situation may be the overriding factor in determining the most
effective resolution style to adopt.
The styles are:

Competitive – people take a firm stance and know what they want.
Typically they are in a position of power. A useful style in an emergency
when a decision needs to be made quickly or when the decision is
unpopular.
Can however leave people feeling unsatisfied and resentful if used in less
urgent situations.

Compromising – This style attempts to find a ‘win-win’ solution that will
keep everyone at least partially satisfied. All parties need to relinquish
something.
This approach is useful when the cost of conflict is greater than the cost of
compromise. Also when a deadline looms and the parties are in deadlock.

Avoiding – People naturally tend towards this style to avoid conflict
altogether. Tactics might include delegating controversial decisions, not
wanting to hurt anyone’s feelings and accepting default decisions.
May be appropriate where win-win is impossible, the issue is trivial, or
when others are in a better position to solve the problem. However, in many
situations this is seen as an ineffective and weak approach to take.

Collaborative – The collaborative style aims for win-win and often relies on
strong leadership who acknowledges that everyone is important.
Collaboration is necessary when there is a need to bring together a variety
of viewpoints to achieve the optimum solution, where there is a history of
prior conflicts in the group, or when the situation is simply too important to
trade-off.

Accommodating – This style indicates a focus on satisfying the needs of
the counterparty ahead of one’s own needs. The risk is that the
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Chapter 10: Negotiation skills and conflict resolution
accommodator can be persuaded to surrender a position even when
surrender is unwarranted.
Accommodating is appropriate when the issues are more important to the
other party, when peace is more valuable than ‘winning’, or when a favour
is owed. However, the approach is unlikely to consistently deliver the most
favourable outcomes.
The conflict resolution process
The classic approach to resolving conflict is:

Set the scene –Use active listening (restating, paraphrasing, summarizing)
to ensure all parties understand the position and perceptions of others.
Establish any ground-rules and agree the resolution process that will be
taken.

Gather information – Establish the underlying interests, needs and
concerns. Also aim to understand the motivations and goals and how your
actions might impact them.
Ensure to focus on business issues and remain objective. Leave
personalities out of the discussion.

Agree the problem – Varying underlying needs, goals and interests can
mean that people perceive problems very differently. It is important to
establish exactly what the problem is that needs fixing.

Brainstorm possible solutions – Whilst an effective facilitator will have
performed this step in advance of the resolution discussion, participative
brainstorming will help ensure that all parties feel they inputted into finding
a solution. This will significantly improve buy-in and commitment to any
resolution that is agreed.

Negotiate a solution – Once both sides have better understood the
position of the other it may well be that a mutually satisfactory solution has
appeared.
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CHAPTER
Certificate in Accounting and Finance
Business management and behavioural studies
11
Management information systems
Contents
1 General system concepts of information technology
2 Specific IT-based systems
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INTRODUCTION
Learning outcomes
The overall objective of the syllabus is to equip candidates with the fundamentals of
management and behavioural studies.
Management information systems
LO 7
On the successful completion of this paper, candidates will be able to
demonstrate a basic understanding of IT based management information
systems
LO 5.1.1
Demonstrate basic understanding of computer hardware i.e. input, output,
storage of information and networking
LO 5.1.2
Understand the concepts of information technology and information systems.
LO 5.1.3
Understand the role and types of information systems in business
LO 5.2.1
Understand data entry, batch processing, online processing and real time online processing
LO 5.3.1
Understand IT based financial reporting system
LO 5.4.1
Understand IT based order processing and inventory control systems
LO 5.5.1
Understand IT based personnel systems
LO 5.6.1
Briefly describe integrated systems, their advantages and disadvantages
LO 5.6.2
Understand main feature of Enterprise Resource Planning
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Chapter 11: Management information systems
1
GENERAL SYSTEM CONCEPTS OF INFORMATION TECHNOLOGY
Section overview

Computer systems

Computer hardware

Input devices

Output devices

Storage devices

Networks

Information technology and information systems

Role and types of information systems in business

Data entry, batch, online and real time processing
1.1 Computer systems
Definition:
A computer system comprises four key components:
Input
Central processing unit (CPU)
Output
Storage
Input devices facilitate the introduction of data and information into the system.
Examples might include a keyboard, scanner, mouse or barcode reader.
Output devices facilitate the extraction of processed information from the system.
Examples would include a printer, speaker or screen (visual display unit).
The central processing unit is the ‘brain’ of the computer that takes the inputs,
processes them and then outputs the results.
Finally, some type of storage facility is useful to enable data to be saved for
future use.
1.2 Computer hardware
Computer hardware consists of the computers themselves plus all the peripheral
equipment connected to a computer for input, output and storage of data (such
as printers and stand-alone disc drives).
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The computers used in IT systems range from the very large supercomputers to
the very small hand-held computers. In many organizations, different computers
are connected to each other to form a network.
The different types of computer that you might encounter as an accountant would
typically include:
Computer type
Description
Supercomputers
Used only in the very largest systems – e.g.
national defence and aerospace.
Mainframe
The most powerful computers typically found in
multi-nationals and other large businesses – e.g.
an airline or oil company. Not as powerful as a
supercomputer, but still incredibly powerful.
Mini-computers
Less powerful than mainframe computers
although not portable like smaller models below
Desk-top personal
computers (PCs)
A computer placed at the user’s desk with its own
processing capabilities and usually a keyboard,
mouse and screen: PCs can operate as standalone computers, or they may be linked as
terminals to a network where the PC functions as
an input/output device but the processing is
executed by another device on the network.
Portable laptops and
notebooks computers
Similar concept to PCs but much smaller and
portable.
Handheld computers
Given the speed of technological advancement in
today’s fast-moving world there is an increasing
number of ever evolving variations on the above
forms. For example, hand-held computers (or
PDAs: personal data assistants) and even many
smart-phones (mobile phones with large touchsensitive input screens) have much of the
functionality found on PCs.
The globalisation of the business environment has resulted in much more
widespread use of portable laptop computers. Portable laptops can typically be
connected to the organisation’s computer network or to the Internet from remote
locations via a data connection such as Wi-Fi or a phone line. This means, for
example, that a manager can access his e-mails or the organisation’s Intranet
system (a system that looks and feels like the internet but is only available to
employees) from anywhere in the world.
1.3 Input devices
As we saw in section 1.1 above computer systems have four key components –
input, CPU, storage and output. In this section we take a brief look at some of the
many input devices commonly used in computer systems.
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Keyboards
Keyboards are the most common input device and are part of virtually all
computer systems. Keyboards can be stand-alone and connected to the
computer with a cable or through a wireless connection, or they might be
integrated into the computer itself, such as with a laptop or notebook.
The basic layout of a keyboard is consistent within a particular geographical
location (based on the local language character set). Variations commonly exist
to reflect things like space saving, video-game enhancements or ergonomic
designs.
Touch-sensitive screens and touch pads
A recent trend has been towards integrating the keyboard into touch-sensitive
screens and touch pads. Both these devices involve the user touching an area of
a screen, for example a picture of a keyboard, to simulate the pressing of a
physical key such as on a regular keyboard.
Touch pads are connected to the computer via a cable or wireless connection
whereas a touch screen would be built-in to the display unit.
Examples of touch-sensitive screens include automated payment booths used to
buy train or bus tickets and bank ATM machines.
Magnetic ink character recognition (MICR)
Magnetic ink character recognition (MICR) requires the input media to be formed
of specially formatted characters printed in magnetic ink. These characters are
then read automatically using a specialised reading device called MICR reader.
The most common example of MICR is in the banking industry with the use of
cheques and deposit slips.
Optical mark reading (OMR)
Optical mark reading (OMR) is similar to MICR in that it is an automated input
method. OMR involves marking a pre-printed form with a pen or typed line (or
cross) in an appropriate box. The card is then read by an OMR device which
senses the mark in each box.
Uses can include national lottery entry forms and ballot voting slips.
Scanners and optical character recognition (OCR)
Scanners read text or illustrations printed on paper and translate the information
into a format the computer can use. The resolution (number of pixels recorded for
each image – pixels are minute areas of illumination on a display screen which
taken together form the image) can normally be adjusted to reflect how sharp the
users need their image on the computer. The greater the resolution the larger the
file size of the scanned image.
Some scanners incorporate optical character recognition (OCR) software which
translates the image into text. For this to work accurately the input document
must be high quality print.
Mice, trackballs and similar devices
Mice and trackball devices are hand-operated devices with internal sensors pick
up the motion and convert it into electronic signals which instruct the cursor
(pointer) on screen to move.
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The ball mouse is now largely replaced by the optical mouse which incorporates
a small light-emitting diode that bounces light off the surface when the mouse
moves across. Optical mice are more comfortable to use and typically more
responsive to movement.
Mice typically have two or three buttons which can be pressed (clicked) to send
messages to the computer. They also frequently have a wheel which can be
used to scroll within images or documents that cover multiple screens.
Trackballs are similar to mice in that they control the cursor on the screen.
However, whilst mice move the cursor through movement across a surface,
trackballs move the cursor by rotating the ball rather than moving the device
across a surface.
Touch sensitive pads and joysticks that similarly control the cursor are also now
commonly found in the centre of the keyboard. Most current laptops and
notebooks incorporate a pad or joystick.
Voice date entry (VDE)
Many computers can now accept voice input via a microphone and voice data
entry (VDE) software.
One particularly useful application is found in language translation programs that
support simultaneous translation. Another example might be in a smartphone
where you can enter commands aurally rather than by typing, for example with
an instruction such as “Call Office”.
Barcodes and QR (quick response) codes, EPOS
Barcodes are the groups of black and white marks with variable spacing and
thickness found on product labels such as those at the supermarket. Each code
is unique and can be read automatically by an electronic barcode reader. This
keeps inventory movement up to date and also converts into a customer invoice
instantly.
QR codes are matrix, or two-dimensional, barcodes. Originally popular in the
automotive industry they have seen a recent rise in popularity elsewhere given
their fast readability and greater storage capacity than standard barcodes.
EPOS stands for electronic point of sale which is normally integrated with
barcode readers. EPOS allows credit and debit cards to be read for instant
payment for goods.
A recent development of EPOS has seen the growth of technology that supports
mobile phones being used in a similar way to credit and debit cards. A phone
signal rather than the magnetic strip on a credit card is used to identify the
purchaser.
Digital cameras
Digital cameras can be found in the form of stand-alone units or they may be
integrated into other technology such as smartphones and tablet computers.
Digital cameras capture images and videos in digital form and allow easy transfer
to a computer where they can be manipulated by software.
Digital cameras are used in many situations whether it is for the development of
marketing material, recording of crime scenes by the police, or by an auditor on a
year-end inventory count.
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Benefits and limitations
The following table presents some of the benefits and limitations of each of the
input methods described above.
Input method
Benefits
Limitations
Keyboards
Common, simple and
cheap
Labour-intensive and slow.
Prone to error.
Touch-sensitive
screens and touch
pads
Saves space. Integrated
graphical user interfaces
are very user-friendly and
intuitive.
Can be difficult to grasp
the techniques for
accurate data entry.
Labour intensive and slow.
Expensive.
Magnetic ink
character
recognition (MICR)
Speed and accuracy
MICR documents are
expensive to produce.
Optical mark
reading (OMR)
Speed and accuracy
OMR documents can be
expensive to produce.
Also a risk of ‘spoilt’
documents (marks made
outside the allotted
boxes).
Scanners and
optical character
recognition (OCR)
Excellent for inputting
graphics and text quickly
Can be slow to scan
multiple images. File sizes
might be large for very
high quality scans. OCR
can be somewhat
inaccurate if input image is
low quality.
Mice and trackball
devices
Easy to use and very
common. Cheap and
simple.
Slow and can be prone to
error.
Voice data entry
(VDE)
Convenient and simple.
Can be inaccurate and
affected by external
interference (noise)
Barcodes and
EPOS
Very common. Accurate.
Quick.
Damaged barcodes are
impossible to read.
Incompatibility issues if
different types of barcodes
are received by the
organization.
Digital cameras
Versatile, quick, accurate.
Widevariety of high quality
image editing software
now available.
Higher quality means
larger file size which can
become expensive and
difficult to manage.
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1.4 Output devices
Output devices
An output device is the part of a computer system that receives the processed
data from the computer and presents it in some way.
Output devices are distinct from input devices which are the parts of the
computer that provide data and instructions. However, technology has advanced
to the stage where some devices are a combination of both input and output such
as a touch-sensitive screen.
Output devices come in a number of forms:
Output
device
Monitor
(display)
Description
A monitor is a bit like a television screen – it provides visual
output from the computer for text and graphics. Note though that
monitors only offer temporary output as the image is lost when
power removed.
Monitors can be external, such as those found attached to PCs,
or can be integrated into the computer such as with laptops and
notebooks. An external monitor can be upgraded or changed
whereas a built-in monitor offers much less flexibility.
The old-fashioned large and bulky cathode-ray tube monitors
(CRT) have been largely replaced by much less bulky flatscreen technology including LCD and LED displays.
The screen’s resolution is the number of pixels (dots) used to
build a picture. Fewer pixels provide lower resolution or image
quality. More pixels and higher resolution and image quality.
Printers
A printer is a device that prints output to a page (on paper).
Printing can be in colour or ‘black and white’ depending on the
printer type.
A number of different types of printers exist
Speakers
and
headsets
Speakers are attached to computers for the output of sound.
The sound output is produced by a sound card. Speakers range
from simple, single-speaker output devices offering low-quality
audio to surround-sound multi-channel units sending different
output to multiple speakers in different locations.
Headsets are a combination of speakers and microphones and
are commonly used by gamers. They are also growing in
popularity as an increasingly cost-effective method of
communicating with friends and family over the internet using
software such as Skype.
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Output
device
Description
Storage
devices
Output may be made to some kind of storage device such as a
DVD or CD-ROM, flash memory (USB flash disk or key), blu-ray
drive or external hard disk drive.
Projector
A projector can be thought of as a variation of monitor in that it
translates the digital output into a visual display projected onto a
screen. Think of some of the lectures you attended and how
common it is for a computer to be connected to a projector to
output the presentation slides.
1.5 Storage devices
Storage devices
We have already seen how the CPU is the brain of the computer taking inputs
from various devices such as keyboards, mice and scanners then outputting to
devices such as speakers, printers and monitors. However, computers need
somewhere to store all the data such as music, videos, pictures, documents,
spreadsheets, presentations, emails and so on.
The different types of storage devices found within a computer system include
the following:
Storage type
Description
Primary
storage
(internal
memory)
Internal temporary store directly accessible by the CPU that
allows it to process data.
Volatile by nature as it is erased when power is turned off.
Much smaller than secondary or tertiary storage but much
quicker to access (as it has no mechanical parts).
Examples include RAM and ROM (see 1.2 above) plus the
CPU’s cache memory (temporary store of instructions
repeatedly required to run programs – typically up to 2MB
(megabytes) in size).
Secondary
storage
(external
memory)
Secondary storage differs from primary storage in that it is not
directly accessible by the CPU.
Secondary storage is used for data not currently being
processed but which may need to be accessed at a later stage,
for example the operating system, documents, music files and
emails.
Non-volatile as data remains intact even when powered off.
Located further from the CPU than primary storage (and not
directly accessible by the CPU). Therefore takes longer to
access. However, is much larger than primary storage.
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Storage type
Description
A computer’s largest secondary storage location is typically its
hard disk drive (also called hard drive), the capacity of which
would typically fall between 40GB (gigabytes) to 2 TB
(terabytes). Other examples include:
Tertiary
storage

Flash memory (USB flash drives or keys)

Floppy disks

CD

DVD

Blu-ray drive

Magnetic tape

Cloud drive
Tertiary storage is not as commonly recognisable as primary or
secondary storage by most computer consumers as they may
never encounter it.
Tertiary storage typically involves a robotic mechanism that
mounts (inserts) and dismounts removable mass storage
media into a storage device.
Often used for archiving rarely accessed information as it is
much slower than secondary storage.
Primarily useful for extremely large data stores accessed
without human operators.
Offline
storage
Offline storage describes any type of data storage that is not
under the control of a processing unit. The medium is typically
recorded on a secondary or tertiary storage device which is
physically removed or disconnected. Off-line storage therefore
needs human intervention to re-connect for subsequent
access.
With offline storage being physically separate from the
computer it can be used to increase general information
security. For example keeping a copy of all your important files
offline in a separate building.
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1.6 Networks
Definition: Computer network
A computer network is a telecommunications infrastructure that allows computers
to exchange data (or ‘talk’) with each other.
The physical connection that exists between networked computers can use either
physical media such as fibre optic or copper wire cables, or wireless media.
The best-known computer network is the internet.
Computer networks support a vast range of uses including:

The world wide web (internet)

Sharing software applications such as databases and Worksheets

Email

Sharing devices such as printers, fax machines and scanners

Online booking systems

Instant messaging

Internet-based communication such as Skype
System architectures
Definition:
The term system architecture refers to the way in which the components of a
computer system such as printers, PCs and storage devices are linked together
and how they interact.
A centralised architecture involves all processing being performed on a single
central computer.
Decentralised architectures spread the processing power throughout the
organisation at several different locations. This is typical of the modern workplace
given the significant processing power of modern PCs.
Typical network configurations include star networks, ring networks, bus
networks and tree networks.
Definition: Client-server computing
Client-server computing describes one level of interaction found between
computers in systems architecture.
A server is a machine that is dedicated to providing a particular function or
service requested by a client within a network system.
Servers can range in power from ‘top-end’ super servers, capable of driving
thousands of network users, to ‘low-end’ servers which are typically a powerful
personal computer (PC). Different types of servers might include file servers,
network servers, print servers, e-mail servers and fax servers.
File servers are used to manage the data files that are accessible to users of the
network. All the shared data files for the system are held on a file server, or are
accessible through a file server.
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Network servers are used to route messages from terminals and other equipment
in the network to other parts of the network. In other words, network servers
manage and control the routing of messages within computer networks.
LAN – Local area network
A LAN is a computer network covering a small geographic area such as a home,
office, group of buildings or school. A LAN’s distinguishing features include:

Due to its localised nature, the data transfer speeds are high

Typically owned, controlled and managed by one person or a single
organization

Low cost maintenance

Relatively low data transmission errors

One LAN can be connected to another LAN over any distance via
telephone lines and radio waves
WAN – Wide area network
A WAN is a computer network that covers a broad area i.e. a network that
communicates across regional, metropolitan or national boundaries over a long
distance. A WAN’s distinguishing features include:

Data transfer speeds are much lower than with LANs due to the greater
distance that information must travel.

WANs exist under collective or distributed ownership and management
covering long distances.

Setup costs are typically higher due to the need to connect to remote
areas. Furthermore, maintaining a WAN is more difficult (and expensive)
than maintaining a LAN due to its wider coverage.

In contrast to LANs, the data transmission error rate tends to be
significantly higher.
1.7 Information technology and information systems
Definition: Information technology
Information technology describes the application of computers and
telecommunications equipment to store, retrieve, transmit and manipulate data.
The term is typically associated with computers and computer networks. However,
the full definition includes other information distribution technology such as
television, telephone and radio.
Definition: Information system
Information systems describe complementary networks of software and hardware
that people and organizations use to collect, filter, process, create and distribute
data and information.
Within organisations, information systems support operations, management and
decision making.
The term ‘information system’ is broader than ‘information technology’ as it
incorporates the way in which people interact with the technology in support of
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business processes, as well as the information and communication technology
(hardware and software) itself.
In summary:

System – a set of interacting components that operate together to
accomplish a purpose

Business system – a collection of people, machines and methods
organised to accomplish a set of specific functions

Information system – all systems and procedures involved in the collection,
storage, production and distribution of information

Information technology – the equipment used to capture, store, transmit
and present information

Information management – planning, the environment, control and
technology
Elements of a system
The elements of a system include:

Goals

Inputs

Processes

Outputs

The environment

Boundary (this limits the system from its environment)
Open and closed systems
Closed systems - the environment has no effect on the system and the system
has no effect on the environment. Examples in the real world are rare and
business examples even rarer; one useful example is that of a scientific
experiment.
Open systems - do interact therefore the environment will affect the system and
the system will affect the environment. All businesses, social and information
systems are examples of open systems.
System adaptation
Open systems will adapt to their environment with varying degrees of extremity.
Examples include:


Deterministic systems

Use predetermined rules

Therefore have predicted operations

Giving predictable outputs

Examples include machines and computer programs

These systems will follow a standard and often have a rule book.
Probabilistic systems

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

Their behaviour is less easy to predict

Most businesses are examples of probabilistic systems

When a business sales forecasts it will try to predict sales based on
past evidence.

In effect the business tries to change before the event has occurred.
Self-organising or cybernetic systems

Most complex type of system

Continually changing

Adapts to the environment

Example trade union negotiations

These types of systems are the least likely to be computerised

Rely heavily on interaction from people
Control systems
Control is important in any information system. The two main types of control are
open and closed loop control.

Closed loop control has inbuilt control very much like a thermostat in a
heating system, they are not responsive to changes in the environment. A
business example which has inbuilt control is a stock or a credit control
system where the system automatically checks responses.
Closed loop control is most suitable for the type of system which is stable.
Systems which exist in a relatively dynamic environment are not suitable for
this type of control.

Open loop control systems do not have inbuilt control as it comes from
the outside the system - no thermostat.
A business example would be the whole organisation. Open control systems
are responsive to the environment and they often involve interaction from
users.
The elements of a control system include:

input, process, output

sensor - measures the output from the system and determines a new value

comparator - compares the new value with that of the standard

standard - the predetermined limit set within the system

effector - effects the feedback into the system can be positive or negative.
1.8 Role and types of information systems in business
Types of information
Information systems are seen in virtually every corner of a business whether in
finance, operations, human resources or marketing.
Information systems assist employees across all levels of the business as
follows:
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Strategic
Tactical
Operational

Strategic information relates to long-term decision making e.g. over a 3-5
year time horizon. Strategic information is useful to senior management
and Directors for establishing the overall strategy of the business. It
therefore incorporates both internal information as well as external
information about competitors, the market and the general business
environment.

Tactical information assists managers in making short-term tactical
decisions such as:


establishing a fee to quote on a particular order

whether to offer discounts on a particular product to help lower
excess inventory

whether to switch suppliers
Operational information relates to the day to day activities of an
organisation. Examples might include:

Daily sales reports

Daily production reports

Latest inventory levels

Details of customer complaints
Role of information systems
Irrespective of the level of information (strategic, tactical or operational),
information is generally used in one of five ways.
Use
Description
Planning
Help establish appropriate resources, time scales
and forecast alternative outcomes
Controlling
To ensure processes are implemented as planned
Recording
transactions
Information systems are used to record
transactions throughout a business e.g. sales,
purchases, errors, returns, customer complaints
and quality control inspections, deposits and cash
movements
Performance
measurement
Compare actual versus planned (budgeted) activity
to identify variances from planned activity and take
corrective action as necessary
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Use
Description
Decision making
Information systems are used to help managers
make all kinds of decisions such as volume (e.g.
purchases and production), price, whether to make
a component internally or buy it from a supplier,
whether to switch suppliers, when to replace assets
and how to organize affairs to minimise a tax
charge.
1.9 Data entry, batch, online and real time processing
Data entry
Data entry describes any of the techniques used to initially record data into a
system. A few examples of data include:

Sales information

Purchase information

New employee details

Updates to existing employee details
Data could be entered manually by a person keying the information in. Some
systems are more advanced and support technology-based data entry such as
optical character recognition or magnetic ink character recognition.
Batch processing
Batch processing is the collection of a group of similar transactions over a period
of time, and their processing at a single time as a batch.
This type of processing has been associated with mainframe centralised type
systems. The method has been reduced in importance with the development of
more advanced types of processing. It still remains an important form of
processing as many systems used now, are based on batch processed systems.


Advantages

Relatively easy to develop

Less processing power is required as deals with similar updates

Checks in place as part of the systems run

Less hardware required, therefore cheaper.
Disadvantages

Often delays between when a transaction is made and when the
master file is updated and the output generated.

Management information is often incomplete due to out of date data.

Often master files kept off line therefore access may not always be
available.
Online processing
Online processing refers to equipment that operates under control of the central
computer but typically from a different location through some kind of terminal.
Examples include:
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
An ATM machine for a bank – the ATM is linked to the bank’s central
computer system and updates the user’s account immediately

Flight booking system at a travel agency
If a service is no longer online (available) it is described as being offline. When a
system is offline its services are no longer available.
You may have experienced something similar when browsing the internet. For
example when you have a Wi-Fi connection your web-browser is considered to
be ‘online’ and will update. However, if there is no Wi-Fi signal and hence no
connection the browser is considered to be ‘offline’. In this case you will not be
able to download any new information to the computer.
Real time processing
Real time processing is the processing of individual transactions as they occur
without the need for batching them together.
This type of processing allows the user to update the master files immediately.


Advantages

Information more up to date therefore providing better management
information.

Increased ability for data to be online.
Disadvantages

Increase in expense as the system becomes more complex to run
and to develop.

Increased hardware capacity which increases costs.
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2
SPECIFIC IT-BASED SYSTEMS
Section overview

Transaction processing systems

Management information systems

Decision support systems

Executive information systems

Expert systems

Financial reporting systems

Order processing and inventory control systems

Personnel systems

Integrated IT systems

Enterprise resource planning (ERP)
2.1 Transaction processing systems (TPS)
Definition:
A TPS performs, records and processes routine transactions.
Finance and accounting TPS
The major functions would typically include:

Budgeting

The nominal ledger

Invoicing

Management accounting
The system might be split into a number of modules including:

Nominal ledger

Accounts payable

Accounts receivable

Budgeting

Treasury management
Human resources TPS
The major functions would typically include:

Personnel records

Benefits

Salaries

Labour relations

Training
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The system might be split into a number of modules including:

Payroll

Employee records

Employee benefits

Career path systems (appraisal)
2.2 Management information systems (MIS)
Definition:
A management information system digests inputted data (distinct pieces of
information such as facts, numbers and words) and processes it into useful
information.
A management information system is characterized as follows:

It support structured decisions

It reports on existing operations

An MIS has little analytical capability and is relatively inflexible

MIS has an internal focus

Used to generate regular reports and typically would allow online access to
a wide range of users.

Will incorporate both current and historical information
2.3 Decision support systems (DSS)
Definition:
A decision support system is a set of related computer programs and data required
to assist with the analysis and decision-making within an organization.
DSS were initially developed to overcome the rigid nature of management
information systems.
The characteristics of decision support systems include:

DSS assists managers at the tactical level when they are required to make
intelligent guesses

A DSS uses formula and equations to enable mathematical modelling

DSS are real-time systems enabling managers to solve problems through
queries and modelling

User inputs queries and variables for the model through a user interface

Contains a natural language interpreter for querying the system

The user interface is integrated with data management and modelling
software from the key components

Spreadsheet packages can become the tool for the development of a
decision support system.
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2.4 Executive information systems (EIS)
Definition:
An executive information system is a type of management information system that
facilitates and supports senior executives in their decision-making.
An EIS incorporates both internal and external data and tends to be more forward
looking rather than historical-based.
EIS typically emphasize graphical displays and simple user interfaces with a ‘highlevel’ executive summary styled dash-board. Executives can then drill-down into
various components of the dashboard to extract more detailed information if
required.
Other characteristics of EIS include:

Helps senior managers to make unstructured decisions with many
contributing factors such as price fixing

Tends to be very expensive and real-time

Often limited in use to a small number of senior managers within the
business
2.5 Expert systems
Definition:
An expert system is a computer program that simulates the judgement and
behaviour of a human or an organization that has expert knowledge and
experience in a particular field.
Expert systems contain a database of accumulated experience and scenarios as
well as a set of rules for applying the knowledge to each particular situation
described by the program.
Examples include legal diagnostics, medical diagnostics, processing a loan
application and on a social level, programs that play chess!
Expert systems are most effective when the following preconditions exist:

The problem is reasonably well-defined

The expert can define some rules

The problem cannot be solved through conventional transaction processing
systems

The expert can be released to focus on more difficult problems

The investment is cost-justified
The advantages gained from using an expert system include:

Allows non-experts to make expert decisions

Fast, accurate and consistent advice

Ability to change input details to explore alternative solutions

Reduction in staff costs - less experts required

Improved allocation of human resources experts concentrate on the more
complex issues
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Chapter 11: Management information systems

Can become a competitive advantage

Availability potentially 24 hours 365 days per year

Multi-access can deal with many problems at one time.
However, some disadvantages may exist, such as:

High initial capital expenditure

Technical support required

System does not automatically learn, it has to be constantly updated by
experts

User as a non-expert may give inaccurate advice without recognising

Down time - systems failures effect all users

Reliance - probable reduction in basic skills

Possible user resistance for higher level experts.
2.6 Financial reporting systems
Definition: Financial accounting and reporting
Financial accounting and reporting involves:

Maintaining a system of accounting records for business transactions and
other items of a financial nature; and

Reporting the financial position and the financial performance of an entity
in a set of ‘financial statements’.
Many businesses operate a system of recording their business transactions in
accounting records. This system is called a book-keeping system or ledger
accounting system and forms the foundation of the financial reporting system.
All large businesses (and many small ones) have a book-keeping system for
recording the financial details of their business transactions on a regular basis.
The information that is recorded in the book-keeping system (ledger records) of
an entity are also analysed and summarised periodically, typically each year, and
the summarised information is presented in financial statements.
Financial statements provide information about the financial position and
performance of the entity.
Financial reporting systems must be reliable, accurate and complete. Access to
data entry should be strictly controlled to authorised personnel only.
Unlike management information systems where there are no formal rules about
the presentation of data extracted from the system, financial reporting systems
must be capable of extracting and summarizing data that will satisfy strict
external reporting requirements.
This means:

The system must be able to support an audit trail for transactions and
manual updates (called journals)

The system must capture all transactions from the transaction processing
system
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Business management and behavioural studies

Transactions must be categorized correctly so that they will ultimate be
extracted and summarised in the correct way within the external financial
statements.
2.7 Order processing and inventory control systems
Definition: Order processing
The order processing system should be capable of recording all orders accurately
and in a timely fashion. For some business such as airlines and hotels the
information needs to be updated immediately, whereas for other businesses an
end of day update may be sufficient.
The system will typically be linked to the inventory control system so that the sales
person can establish whether the organisation is capable of fulfilling the order
received.
Definition: Inventory control system
The objective of the inventory control system is to ensure that the business
maintains an appropriate amount of inventory at all times. The control system
should be able to indicate accurate levels of inventory for all the lines maintained
by a business and trigger the ordering of replacement inventory when inventory
levels fall to a certain level.
When the business is involved in manufacturing the inventory control system
must ensure that there are enough items in place to allow production to continue
smoothly.
Order processing and inventory control systems typically share the following
characteristics:

The system can accurately report the current inventory level at any time

A rule should be associated with each item that will trigger a reorder such
as minimum inventory level

The age of the inventory can be tracked. This will assist sales managers in
identifying ageing stock and employing tactics to reduce it. This is
particularly important with perishable inventory (e.g. food and drink) that
could have hygiene as well as commercial considerations to consider.

The system should be able to highlight shortages

The system should be able to show individual and total cost of items

The system should maintain supplier details

Delivery dates both inwards and outwards must be maintained to enable
the warehouse manager to manage goods inwards and despatch

The location of the inventory should be recorded to ensure it can be found
easily and efficiently
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Chapter 11: Management information systems
2.8 Personnel systems
Definition:
The personnel system exists to support the human resources management
function in performing its duties of maintaining an appropriate workforce. This
involves

Recruitment

Selection; and

Staff development and appraisal.
Furthermore, the system contains a significant amount of sensitive and
confidential information meaning there must be strict control around maintaining
data security and access to the system.
The system will typically incorporate a number of components including:



Recruitment

Highlighting internal job vacancies that are available to existing staff

Running external recruitment campaigns and tracking their cost
effectiveness
Redundancy

Planning and executing voluntary redundancy programs

Planning and executing compulsory redundancies making sure the
company follows all the legal requirements
Personnel management and control

Maintaining contract of employment details such as salary, holiday
entitlement and duties

Family and medical contact details

Employment history

Training records

Training plan

Qualifications and skills

Amount of holiday accrued and taken

Sick leave accrued and taken plus authorised absences such as
bereavements

Unauthorized absence

Time off in lieu

Disciplinary record

Bonus and pay history

Other rewards and commendations

Annual appraisal

Goals and objectives
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Business management and behavioural studies


Formal checks such as references
Personnel management reporting – management will benefit from seeing
graph trends and summary reports to help with making decisions on
headcount. These might include:

Benefits report

Headcount (employee numbers) report

Pay details and total wage expense

Gender and diversity mix information

Age profiling

Tenure profiling

Absence analysis
2.9 Integrated IT systems
Definition:
An integrated IT system describes the scenario where all modules of the system
are linked and function together as a system in a coordinated fashion.
Integrated finance system
An integrated finance system would link a number of underlying modules such as

Accounts payable control

Accounts receivable control

Accruals and prepayments

Bank and cash

Inventory

Purchases

Sales
So for example a new sales order would be simultaneously reflected in the
accounts receivable, sales and inventory modules.
Advantages of integrated systems

Offers a more complete view

Enables better informed decisions

Should ultimately lead to a more efficient operation

Which would lead to greater customer satisfaction and hence profitability
Disadvantages of integrated systems

Greater risk that if one module fails the whole system could fail

More complex and therefore prone to error

More expensive than standalone systems

May require a greater level of support as the system is likely to need to be
bespoke (tailored) specifically to the organisation
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Chapter 11: Management information systems
2.10 Enterprise resource planning (ERP)
Definition:
Enterprise resource planning (ERP) is a cross-functional system driven by an
integrated suite of software modules supporting the basic internal processes of a
business.
The system incorporates a real-time view of core business processes such as:

Order processing

Inventory management

Productions
Business resources
ERP systems track business resources such as:

Cash

Raw materials

Production capacity

Personnel
Commitments
ERP systems also track the status of commitments such as:

Purchase orders

Employee costs

Customer orders
Tracking is permanently updated irrespective of the department that entered the
information – hence the term ‘enterprise’.
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Business management and behavioural studies
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Certificate in Accounting and Finance
Business management and behavioural studies
I
Index
a
Adair’s 50: 50 rule
Adair’s action-centred leadership
Ageing population
Anisation structure: Mintzberg
Anti-collusion regulations
Ashridge model
Attitude
cross-cultural variation
Attitude and behaviour
c
192
191
57
15
36
182
140
141
142
Carbon footprint
62
Centralisation
95
Change agent
116
Change and organisation culture
110
Client-server computing
239
Closed systems
241
Competition law
36
Competitive factors
65
Competitive rivalry
72
Computer hardware
231
Computer network
239
Computer systems
231
Conflict:
resolution
223, 227
sources
223
Consequences of change
109
Constructive feedback and motivation 164
Consumer protection
37
Contingency theory
22
organisation structure
98
Contract law
37
Contrast effects
139
Control systems
242
Co-operatives
78
Corporate culture
123
Corporate culture (Handy)
128
Cultural web (Schein)
124
b
Barcodes and EPOS
Bargaining power of customers
Bargaining power of suppliers
Batch processing
Belbin: team roles
Bennis: leaders as enablers and
originators
Blake and Mouton’s grid
Bonuses
Bureaucracy
Burns and Stalker
© Emile Woolf International
234
72
71
244
204
193
180
164
8
99
255
The Institute of Chartered Accountants of Pakistan
Business management and behavioural studies
Culture for management: significance
Culture: definition
Equity
Executive directors
Executive information systems
Expectancy theory
implications
Vroom
Expert systems
Explicit attitudes
External relationships
External stakeholders
Extrinsic rewards
124
123
d
Data entry
244
Data protection and security
35
Data protection law
34
Davis and Lawrence 1977
91
Deadlock
220
Dealing with conflict
226
Decision support systems
247
De-layering
60
Demand and supply
51
Demographic patterns
58
Demography
57
Desk-top personal computers (PCs)
232
Digital cameras
234
Distributive bargaining
217
Divisional organisation structure
90
Dorming (adjourning)
208, 209
Downsizing
59
Drucker
management theory
12
mission statement
166
© Emile Woolf International
158
157
248
141
96
81
161
f
Fayol
principles of management
Fiedler’s contingency model
File servers
Financial reporting systems
Fiscal policy
Five Forces model (Porter)
Foreign exchange rates and
international payments
disequilibrium
Formal organisation
Forming
Four Rs model
Freedom of contract
Functional (constructive) conflict
Functional organisation structure
e
Economic activity: calculation;
expenditure approach
Economic cycle
Economic policy
measures
Economic stagnation
Economy
Effective leadership
Effectiveness
Efficiency
Elastic demand
Employment law
Enterprise resource planning (ERP)
Entrepreneurial organisation
Environmental influences
Environmental scan
174
80
248
40
41
39
49
44
212
177
212
212
55
32
253
89
29
29
5
6
186
239
249
47
69
46
87
207
116
37
225
89
g
Gemini 4Rs
Goal setting
Goals
Government economic policy aims
Government policy for demographic
change
256
116
165
167
41
58
The Institute of Chartered Accountants of Pakistan
Index
International payments disequilibrium
Intra-individual conflict
Intrinsic rewards
h
Halo effect
Handy (Corporate culture)
Handy’s best fit approach
Health and safety law
Heifetz: leadership as an activity
Hersey and Blanchard: situational
leadership theory
Herzberg and motivation-hygiene
theory (two-factor theory)
Hierarchy of needs
limitations
Maslow
Hofstede
138
128
189
33
194
j
Job satisfaction
Job stress: triggers
Johnson and Scholes
cultural web
value chain
187
156
156
154
130
© Emile Woolf International
144
147
124
68
k
Kanter
Keyboards
Kotter (Leadership)
i
Implicit attitudes
Incentives
Incremental change
Individual approaches to work
Individual behaviour at work
Inelastic demand
Inflation
implications for the distribution of
wealth
Informal organisation
significance
Information system/s
types
role
Information technology
Input devices
Integrated IT systems
Integrative bargaining
Interest rates: managing
Inter-group conflict
Internal relationships: centralisation
versus decentralisation
Internal stakeholders
International economic policies
International payments
International payments and foreign
currencies
46
223
161
141
213
107
201
199
55
42
13
233
194
l
Law of effect
171
Leadership and adaptive change
195
Leadership style/s
177,184
contingency theories
186
definition
3, 23, 24, 25, 26
qualities
191
trait theories
178
Legal authority
32
Legitimate authority
9
Levers of change
112
Lewin:
force field analysis
113
unfreeze, change, re-freeze
114
Likert’s leadership styles
184
Lippitt and White’s leadership styles
178
Lobby groups
38
Local area network (LAN)
240
42
87
87
240
242
243
240
232
252
217
48
223
95
79
49
45
45
257
The Institute of Chartered Accountants of Pakistan
Business management and behavioural studies
m
n
Machine bureaucracy
99, 102
Macro-economic factors
39
Macroeconomic policy
39
Macroeconomics
39
Magnetic ink character recognition
(MICR)
233
Mainframe
232
Man relations movement of
management theory
10
Management by objectives
169
Management information systems
247
Management:
classical theories
5
definition
3
modern theories
12
Maslow: the hierarchy of needs
154
Matrix organisation structure
90
Mayo (human relations school)
10
McClelland: motivational needs
theory
159
McGregor: Theory X and Theory Y
17
McKinsey’s 7S approach
117
Mechanistic organisation
99
Mendelow’s power/interest matrix
84
Mice, trackballs and similar devices
233
Micro-economic factors
51
Microeconomics
39
Mini-computers
232
Mintzberg
14, 166
Mintzberg and organisation structure
15
Mintzberg’s five building blocks for
organisational configurations
101
Mintzberg’s six organisational
configurations
102
Mission
166
Mission statement
166
Monetary policy
48
Monitor (display)
236
Monopolies
36
Monopoly pricing
52
Motivation
153, 213
content theories
153
process theories
153
Motivational needs theory (McClellan) 159
Motivation-hygiene theory
156
National economic policies
National economy
National income growth and inflation
Negotiation
process
skills of an effective negotiator
Network servers
Networks
Non-government organisations
Norming
Notebooks
Not-for-profit organisations
© Emile Woolf International
47
40
41
217
217
218
239
239
77
207
232
77
o
Objectives
167
Off-line storage
238
Online processing
244
Open systems
241
Operations Research
(Management science approach)
19
Optical mark reading (OMR)
233
Order processing and inventory
control systems
250
Organic organisation
99
Organisation culture: factors that
shape organisation culture
124
Organisation structure/s
77, 88, 107
Organisation type:
77
business organisations
77
distinguishing features
77
non-government
77
not-for-profit
77
public sector
77
Organisational culture
123
Organisational processes
94
Organisational structure divisional
88
Organisational structure functional
89
Organizational justice
174
Ouchi (Theory Z)
16
Output devices
236
Outsourcing
60, 96
258
The Institute of Chartered Accountants of Pakistan
Index
Scanners and optical character
recognition (OCR)
Schein
three levels of culture
Scientific management
criticisms
underlying principles
Secondary storage
(external memory)
Selective perception
Self-efficacy
Senior managers
Sensation
Seven S approach
Shareholders
SMART
Social and demographic factors in the
environment
Span of control
Speakers and headsets
Stakeholder conflicts of interest
Stakeholder mapping
Stakeholder/s:
connected
definition
external
internal
main
Standard form contracts
Stereotyping
Stewart (bureaucracy)
Storage devices
Storming
Strategic change
Strategy implementation
Stress
Supercomputers
Supervision: definition
Supranational bodies
SWOT analysis
System architecture
p
Paradigm
Perception
Perceptual problems and distortions
Perceptual selectivity
Performance-related pay
Performing
Person culture
Personal data
Personnel systems
PEST analysis
Physical environment
Planned change (or proactive
change)
Political and legal influence on
business
Portable laptops
Porter (Five forces model)
Power culture
Price elasticity of demand
Primary storage (internal memory)
Printers
Project teams
Projection
Projector
Public sector organisations
128
135
138
136
163
208
129
34
251
29
62
107
31
232
69
128
54
237
236
203
139
237
77
r
Real time processing
Reinforcement theory
Reward system and motivation
Reward systems
Rewards:
extrinsic
intrinsic
Role culture
245
171
162
161
161
161
129
© Emile Woolf International
237
138
170
80
136
117
79
167
57
92
236
86
84
83
79
81
79
83
37
138
9
237
207
112
88
146
232
4
32
65
239
t
s
Sale of goods legislation
233
123
127
5
6
6
Tannenbaum and Schmidt’s
leadership continuum
37
259
181
The Institute of Chartered Accountants of Pakistan
Business management and behavioural studies
frictional unemployment
regional unemployment
seasonal unemployment
structural unemployment
technological unemployment
transitional unemployment
Unplanned change
(or reactive change)
Urwick: Principles of organisations
Task culture
129
Taylor (Scientific management)
5
Team approaches to work
201
Team building: role of management
202
Team development
207
Team effectiveness: tools and
techniques for building team
effectiveness
213
Team formation
207
Team performance: evaluating
212
Team roles
203, 204
Team-building tools
213
Teams
203
effective
211
ineffective
211
Technological factors on working
methods
59
Tertiary storage
238
Theory Z (Ouchi)
16
Thomas and Kilmann
226
Threat from potential entrants
70
Threat from substitute products
71
Touch-sensitive screens and touch
pads
233
Transaction processing systems
246
Transformational change
107
Triggers for change
107
Tuckman (team development)
207
Tuckman’s analysis
208
© Emile Woolf International
107
8
v
Value chain
Johnson and Scholes
primary
secondary
Virtual company
Virtual organisation
Voice date entry (VTE)
Vroom: expectancy theory
68
68
69
61
97
234
157
w
Weber (bureaucracy)
Wide area network (WAN)
Work group and a team: difference
Work group behaviour
Work groups:
formal
informal
Work team: successful
Worldwide economic recession
u
Unemployment
Unemployment types
cyclical unemployment
44
44
44
44
44
43
43
43
44
260
8
240
203
199
200
199
203
45
The Institute of Chartered Accountants of Pakistan